How Europe’s Carbon Border Tax Could Help Africa

The EU’s carbon border adjustment mechanism is designed to lower greenhouse-gas emissions and encourage cleaner industrial production beyond its borders. But the mechanism can achieve meaningful change only if it is implemented with developing countries’ unique challenges in mind.

JOHANNESBURG – As the European Union pursues vigorous efforts to achieve its targets under the Paris climate agreement, the bloc’s proposed carbon border adjustment mechanism (CBAM) offers the tantalizing promise of cleaner industry and reduced emissions within and beyond its borders. By putting a price on the carbon dioxide emitted during the production of certain imports, the system aims to level the playing field between EU and third-country businesses and prevent so-called “carbon leakage” – the shifting of carbon-intensive industries to countries with weaker environmental standards.

A key objective of the CBAM is to generate “own resources” for the bloc: the EU expects that, by full implementation in 2030, the mechanism will raise around €10 billion ($11 billion) annually, which is earmarked to repay the bloc’s pandemic recovery debt. Perhaps more importantly, the CBAM will have global implications. While the mechanism could accelerate the green transition by effectively exporting the EU’s stringent climate targets, it could also adversely affect developing economies, particularly in Africa.

One of the main concerns is that the CBAM, which officially begins its transitional phase in October 2023 and will initially apply only to cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen, could significantly increase the cost of exporting to the EU. This would be especially problematic for African economies, which already face some of the highest trade barriers in the world and often rely heavily on exports to drive growth. David Luke, a London School of Economics professor specializing in African trade policy, recently warned that the CBAM tax may reduce African exports to the bloc by almost 6%.

More broadly, the tariff may have a disproportionate impact on countries with weaker economies and limited infrastructure. Lacking the capacity to meet the EU’s stringent carbon standards would put these countries at a competitive disadvantage and further widen the economic gap with the bloc. An analysis by the Center for Global Development found that Mozambique’s GDP, for example, could plausibly fall by 1.6%, given that the country sent more than half of its aluminum exports to the EU in 2019.

There are also concerns that the EU might, at a later point, impose trade sanctions against African states that fail to meet its emissions targets, exacerbating economic precarity and straining an already fragile global trading system. More immediately, managing the CBAM, which requires countries to calculate emissions associated with goods produced domestically, will require technical knowhow and administrative capacity that many governments simply do not possess.

At the same time, it is important to recognize the CBAM’s potential to drive positive change in African economies. By encouraging a reduction in greenhouse-gas emissions, the tariff could lead to the development of new industries and technologies that are less reliant on carbon-intensive processes. This, in turn, would create new economic opportunities and support more sustainable growth. The green transition is often touted as a job creator globally, and in Africa, the renewable-energy sector has the potential to create up to four million new jobs by the end of this decade.

Furthermore, African countries that are already making efforts to decarbonize would benefit from the EU’s strategy to rein in carbon leakage. A clean-energy revolution will also go a long way toward boosting full electricity access, which, according to the International Energy Agency, could be achieved by 2030 with an annual investment of $35 billion – less than 1% of global GDP. More than half of the estimated 770 million people currently living without access to electricity are located in Africa.

Ultimately, any implementation of the CBAM must consider the unique challenges African countries face. For starters, the EU currently accounts for about 8% of global greenhouse-gas emissions (and is historically a large emitter), while Africa’s contribution is relatively small, around 4%. And yet the latter will bear the brunt of future global warming. Moreover, implementation requires a differentiated approach that makes allowances for widely varying levels of development. This could include providing financial and technical support to help African governments meet the EU’s carbon standards and exempting certain products or sectors that are of particular importance to the continent’s economies.

A carbon border tax is just one tool in the fight against climate change. It may prove to be a powerful force, but only if it includes provisions to mitigate adverse effects on developing economies. Just as addressing global warming requires a collaborative approach, applying the CBAM requires the EU to work closely with governments in Africa to support the continent’s climate resilience. Failure to do so would undermine the mechanism’s transformative potential.

First published by Project Syndicate