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African States should keep track of the European Union’s Carbon Border Adjustment Mechanism as implementation advances


African States should keep track of the European Union’s Carbon Border Adjustment Mechanism as implementation advances

African States should keep track of the European Union’s Carbon Border Adjustment Mechanism as implementation advances
On December 13, 2022, the Council of the European Union and the European Parliament reached a provisional agreement on the implementation of an EU Carbon Border Adjustment Mechanism (CBAM). This agreement brings the European Union a step closer to finalising what has been a lengthy legislative process to implement a CBAM. The mechanism was first proposed by the European Commission in July 2021 and concern from its trading partners has been increasing since. The agreement can be finalised once it is confirmed by the ambassadors of the EU member states and the European Parliament. As the reality of the CBAM sets in, and the pool of research modelling the impact of the CBAM on third countries grows, alarm bells are ringing for many of the EU’s trading partners. This blog post looks at what is known about the contents of the compromise text, what the predicted impacts are for African states, and how they might respond.
CBAM timeline

The CBAM regulation provides for a mechanism to address the contested issue of carbon leakage. Carbon leakage refers to the process whereby ambitious environmental policies in one region influence investment and trade flows, leading to the relocation of emissions-intensive activities to lower regulatory-cost regions. By requiring importers to pay a carbon price equivalent to that paid by EU producers under the EU Emissions Trading System (ETS), the CBAM aims to level the playing field for businesses operating in the EU and those operating in regions with different carbon pricing systems.

A revised text of the CBAM proposal, based on the Agreement reached in December 2022, has not been published. However, two press releases from the Council of the European Union confirm the following details[1]:

  • The CBAM’s design remains unchanged from previous proposals (see a more detailed description of previous proposals here): EU importers of goods into the customs territory of the European Union will need to obtain CBAM certificates to cover the embedded emissions in those goods imported into the EU. The price of these certificates will be linked to the price of EU ETS allowances to ensure that importers pay the same carbon price as domestic producers. If a non-EU producer can show that a carbon price has already been paid for the production of imported goods in a third country, this cost can be deducted.

  • Indirect emissions (those emissions that occur upstream of the actual production process that are associated with electricity, extraction of raw materials, transportation etc.) will also be included in the regulation in a ‘well-circumscribed manner’. The inclusion of indirect emissions will be particularly disadvantageous for countries with high emissions intensity of electricity generation.

  • The transitional phase of the CBAM will commence on the 1st of October 2023 (it had previously been set for the 1st Jan 2023). During this time only reporting obligations will apply; the requirement to purchase CBAM certificates will be effective from 2026. By 2034, 100% of the CBAM liability will have to be paid. From 2026 to 2034, free allowances under the EU ETS will be phased out while the CBAM is phased in. The Text of the trilogue agreement on the EU emissions trading scheme (Article 30) elaborates on how this should happen (where the CBAM factor refers to a factor reducing the free allocation of allowances for producers of goods covered by the CBAM scheme):

“The reduction of free allocation should be implemented by applying a factor to free allocation for CBAM sectors, while the CBAM is phased in. The CBAM factor should be equal to 100 % for the period between the entry into force of that Regulation and the end of 2025, and subject to the application of provisions referred to in Article 36(3), point (b), of that Regulation, should be equal to 97,5 % in 2026, 95 % in 2027, 90 % in 2028, 77,5 % in 2029, 51,5 % in 2030, 39 % in 2031, 26,5 % in 2032 and 14 % in 2033. From 2034, no CBAM factor should apply.”

  • The sectoral scope covers:
    • Iron and steel
    • Cement
    • Fertilisers
    • Aluminium
    • Electricity
    • Hydrogen

Notably, the European Parliament’s proposal from June 2022 to include hydrogen has been taken forward, while its proposal to extend the scope to include other chemicals and polymers has not.

