African manufacturers must wake up to the new EU border tax
The EU has launched its Carbon Border Adjustment Mechanism (CBAM), which will make it much more costly and complicated for African firms that export to the EU.
The CBAM, which came into force on October 1, is an import tariff on carbonintensive goods from abroad. It is applied as a tax paid by the importer when products enter the EU. The tax is assessed on the amount of greenhouse gas emissions embedded in goods being exported to Europe.
The aim is to standardise the price of carbon between EU products and imports, to ensure EU manufacturers are not disadvantaged by imports from countries that do not impose the same severity of carbon tax.
Initially, the carbon-intensive sectors to be covered by the CBAM will be aluminium, cement, electricity, fertilisers, iron and steel and hydrogen.
For SA, exports to the EU of iron and steel and aluminium will be the categories that are initially hardest hit. The inclusion of additional sectors — including the organic chemicals and polymers sectors — will be considered later.
As from 2026 CBAM tax will actually be paid and phased in, imports into the EU will face a similar tax burden as goods made by European companies. There is widespread concern among those who responded to EU consultations before the CBAM was launched at the fast pace at which the EU has proceeded.
UNJUST BURDENS
SA’s department of trade, industry & competition submitted a lengthy response to the request for comments, voicing several concerns about CBAM. It criticised “the unilateral imposition of the EU’s CBAM and other measures under the Green Deal that pose a threat to our sustainable development and climate change mitigation action imperatives and those of fellow African and other developing countries, including addressing inequality, unemployment and poverty eradication ” .
“CBAM has the effect of transferring the burden of climate action onto developing economies, and places unjust burdens on our country and industries,” it said.
In a research paper, “EU’s Carbon Border Adjustment Mechanism & Implications for SA Exports”, SA research body Trade & Industrial Policy Strategies (Tips) warned that: “The CBAM will undoubtedly have a negative impact on SA exports. The iron and steel and aluminium sectors are at high risk. This is primarily due to the use of coal-powered electricity and coal as feedstock in these sectors.”
The CBAM will also affect exporters from the rest of Africa. There is a strong likelihood that other jurisdictions — including the UK, Japan and Canada — will soon impose their own equivalents.
London School of Economics professor Dave Luke has suggested the CBAM may reduce African exports to the EU by up to 5.7%, equivalent to a $16bn reduction in GDP.
Initially, the CBAM will be levied on direct emissions — reflecting the emissions that were generated in their production. But in December it was agreed to extend the CBAM to indirect emissions
— those from bought-in electricity. We expect that emissions in bought-in raw materials and components will also be included. This means African manufacturers will need to consider where they source components and raw materials, and could mean having to change suppliers or ensure existing suppliers adopt greener production methods. Exporters will need to consider not only what they produce, but what they produce it from.
SCRAMBLING
There wasn’t much time to prepare for the new EU border tax, and companies are scrambling to assess how quickly they can decarbonise before the January 2026 date from which the CBAM will be paid. A holistic approach across value chains is required to map and mitigate the impacts of the regime.
Forestry, fisheries & environment minister Barbara Creecy told President Cyril Ramaphosa’s 2023 Investment Conference that as new green legislation comes into effect there will be a “transition risk”, noting that “CBAM will constrain our auto sector. So, it is worth having a lower carbon growth trajectory”.
Tips says the CBAM “will impose significant compliance costs”. Exporting firms will not only have to account for, report and verify embedded emissions in their products, but third-party verifiable carbon audits will eventually be required, which can be costly even for large firms. The research firm suggests the administrative burden on exporters could be eased if governments were to introduce domestic carbon reporting systems, and advocates decarbonising industry and the electricity system, and introducing more ambitious climate change policies.
As the CBAM aims to achieve equivalence between the carbon tax burden on EUmanufactured products and imports into Europe, it would be mitigated if exporting countries were to bring their own carbon tax regimes in line with those of the European community.