What the EU carbon tax spells for Africa

A recent EU law imposing tariffs on imports according to their carbon emissions has raised concerns globally, especially among developing economies. These concerns revolve around the law's potential negative impacts on economic growth, exports and overall competitiveness, which could lead to trade disputes.

The law is intended to disincentivise the use of fossil fuel in industries, encourage a transition to clean energy, tame carbon leakage and decarbonise trade.

Reducing emissions through taxation

Initially, the carbon tax regulation applied to companies operating within the EU that currently pay roughly USD 80 per one tonne of emitted carbon dioxide. However, fearing that firms would attempt to bypass this tax by offshoring production to non-EU countries with more lax environmental regulations and exporting the final products to Europe, the European bloc introduced a revised and more comprehensive version of the law, titled the Carbon Border Adjustment Mechanism (CBAM).

Under this new arrangement, imports into the EU will face charges based on their carbon emissions. This falls within the broader framework of the Fit for 55 package, a series of regulations aimed at reducing emissions by at least 55 percent compared to 1990 levels by 2030. It represents the world's first-ever tax of this nature. 

The law, which will come into force in October of this year, will be rolled out in two phases. The first phase will run for three years and require businesses trading with the European Union to share emissions data regarding their products and processes.

The tax law will target the iron, steel, cement, aluminum, fertiliser, hydrogen and electricity sectors.

The African dilemma

While the carbon tax has garnered approval in the Global North as a forward-looking climate initiative, it has faced substantial backlash in the Global South, with experts, reports and civil society groups accusing it of promoting protectionism and exacerbating trade imbalances that could adversely affect the fragile economies of developing nations.

Africa, a substantial trading partner of the European bloc, finds itself disproportionately affected by the new tax regulations, which target key sectors that serve as the backbone of its economy. The move therefore threatens to impede the growth prospects of many African nations.

According to a report jointly produced by the African Climate Foundation (ACF) and the Firoz Lalji Institute for Africa at the London School of Economics and Political Science (LSE), the application of CBAM to all imports would lead to a 5.72 per cent reduction in exports from African countries to the EU. This would correspond to a decline of the continent's GDP by 1.12 per cent, amounting to Euro 31 billion based on African GDP levels in 2021.

"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%," the report reads. "If the scope of the CBAM is expanded over time, the impact could be more substantial."

Meanwhile, the United Nations Conference on Trade and Development (UNCTAD) has raised concerns over the tax's potential impact on low-income nations, arguing that incomes from these countries would dip to a cumulative USD 5.86 billion if the EU carbon price is set at USD 44 per tonne. 

"The analysis indicates that the CBAM generates a gap between developing and developed countries in terms of welfare. With a $44 per tonne carbon tax, developed country incomes rise by $2.5 billion while developing countries’ incomes fall by $5.9 billion," noted a UNCTAD report titled A European Union Carbon Border Adjustment Mechanism: Implications for Developing Countries. "Developed countries, however, experience a higher welfare loss, driven by losses in the European Union, from the initial introduction of the carbon price of $51 billion with a carbon price of $44, while developing countries gain $1 billion in the absence of a CBAM."

It should be noted that African nations heavily depend on these exports as a source of foreign earnings. Therefore, any decline in exports would result in reduced government revenues, which, in turn, would hamper government spending on critical projects, including essential social development initiatives such as education and healthcare.

And as manufacturing companies grapple with higher taxes, many may resort to workforce reductions or even complete shutdowns. This could lead to the loss of tens of thousands of jobs, as these industries serve as major employers. The absence of household incomes from these breadwinners might exacerbate existing inequalities and increase poverty rates in the affected regions.

A case for market diversification

Mozambique is among the nations bracing for the impact of the new carbon tax. This Southern African country annually produces over 560, 000 tonnes of aluminium, generating exports valued at $1.91 billion that reach the European Union. Given that aluminium is the primary industrial employer in the nation, it is likely that job losses and decreased industrial tax revenues will follow.

The concern lies in the process of producing refined aluminum, where up to two-thirds of emissions are generated. This process involves extracting the final product from alumina through smelting, which requires high heat and substantial electricity, some of which is supplied by coal-based sources from South Africa.

The African Climate Foundation projects that the country’s wages could fall by 0.12 per cent due to the tax. 

South Africa, which powers over 80 per cent of its industrial operations by burning coal, could also be staring at a bleak trading future with the EU should the carbon tax sail through.

According to a working paper produced for the Presidential Climate Commission (PCC), the EU imported on average USD 1.4 billion worth of products every year between 2017 and 2021 from South African sectors that have been covered by CBAM, including the iron and steel industries, which together employ roughly 28,000 people. 

The development by the EU could inspire other developed economies that are potential markets for Africa to follow suit as they seek to decarbonise trade. Such a move could have even greater implications for developing economies. 

Some African experts, however, view the law as a potential catalyst for innovation.

"The EU decision presents Africa with an opportunity to explore diversification of its markets and trading partners in order to insulate itself from the shocks of overreliance on the EU market," Moses Mwaniri, a lecturer at the University of Nairobi's School of Business, told FairPlanet. "The continent is also presented with the opportunity to scale up its renewable energy hold. At the moment, it only attracts 2 per cent of the international investments in green energy.

"If that number was higher, it would have navigated the new tax by having in place green-conscious industries and exports."

But Monica Muia, an environmental activist, argues that the tax is unjust and will only exacerbate global inequalities while undermining the goals of a just energy transition. She further noted that the tax must be complemented by efforts from developed nations to provide climate financing to developing countries and facilitate technology transfer that supports the transition of these countries to low-carbon economies.

"There must be a reasonable way to introduce the tax regime," Muia told FairPlanet. "Europe contributes a bulk of carbon emissions compared to developing nations, yet [the latter] are the most buffeted by climate crisis occasioned by these emissions. The tax will not only affect trade volumes, but will increase inequalities and fan poverty."

As opinions regarding the potential impact of the carbon tax on Africa's economies, trade relations and net-zero transition vary, there is a growing call to find a balance between profits, people and the planet when it comes to emissions regulations.

"A major insight that could be drawn from the findings of this authoritative report is that deeper and more meaningful reflections on the wider implications of CBAM are necessary," noted the ACF report. "The risk that CBAM could precipitate trade wars between the EU and its trading partners requires multilateral solutions to decarbonising trade."

Image by Chris LeBoutillier