#1BUSA BUSINESS UNITY SOUTH AFRICA BUSA PRESENTATION ON THE SOUTH AFRICAN EXPERIENCE 07 MARCH 2023 NATIONAL OFFICE 61 Katherine Street, Sandton, 2196 P.O. Box 652807, Benmore, 2010 PARLIAMENTARY OFFICE 9 Church Square, 1st Floor Graaffs Trust Building Cape Town, CBD P.O. Box 3867, Cape Town, 8000#2ABOUT BUSA BUSA is a confederation of business organisations, including chambers of commerce and industry, professional associations, corporate associations and unisectoral organisations. It represents South African business on macroeconomic and high-level issues that affect it at the national and international levels. BUSA's function is to ensure that business plays a constructive role in the country's economic growth, development and transformation and to create an environment in which businesses of all sizes and in all sectors can thrive, expand and be competitive. BUSA is the APEX business organisation. As a principal representative of business in South Africa, BUSA represents the views of its members in several national structures and bodies, both statutory and non-statutory. BUSA also represents businesses' interests in the National Economic Development and Labour Council (NEDLAC). BUSA#3INTRODUCTION Welcome the opportunity to participate and to present. Business in South Africa supports a net-zero emissions target by 2050, business also recognises the need for shifts in our energy and industrial economy to begin now. Consideration has been given to what must happen in the short term to realize a net-zero economy in 2050. • Key linkages to: • Provisions in the United Nations Framework Convention on Climate Change . Kyoto Protocol commitments Obligations under the Paris Agreement It is imperative that South Africa enacts climate change legislation with associated policy mix and measures that reflect global momentum BUSA#4ACHIEVING GLOBAL DECARBONISATION AND GROWTH OF LOW CARBON SECTORS REQUIRES CO-OPERATION ON AN UNPRECEDENTED SCALE . • • South Africa has an ambitious Nationally Determined Contribution (NDC) commitment of 420 - 350 MtCO2 by 2030, which needs to be executed in a just manner, while simultaneously facing reduced competitiveness of export products due to impending carbon border taxes¹ The major reduction lever to achieve this target is the decarbonisation of the electricity sector. Decarbonisation of industry and growth of low carbon sectors are also critical levers to meet South Africa's NDC, with the voluntary targets set by large emitters already being accounted toward the achievement of the national targets under the Paris Agreement. On this basis, the JETP² facility was set up, prioritising the electricity sector and green hydrogen production. Development of an export-competitive green hydrogen sector would aid the country's just transition through the stimulation of investments leading to industrialisation, job creation, economic growth, decarbonisation and an ability to counter some of the decline in economic growth that border taxes are likely to bring. Significant capital investment in technologies and access to markets able to pay product premiums is needed to realise the potential of green hydrogen in South Africa and bolster a declining economy Ensuring a Just Transition, Paris agreement and NDC compliance and meeting South Africa's growth objectives are inextricably linked BUSA 1Specifically the European Union's Carbon Border Adjustment Mechanism (CBAM); 2JETP - Just Energy Transition Partnership;#5• • SOUTH AFRICA IS WELL-POSITIONED TO PLAY A LEADING ROLE IN GLOBAL GREEN HYDROGEN EFFORTS IF KEY MARKETS CAN BE ACCESSED Our solar and wind endowments, availability of Platinum Group Metals and infrastructure and expertise in technologies such as Fischer Tropsch (FT) technology are key to realising this value proposition An enabling regulatory environment to access key markets, including our trade partners, such as the European Union (EU) and Japan, for green hydrogen and derivatives is imperative to enable the business case, provide investment security and scale the green hydrogen sector to realise just transition benefits The EU's Hydrogen Strategy acknowledges hydrogen demand will not be met through domestic generation alone with the region targeting 10 Mt of renewable hydrogen imports by 2030 The EU Renewable Energy Directive (EU RED II) and associated Delegated Acts (DA) are some of the main EU instruments dealing with the promotion of energy from renewable sources Renewable and low-carbon products must meet the stipulated eligibility criteria irrespective of whether they were produced in the EU or imported from another region² South Africa, therefore, needs to meet all product criteria in RED II to access the EU compliance market and access project funding and subsidies via mechanisms such as the H2Global auction. Enabling the hydrogen economy in South Africa through access to export markets represents an opportunity to increase bilateral trade and investment flows and accelerate the achievement of global climate goals BUSA 1Including ammonia methanol and sustainable aviation