EU ETS Explained for South African Exporters

The EU ETS: The Engine Behind CBAM Pricing

The EU Emissions Trading System (EU ETS) is the world's largest carbon market, covering approximately 40% of EU greenhouse gas emissions. It was established in 2005 and has undergone four major reform phases. The current Phase 4 (2021–2030) includes the most aggressive cap reductions in the system's history.

For South African exporters, the EU ETS matters for one critical reason: CBAM certificate prices are directly linked to the weekly average EU ETS auction price. When the EU ETS price rises, CBAM costs rise proportionally.

How the EU ETS Works

The EU ETS operates on a cap-and-trade principle:

The Cap: The EU sets a total annual limit on greenhouse gas emissions from covered sectors. This cap declines each year, creating structural scarcity of allowances.

Allowances: Each EU Allowance (EUA) represents the right to emit one tonne of CO₂ equivalent. Companies must surrender one EUA for every tonne they emit.

Trading: Companies that reduce emissions below their allowance allocation can sell surplus allowances. Companies that emit more than their allocation must buy additional allowances. This creates a market price.

Auctions: The majority of allowances are now auctioned rather than given free of charge. The auction clearing price becomes the reference price for CBAM certificates.

Free Allowances and CBAM

Historically, EU manufacturers in CBAM-covered sectors received free allowances to protect them from carbon leakage — the risk that production would shift to countries with weaker carbon pricing. CBAM replaces this protection mechanism.

As CBAM is phased in (2026–2034), free allowances for CBAM-covered sectors are being progressively reduced. By 2034, free allowances for these sectors will be eliminated entirely. This means the full EU ETS carbon cost will apply to EU manufacturers — and CBAM ensures that imported goods face an equivalent cost.

Price Drivers and Forecasts

The EU ETS price is influenced by several factors:

• ▸Energy prices: High gas prices increase demand for coal power, increasing emissions and demand for allowances
• ▸Economic activity: Higher industrial output increases emissions and allowance demand
• ▸Policy signals: EU climate ambition announcements affect long-term price expectations
• ▸Renewable energy deployment: Faster renewable buildout reduces power sector emissions and allowance demand

Analyst consensus for EU ETS prices:

| Year | Low Scenario | Base Scenario | High Scenario | |------|-------------|---------------|---------------| | 2026 | EUR 55 | EUR 65 | EUR 80 | | 2028 | EUR 65 | EUR 85 | EUR 110 | | 2030 | EUR 80 | EUR 100 | EUR 130 |

Implications for SA Exporters

SA exporters should build EU ETS price sensitivity into their CBAM financial planning. A steel exporter shipping 100,000 tonnes with 2.18 tCO₂/tonne embedded carbon faces:

• ▸At EUR 65/tonne: EUR 14.17M gross CBAM liability
• ▸At EUR 85/tonne: EUR 18.53M gross CBAM liability
• ▸At EUR 100/tonne: EUR 21.8M gross CBAM liability

The SA carbon tax credit partially offsets this, but the net exposure remains substantial. Use our CBAM Calculator to model your specific scenario.

For a complete CBAM compliance registration pathway, visit the Digital Product Passport Registry.