EU, UK tax on imports will be a blow for African countries

The Carbon Border Adjustment Mechanism stands to negatively affect the continent

There is a global shift to lower greenhouse gas emissions as part of the drive to fight climate change. As part of this, the EU and the UK are in the process of implementing the Carbon Border Adjustment Mechanism (CBAM). 

In principle, CBAM looks to lower carbon emissions by addressing something known as carbon leakage or offshoring emissions. In essence, it involves the transferring to the EU or UK of products which will increase their emissions. It is a tax on products with high carbon coming into the EU or UK. The aim, according to these countries, is to create a level playing field, grow industry decarbonisation and apply a carbon price to imports.

The goal is to stop carbon leakage on moved goods and lessen emissions from one country to another. The EU implemented CBAM in October last year, as a trial phase, and hopes to fully implement it in 2026. The UK CBAM is under consultation with a view to launching it in about 2027. 

Overall, CBAM aims to increase global climate action by encouraging countries that are subject to it to raise their emission targets and increase domestic carbon prices which lessen their liability and earn higher tax revenues, as noted in a publication by the South African Reserve Bank.

Faten Aggad, the executive director at the African Future Policies Hub, told the Mail & Guardian that “while the EU is attempting to present this as climate action, my argument is that it’s actually an industrial policy …

“So, the question really is whether CBAM is truly a climate measure or actually a measure to protect European industries from competition,” she said.

If the end goal of CBAM is to lower emissions and stop carbon leakage, why is there such a furore over it? To put it simply, CBAM affects South Africa and, more broadly the continent, massively. It stands to affect least-developed countries much more harshly than the EU and UK’s other trading partners. 

CBAM imposes tariffs on African countries responsible for very little of global carbon emissions which will negatively affect their trading options. It is a major injustice.

The South African Institute of International Affairs reported it “may reduce continental gross domestic product by -0.91% and cause a slump in exports of various products to the EU”. 

South Africa’s Department of Trade, Industry and Competition said, “These measures will disrupt exports, undermine investments and lead to job losses in a context where we are working hard to bring down the levels of youth (aged 18 to 34 years) unemployment which currently stands at 45.5%. Instead of supporting South Africa to build economic resilience and social cohesion, the CBAM measures will deepen socio-economic frictions.”

Concerningly for South Africa, about R52.4 billion of exports (at 2022 values) are at risk in the short term. This is about 10% of South African exports to the EU and approximately 2.2% of exports to the world, as noted by Seutame Maimele writing for Trade & Industrial Policy Strategies, an independent, non-profit economic research institution.

Last year, at the African Climate Summit in Nairobi, Kenya, countries signed a declaration that called for fair trade for countries on the continent and tariffs to be subject to discussion and agreement, not unilaterally applied, which is what CBAM in its current format is. It is still open to discussions, comments and opposition.

The main sectors on the CBAM list include iron, steel, cement, fertiliser, aluminium, electricity and hydrogen.

The EU accounts for 26% of Africa’s exports of fertiliser, 16% of iron and steel, 12% of aluminium and 12% of cement. CBAM could cause a fall in exports of aluminium from Africa to the EU by up to 13.9%, iron and steel by 8.2%, fertiliser by 3.9% and cement by 3.1%, according to a joint study by the African Climate Foundation and the LSE Firoz Lalji Institute for Africa.

Aggad noted that Mozambique is one of the countries that will be hit the hardest. “In fact, Mozambique is the most affected country. The reason is their aluminium manufacturing plant, which depends heavily on exports to the European Union.”

The EU and the UK must acknowledge the imbalance CBAM brings to African trade and countries. It needs to hear these concerns and include these trading partners in discussions on making such a mechanism workable. In its current form, it stands to negatively affect countries already hit by the global trade imbalance. 

It will exacerbate the inequalities on the continent and further highlights the need for finance to enable African countries to transition to emitting fewer greenhouse gases in creating products. Failure to do so will see the EU and UK moving to other countries, such as China and India for goods, which will impoverish more African countries.

Aggad believes another way to fight it would be to go to the World Trade Organisation but this might not yield the required result. She believes Africa should consider its own CBAM-style tax, with the collection of the money on the African side, instead of in the EU or UK. This would keep the revenue on the continent.

The EU and UK are trying to lower greenhouse gas emissions but the question must be asked if this is the way to go about it. To do it in a way that is harmful to least-developed countries and regions that are already impoverished will only enhance inequality. 

“I do not have a sense that they’re seriously listening or having discussions in good faith,” Aggad said.