fuels - SAF, 2Specifically if products are to be counted towards the EU renewable energy/product goals#6• • . CONDUCIVE EU REGULATIONS COULD UNLOCK THE EXPORT MARKET FOR GREEN HYDROGEN AND ASSOCIATED PRODUCTS FROM SOUTH AFRICA Utilising existing assets, repurposed to produce green hydrogen and derivatives, allows for fast scaling to meet demand South Africa's existing FT facilities in Secunda currently use coal and gas to produce ~2.5 Mt/a of hydrogen; however, these assets can be repurposed to use sustainable carbon¹ and green hydrogen to produce high value, low carbon PtX² and bio-derived products for the global market Transitioning Sasol's Secunda facility to an end state where no fossil-based feedstocks are required will ultimately result in the reduction of over 50 Mt CO2e/a; however, the transition needs to take place in a phased approach, aligned with national priorities of a just transition The draft Delegated Act 28 (DA28) to REDII establishes a GHG accounting methodology to assess GHG emission savings from Renewable Fuels of Non-Biological Origin (RFNBOs) 3 and also describes eligible sources of CO2 In its current form the DA presents a number of challenges that impacts the ability to produce sufficient volumes of eligible sustainable products to justify the project economics of introducing sustainable feedstock Key challenges with the proposed EU regulations are: (1) lack of recognition of flexible allocation of GHG emissions savings to one product, (2) the ability to meet the EU's requirements for CO2 (accounting and paying a carbon price) and (3) recognition of FT CO2 as an eligible feedstock for the duration of the project life. BUSA 1From biogenic sources, unavoidable industrial CO2 streams and CO2 from direct air capture (DAC); 2Power-to-X (PtX) is an all-encompassing term referring to renewable products from the combination of CO2 and green hydrogen; 3RFNBOs are the EU nomenclature for green hydrogen and PtX fuels#7(1) LACK OF RECOGNITION OF FLEXIBLE ALLOCATION OF GHG EMISSIONS SAVINGS TO ONE PRODUCT The ability to maximise the volume of premium products such as renewable fuels is critical to the business case of transitioning existing FT assets to a low carbon end state The main enabler is the allocation of all incremental sustainable inputs (e.g. biomass, green H2, recycled fossil CO2) to renewable fuels such as SAF in a co-processing¹ facility - called 'flexible allocation'. Total carbon in feed = 100 Mtpa Biomass Total biomass in feed = 0 Mtpa 0% & Green H₂ implemented Total carbon in feed Total biomass in feed = 10 Mtpa 10% Percentage biomass = = 100 Mtpa i) Proportionate ii) Selective attribution methodology Percentage biomass = 30 Mtpal 20 Mtpa (C as 00₂) (C as CO₂) Product 1:40 Mtpa Blomass 8 Mt pa Producer Product 2: 10 Mtpal Carbon Carbon Jet Fuel 20 Mtpaj 100 90 Mtpa Mtpa Jet Fuel Produced = 20 Mtpa Blomass 2Mtpa attribution methodology 27 Mtpa +3 Mitpa (CO₂) Product 1: SAF 18 Mtpa (00₂) 2 Mtpa 36 Mtpa +4 Mtpa Product 2: Producer 9 Mtpa-1 :2 Mon Jet Fuel: 18 Mps SAF Produced = 2 Mtpa Carbon 90 Mtpa Biomass 10 Mtpa 30 Mtoa +(00₂) Product 1:40 Mtpa Producer Product 2: 10 Mtpa SAF 10 Mbpel Jet Fuel: 10 Mitpa 10 Mtpa (CO₂) 10 Mtpa (CO,) SAF Produced = 10 Mtpa Net Jet Fuel system CO2 emissions = 50 Mtpa Net SAF system CO2 emissions = 45 Mtpa Net SAF system CO₂ emissions 40 Mtpa • A 'flexible allocation' maximises sustainable product volumes and is therefore favoured over 'proportional allocation' where sustainable inputs are allocated proportionally across the entire product slate (e.g. based on energy content) The challenge is that while both methods are recognised by global certification bodies, only 'proportional allocation' is recognised under the REDII and DA28. Flexible Attribution is needed to stimulate innovation and enable an affordable decarbonisation pathway, but EU rules do not allow this allocation method BUSA 1 Refers to the situation when fossil and sustainable feedstocks are co-processed together in existing FT facilities#8(2) THE ABILITY TO MEET THE EU'S REQUIREMENTS FOR CO2 CÓ₂ (ACCOUNTING AND PAYING A CARBON PRICE) Under DA28 fossil CO2 captured from electricity production is eligible to 2035 and fossil CO2 from other industrial processes is eligible carbon to 2040, provided that the CO2 has been "taken into account upstream in an effective carbon pricing system". Raises the remaining two concerns: (2) The ability to meet the EU's requirements for CO2 (accounting and paying a carbon price): CO₂ must be accounted for at the source where it would have originally been emitted even though it is not actually emitted, and a carbon tax must be paid on this CO2. Emissions associated with energy (electricity, heat) required for capture of CO₂ need to be counted (towards e₁) → Less energy- intensive processes or proof of sourcing CO₂ renewable energy only can reduce e CO CO CO Carbon that has been accounted for through "effective" carbon Industrial CO2 source (CO₂ diverted from original fate of being released to atmosphere) pricing is "diverted" from its original fate of