The real impact of carbon taxes on electricity costs
By Andre Nepgen
South Africa is at a critical juncture in energy procurement. The growing impact of carbon taxes and the European Union's (EU) looming Carbon Border Adjustment Mechanism (CBAM) should be of concern local businesses. The question we should ask ourselves is whether we're prepared for the cost of our ongoing reliance on fossil fuels.
South Africa has one of the dirtiest energy profiles in the world - compared to other major economies, our country is heavily dependent on coal and fossil fuels. We emit roughly 1 tonne of CO2e for every megawatt hour of electricity consumed - one of the world's highest levels of carbon emissions per unit of electricity. In fact, our electricity is twice as dirty as the global median. This heavy reliance on fossil fuels is not only unsustainable from an environmental point of view, but is financially disastrous when you factor in global carbon tax policies.
For a long time, our dependence on coal was overlooked, but that is coming to an end. We lag far behind in the global shift towards cleaner, renewable energy. And with rising carbon taxes, that "dirty" status is going to cost us dearly.
The stealth cost of carbon taxes
South African businesses face a carbon tax double whammy. Domestic carbon taxes are increasing faster than inflation - and will rise to R462 per tonne of CO2e in 2030 from the current R190, according to rates published by the National Treasury. While in parallel, tax allowances are being phased out - depending on the nature of the business, allowances currently provide up to 85% relief but could be completely or partially phased out within the next ten or so years, if not sooner. Many businesses initially considered carbon taxes a minor expense, but they will soon become a substantial part of operating expenses for those businesses that remain reliant on fossil fuels.
What's especially worrying is how these costs are being slipped into operations. By 2026, South African carbon taxes will add between 6 and 9 cents per kWh to electricity prices. In 2035, they could rise to between 34 and 72 cents per kWh, and by 2046, some companies could be paying an additional 166 cents per kWh more. To give context to these numbers, we typically see businesses paying between 133 cents and 150 cents per kWh in electricity generation costs today.
For companies exporting products such as aluminium, iron, steel, and fertiliser to Europe, the EU's CBAM is another ticking time bomb. CBAM is the penalty that will be imposed on EU importers from countries with lower carbon taxes than in the EU, with the size of the penalty determined by the difference in carbon taxes between the two countries. The issue is that local manufacturing processes for these products are emissions-intensive and are subject to a much lower carbon tax rate than that levied on businesses in the EU. With the EU being South Africa's largest trade partner, it is estimated that approximately R52.4 billion of South African exports are under threat in the short term because of CBAM. This figure is expected to grow as the scope of CBAM expands to include more and more products over time.
In 2026, when CBAM kicks in, European carbon taxes are expected to be around €85 (around R1 630) per tonne of CO2e. This is 15 times higher than our carbon taxes, which are expected to be set at €5.5 (around R105) in 2026, after taking tax allowances into account. For the average industry impacted by the EU's CBAM, this translates into an extra 80c per kWh in electricity costs in 2030, ramping up to as much as R1.65 per kWh in 2035. For South African companies exporting to Europe, that tax gap will hit profitability hard and make it nearly impossible to remain competitive unless they decarbonise.
Looking beyond price
We need to stop focusing solely on the price of electricity. We should ask ourselves how we can maximise our use of renewable energy. In conversations with CFOs and business leaders, we always come back to the same question: "What's your long-term energy strategy?" Failing to plan for the transition to renewable energy has dire consequences. By 2034, over 35% of electricity costs could come from carbon taxes. Imagine paying taxes that are almost as high as the cost of the electricity itself? The businesses that incorporate the most renewable energy into their operations will be the ones that survive and thrive in this new carbon-constrained world.
The urgency of action
By 2035, existing electricity generation costs could increase by as much as 28% in today's terms due to South African carbon tax alone. For industries exposed to CBAM, this increase could rise by another 64%. There's no business in South Africa that won't feel the pain of that increase. Every year that goes by without a solid renewable energy strategy in place that offers close to 100% coverage is another year that businesses are digging themselves into a financial hole.
Investing in maximum renewable energy coverage today reduces one's carbon footprint and protects the bottom line from inevitable carbon tax hikes.
The takeaway is simple: The future belongs to companies that balance economic growth with environmental responsibility, and those businesses that have secured as close to 100% coverage of renewable energy will be the most safeguarded. Embracing renewable energy sooner rather than later isn't solely about saving the planet -- it's a move that will save businesses from compounding taxes.
This opinion piece was originally published in Business Day.