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How Will the EU’s Carbon Border Tax Affect Africa?

African and European officials are heading for a confrontation over the costs of a new carbon tax which could cut trade levels and complicate wider negotiations at the UN COP28 Climate Summit in Dubai starting on Thursday (30 November). South Africa and India, with the discreet support of the United States, are challenging the new tax at the World Trade Organization arguing that it constitutes a discriminatory trade barrier.

At issue is the European Union’s Carbon Border Adjustment Mechanism (CBAM) which came into force in October. The first bill for companies will land on 31 January 2024, and the new system of taxation will take full effect by 2032.

“The risk is that we will see a battle of jurisdictions over green energy laws — the US with its Inflation Reduction Act and the EU with its Carbon Border Tax — and others could join in”, says Dr Carlos Lopes who chairs the African Climate Foundation (ACF) and is a professor at the University of Cape Town, and a former African Union envoy to the EU.

“Many African officials see these new regulations as another layer of protectionism which will cut their access to markets in industrialised economies,” adds Lopes.

There are also ethical and practical points, he argues: “You can only run carbon markets when you have a plan to exit fossil fuels.”

One of the sternest critics of the EU’s new rule is South Africa which was the first country in its region to set a carbon tax: at 120 South African Rand (US$7) per ton of CO2.

It is also negotiating a $8.5bn [€7.7bn] Just Energy Transition Partnership (JETP) with the EU, the UK and the US to speed up the de-carbonisation of its economy, moving from its high dependence on coal-fired power stations to solar and wind power over the next 20 years.

But both the carbon tax and the JETP are strongly opposed by corporate and trade union lobbies in South Africa.

EU ‘not good at green diplomacy’

The CBAM is a carbon levy which will apply initially to imports of aluminium, cement, electricity, fertilisers, hydrogen, iron and steel. It could substantially increase the cost of exporting to the EU.

Importers of these products in the EU will pay a carbon levy, unless the products come from regions with similar laws on emissions to the EU.

It will hit African economies harder than their peers. The CBAM tax could cut African exports to the EU by almost five percent, according to Dr David Luke, a specialist in African trade policy at the London School of Economics.

“The EU is not good at green diplomacy,” former WTO Secretary-General Pascal Lamy has said. Euro MPs spent two years drafting and negotiating the new mechanism, mostly within the EU bubble.

An exemption for least-developed countries was considered by both the Commission and the European Parliament but was dropped.

Part of the problem, insiders say, is that CBAM’s design was led by the European Commission’s Directorate-General for Taxation and Customs Union (DG TAXUD) rather than as a trade instrument. The result was scant consultation with African or other third countries.

The mechanism puts a disproportional responsibility on a continent “… that is among the least responsible for greenhouse gas emissions, but among those most affected by climate change,” the African Group at the WTO said.

The most comprehensive study, commissioned by the African Climate Foundation (ACF), found that “Africa’s economy will be negatively affected by the CBAM with exports to the EU declining by four percent in total, that Africa will be worse affected than any of the other major economies analysed… that even at €40 per tonne, the CBAM will raise EU import tariff revenue substantially, but have little impact on global CO2 emissions”.

The ACF also warned that “with a higher carbon price and more extensive product coverage, Africa’s exports to the EU would decrease by 5.75 percent, with Africa’s GDP falling by 1.12 percent (almost twice the initial scenario of a partial CBAM and a lower carbon cost)”.

Unequal impacts

The impact will be very uneven. Aluminium accounts for nearly 20 percent of Mozambique’s total exports, 97 percent of which is exported to the EU.

According to the Washington DC-based Center for Global Development, Mozambique could lose as much as 1.5 percent of its GDP due to the CBAM levies.

Others, such as Kenya, Morocco and Ethiopia, which are not major minerals exporters and have large and expanding renewable energy sectors — stand to benefit from CBAM. At the African Climate Summit in September in Nairobi, Kenya’s president William Ruto urged the EU to allow more African carbon credits in its existing emission trading markets.

This dynamic complicates Africa’s ability to lobby as a united continent. That said, the Nairobi Declaration — signed by all governments at the African Climate Summit in Nairobi — includes calls for “designing global and regional trade mechanisms in a manner that enables products from Africa to compete on fair and equitable terms”.

It also demanded that “trade-related environmental tariffs and non-tariff barriers must be subject to multilateral discussions and agreements and not be unilateral”.

The Africa Group points out that the WTO has separate committees on trade and environment, and trade and development. But it lacks a forum in which all three — trade, environment and development — could be discussed and negotiated together. The rules for the three areas could be much better coordinated.

“Measures adopted by developed countries as part of industrial policies aimed at developing green industries should be available to developing countries,” argues the African Group paper, adding that “this necessitates that the CTE engages on issues of importance to developing countries.”

‘A minor irritant’

European officials are reluctant to modify the rules of the CBAM to meet the concerns of African and other critics. It won heavy backing in Brussels. The bill establishing CBAM was adopted by a hefty majority with cross-party support in the European Parliament. It was also backed by many Brussels think tanks and activists.