being released to the atmosphere → Savings can be credited (towards e) Emissions from transport and distribution of CO2 need to be counted (towards e) Electricity required for electrolysis and qualifying as fully renewable acc. to D.A to Art. 27 REDII can be attributed zero GHG emissions → does not factor into e Emissions from transport and distribution need to be counted (towards e) CO₂ emitted (on combustion of the RFNBO) LCA treatment (carbon-neutral): -1 tco₂/tCO2 GHG and reporting Considered an emission (scope 1) for Carbon Tax treatment: which allowances must be surrendered (carbon tax paid) BUSA +1 tCO₂/tCO2 Carbon is released into the atmosphere → Emissions need to be counted (towards o) • The South African GHG reporting, and carbon tax systems are only set up to cater for emissions actually emitted. Could have implications for achieving NDC commitments. End-user does not need to surrender allowances/pay a carbon tax and emissions are not counted as scope 1#9. • • CARBON BORDER ADJUSTMENT MECHANISM (CBAM) IN THE EU The EU is one of South Africa's major export destinations, accounting for 19% of its total exports in 2019 CBAM will increase the costs of South African exports in the EU markets, reducing their competitiveness and hence the likely value of future exports. A total of US$1.5 billion of South African exports (based on 2021 data) is at risk in the short term, with this number set to increase as the CBAM covers more and more products. SA exports to the EU could fall in 2030 by 9% (Chemicals), 16% (aluminium), 31% (iron and steel) and 44% (cement) - reducing South Africa's GDP by 0.02% Inclusion of indirect emissions would be particularly disadvantageous to South African producers who are reliant on coal- based electricity - making us one of the most carbon-intensive exporters The CBAM will undoubtedly have a negative impact on South African exports. The iron and steel and aluminum sectors are particularly at high risk. This is primarily due to the use of coal-powered electricity and coal as feedstock in these sectors Even though South Africa is reducing emissions it is unlikely to be fast enough to address the significant export revenue loss that CBAM will bring in a time when this revenue is so desperately needed BUSA#10KEY TAKEAWAYS (1/2) • . The Paris Agreement was set up using a bottom-up approach i.e., nationally determined, but still with the aim of achieving global objectives of climate action, reduction in poverty, economic development and ensuring equality. But by implication, the 'nationally determined' methodology puts national interest first and foremost. As illustrated, following this approach the EU regulations are unintentionally impeding South Africa's ability to access the EU green hydrogen and derivatives market and could inadvertently contribute to impeding our ability to meet national and global targets. Securing a new export market has never been more pressing for South Africa, given the implications of impending carbon border taxes (e.g. CBAM) on competitiveness and potential loss of key markets for many sectors The steps required to start transitioning existing FT facilities to producing green products are known and technically feasible, but hinge on: . • • Allocation of the first green molecules replacing coal in the process to a single product for which a premium can be obtained, specifically SAF The ability to demonstrate compliance with the EU rules for accounting and paying a carbon price on feedstock CO2 without impacting national targets; and Recognition of recycled CO2 from the FT process as an eligible feedstock for producing sustainable products in a timeframe that facilitates project economics. BUSA#11KEY TAKEAWAYS (2/2) The progressive repurposing of FT facilities to sustainable feedstocks and products is: • compatible with a national net zero end state; . • aligned with the Just Energy Transition; a catalyst for green investments and jobs in the Mpumalanga region (currently dominated by coal mining sector); and a significant contributor to South Africa's decarbonisation efforts (~57 Mtpa of CO2 emissions avoided). The unintended consequence of the draft DA in their current form would make it impossible to meet EU product certification requirements, increasing the risk of securing or accelerating the investments required to meet climate objectives Opening the door to the EU market for low carbon synthetic aviation fuels from South Africa would create opportunities for the construction of additional 20 GW of electrolyser capacity in areas like Secunda, and roughly twice as much renewable capacity to power it. This will eventually result in a suite of low-carbon synthetic fuels and chemicals required to achieve decarbonisation of hard-to-abate sectors such as aviation and industrial chemicals for the global markets. BUSA#12BUSA BUSINESS UNITY SOUTH AFRICA THANK YOU NATIONAL OFFICE 61 Katherine Street, Sandton, 2196 P.O. Box 652807, Benmore, 2010 PARLIAMENTARY OFFICE 9 Church Square, 1st Floor Graaffs Trust Building Cape Town, CBD P.O. Box 3867, Cape Town, 8000