Recent studies conducted to estimate the projected impact of the EU’s CBAM on African economies project serious implications for South African and African exports to the EU. While these studies do not incorporate the specific design details provided about the December Agreement (such as the sectoral coverage, the CBAM factor, and the inclusion of indirect emissions), nor do they factor in the specific carbon intensity of production in the impacted country, they are still a reasonable indication of what might be expected:

  • A working paper commissioned by South Africa’s Presidential Climate Commission (PCC) models the impact of a CBAM based on the design of the European Commission’s Proposal. The model suggests that the implementation of a CBAM could mean that Africa’s exports to the EU decline by 30-35% (€1.7bn– €1.8bn fall) by 2030 relative to baseline scenarios without a CBAM. The estimated decline of EU exports to Africa is much smaller (€0.5bn). The study also finds that the value of South Africa’s exports to Europe which are covered by the CBAM[2] makes up an average of $1.4 billion annually. Of the sectors covered by the CBAM, South Africa’s iron and steel sector, which employs 28,000 people, stands to be the most affected.

  • Research commissioned by the Africa Climate Foundation, which is yet to be published, finds smaller but still worrying export declines for the continent. The study suggests CBAM may decrease Africa's exports to the EU by up to 5.7%, which would result in a 0.91% reduction in the continent's gross domestic product, equivalent to $16 billion[3].

  • The United Nations Least Developed Countries Report 2022 includes a general analysis of how carbon emissions trade policies (such as the CBAM) might impact LDCs. It finds that a 1% decrease in demand in the EU for goods in the iron, steel, cement, fertilizers, aluminium and electricity sectors leads to a slight decline in GDP in 21 (out of 38) LDCs, no change in 8 LDCs, and some gains in 9 LDCs (Angola, Burundi, Central African Republic, Liberia, Mauritania, Mozambique, Sierra Leone and the United Republic of Tanzania[4].

When the design of the CBAM is finalised, a global general equilibrium model that includes the relative emissions intensity of production across the world will provide more detailed and accurate picture of how the CBAM will impact African economies and their different sectors. In the meantime, the understanding that the CBAM will have a significant impact on African exports to the European Union should be enough to elicit a proactive (and ideally collective) response. Countries whose exports are exposed to the CBAM should utilise the avenues made available, for receiving support from the EU to capacitate exporters to understand, comply, and respond to its impacts. They should also push for the opening of new, and more generous avenues than those provided for by the regulations such as allocating a portion of the CBAM’s revenue to supporting decarbonisation efforts in developing countries. Exporters need to prepare for the potential impact of the Carbon Border Adjustment Mechanism (CBAM) by evaluating its effect on their business, identifying ways to mitigate its impact, and adjusting their business strategies to align with a low-carbon future. This is particularly important given that other countries (notably the USA and Canada) may follow the EU in implementing carbon border taxes.

The CBAM’s implementation does not have to be all bad news. The continent stands to benefit from it and the wider global shift towards renewable energies if it heeds calls to prioritise the development of green regional value chains and reap the benefits of its rich endowment of critical minerals[5]. Initiatives under the AfCFTA for Africa’s industrialisation should be designed to support this strategy and the broader objective of accelerating Africa’s transition to a low-carbon economy.

See a related infographic on The European Union’s Carbon Border Adjustment Mechanism

[1] Council of the European Union. (2022). ‘EU climate action: provisional agreement reached on Carbon Border Adjustment Mechanism’ 13th December & Council of the European Union (2022) ‘Fit for 55’: Council and Parliament reach provisional deal on EU emissions trading system and the Social Climate Fund’ 18th December.

[2] This study is based on the specifics of the European Commission’s (EC) Proposal which differ from the trilogue agreement. The EC proposed: transition period from 2023-2025 and CBAM phasing in at 10% from 2026-2034; hydrogen is not covered by the CBAM; direct emissions only.

[3]Creamer, T. (2023, February 15). EU carbon border tariffs could knock $16bn off Africa’s yearly GDP. Engineering News. https://www.engineeringnews.co.za/article/eu-carbon-border-tariffs-could-knock-16bn-off-africas-yearly-gdp-2023-02-15

[4] UNCTAD. (2022). The low-carbon transition and its daunting implications for structural transformation. https://unctad.org/system/files/official-document/ldc2022_en.pdf

[5] Minerals used to produce green technologies.

About the Author(s)

Gita Briel

Gita Briel is a former researcher at tralac. Her research interests include the trade-environment nexus, applied development economics, and global environmental governance.

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