CBAM sits alongside recent reform of the European Union Emissions Trading System (ETS), and new regulations around deforestation and due diligence in value chains. The next European Commission, likely to be led for a second term by president Ursula von der Leyen, will take office next October following the European elections. And it will probably table a new Net-Zero Industry Act (NZIA) and a Critical Raw Materials Act (CRMA). These are all part of the EU’s attempt to lead a global decarbonisation drive.

“CBAM is the logical consequence of the [phase-out] of free allowances in the EU as it aims for a 55 percent reduction in emissions by 2030,” says Pierre Leturcq, a senior analyst at the Institute for European Environmental Policy (IEEP). It also shows that “…the EU is tired of waiting for others to reduce emissions as quickly as member states.”

The EU’s push towards net zero emissions and its Green New Deal (GND) are an attempt to position the bloc as the global leader in emissions reduction and rule-maker on carbon levies. It wants to win in the battle of jurisdictions outlined by Lopes.

The CBAM is also part of the EU’s response to the US Inflation Reduction Act (IRA) and is supposed to protect EU industry. So far, EU industry has received most of its allowances free; this explains why emissions trading has yet to make much of a dent in Europe’s industrial emissions. To change that, the EU is planning to phase out the free allowances over several years, starting in 2026.

Daniel Gros, director of the Centre for European Policy Studies (CEPS), argues that the costs of the levy are overstated. “CBAM covers only around 3 percent of all goods imported into the EU, with a total value of between €50bn and €60bn annually.”

“While the EU’s trading partners will complain, especially about the inclusion of steel products, for most countries the CBAM will be a minor irritant at worst,” says Gros, adding that CBAM “will apply only to a small and rather disparate selection of carbon-intensive products that are prone to carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. And, for the most part, these are not widely traded goods.”

WTO compliant?

India and South Africa have led the international opposition to CBAM, arguing it could breach the WTO’s non-discrimination principle. The African Group at the WTO said that its rules allow trade measures that trade measures that help implement domestic environment policies but aim to stop such measures from creating obstacles to trade.

“Any climate justified measures [such as levies] that directly restrict market access by developing countries and LDCs (Less Developed Countries), where research shows the reduction of carbon emissions is minimal, should be avoided,” it adds.

EU officials insist that the phase-out of free allowances for carbon emissions to EU firms means that it is WTO compliant. They add privately that India’s and South Africa’s challenges to the CBAN at the WTO are immaterial. CBAM has already entered into force and the WTO cannot force the EU to shelve it.

The Indian government has recently indicated that it may revise its tax regime to counter the EU carbon tax. Prime Minister Narendra Modi’s government is currently in talks with the European Commission on a free trade agreement, which could give it more leverage. Its handling of CBAM will be closely watched by states in Africa and South America.

The EU’s failure to agree on mitigation or adaption measures after years of negotiations is also frustrating African officials. It raises scepticism about EU promises regional economies will not suffer economic losses from the CBAM as they will be offered a compensatory mechanism.

The Commission insists it will police the regime with a light-touch, with the objective being ‘to serve as a pilot and learning period for all stakeholders’ and to ‘collect useful information on embedded emissions to refine the methodology’. EU officials expect that, by full implementation in 2030, the mechanism will raise around €10bn [US$11bn] per year for the bloc’s budget.

But costs are inevitable. Emissions accounting is tricky and few African economies have a system in place.

The African Group at the WTO argues that complying with the CBAM will require much more administration and raise export costs, such as setting up procedures to report on levels of carbon emissions. “These [costs] will be difficult if not prohibitive for most, if not all, developing countries,” concludes the Africa Group.

Join the ‘climate club’

EU officials are looking at ways to compensate African exporters who will have to incur higher costs.

One camp, led by German Chancellor Olaf Scholz, has called for African states to join the EU’s ‘climate club’ and impose their own carbon border tax by copying and pasting the EU’s new rules. But that would work only if it was coordinated across the all the region’s economies. The African Union, unlike the European Commission, doesn’t have the mandate to do that.

We hear the EU executive may consider increasing European investment and technical support for an African clean energy transition, with some of the levies from African CBAM exports being used to finance this support via the EU’s Global Gateway infrastructure investment programme. This could help countries take advantage of the emerging green export markets.

African leaders say they this would involve more conditionality and bureaucracy and lacks a clear commitment on the structure of the compensation. It could be a form of tax rebate.

Trade analysts warn that the EU will gradually expand the scope of CBAM, as part of an uptick of climate-related protectionist measures.

Faten Aggad, a former advisor to the African Union, has warned that if CBAM’s coverage expands in future, the impact on African economies could be far more substantial. She points to maritime shipping as the most likely next sector for CBAM expansion, which could hit several African ports, including Egypt’s Port Said and Morocco’s Tangier.

Source : euobserver