African Business

Africa could lose $25bn per annum as a direct result of the EU’s CBAM

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The first comprehensive study focusing on the implications of the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) on Africa has been released by the African Climate Foundation (ACF) and the Firoz Lalji Institute for Africa at the London School of Economics and Political Science (LSE). 

The report raises concerns about the economic ramifications of the CBAM on Africa, as it is likely to hit the competitiveness of African exports, particularly industrial exports if product coverage expands over time. It also notes that the CBAM process introduces administrative hurdles to market access by African countries, which historically struggled to access the European market.

The joint report sets out the implications of the CBAM for Africa regarding relevant obligations under international legal frameworks as well as strategic considerations for African countries, ensuring the CBAM is designed and implemented in such a way that is neither more trade restrictive than necessary nor discriminatory.

The CBAM will be introduced on October 1, 2023, with a three-year transition period during which only emissions reporting obligations will apply, without any financial payments or adjustments. After the transition period, the CBAM will be gradually phased in from 2026 to 2034. It will initially cover imports of iron and steel, cement, aluminium, fertiliser, hydrogen, and electricity. 

“The CBAM aims to position the EU as a global leader on climate action and reduce greenhouse gas emissions to 55% below the 1990 levels by 2030. However, the proposal has faced scrutiny from partners like Africa, who question its compliance with Paris commitments and its impact on African exports,” says Carlos Lopes – the ACF’s chairman of the board and advisory council. 

Africa is home to 33 of the world’s 46 least developed countries (LDCs), identified as highly economically vulnerable and confronting severe structural impediments to sustainable development.

The report identifies that several African least developed countries would be among those most impacted by the application of the CBAM. In a hypothetical scenario in which the CBAM was applied to all imported products, 11 African LDCs would be forecasted to experience a moderate to a large negative impact on their GDP by more than 1.5& and up to 8.4%.

Then, in a hypothetical model in which the CBAM was applied to all imports, the report forecasts it to reduce total exports to the EU from African countries by 5.72% and to reduce Africa’s GDP by 1.12% (equivalent to E31 billion in 2021 levels of African GDP). 

Given that the EU is a particularly import-export market for African countries, the CBAM could cause a fall in exports from Africa to the EU of aluminium by up to 13.9%, iron and steel by 8.2%, fertiliser by 3.9% and cement by 3.1%. If the scope of the CBAM is expanded over time, the impact could be more substantial, the report indicated.

“When the CBAM was under consideration, an exemption for LDCs and vulnerable economies was considered, but ultimately decided against by the EU. Instead, the European Parliament called for the EU to provide financial support, at least equivalent in financial value to the revenues generated by the sale of CBAM certificates, to support least developed countries’ efforts towards the decarbonisation of the manufacturing industries.

However, the EU has committed CBAM revenues to its Innovation Fund, which seeks to support innovative techniques, processes, and technologies, including the scaling up of such techniques, processes and technologies, with a view to their broad roll-out across the EU.”

“This contradicts an earlier EU proposal to finance LDC efforts towards the decarbonisation of their manufacturing industries at the level of revenues generated by the sale of CBAM certificates,” the report argued.

“Considering the issues raised by the joint report, it is essential that key stakeholders engage in a constructive dialogue on the CBAM. The EU must acknowledge the concerns of its partners and work towards mitigating the negative impacts on African economies. At the same time, African countries should also take the lead in formulating measures to protect their interests and ensure their economic development is not hampered by the CBAM,” it added.

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