Carbon Border Adjustment Mechanisms

Many developed countries are starting to push for more climate-ambitious policies within their territories. However, to mitigate the risk of carbon leakage, several countries are considering the adoption of carbon border adjustment mechanisms (CBAMs). CBAMs are meant to level the playing field between countries where different carbon prices are applicable by imposing a levy on the carbon dioxide (CO2) emissions embedded in a product. The International Economics Consulting team has authored a paper which explores how African countries would be affected should the proposed CBAMs be implemented by five countries and regions, namely the European Union, the United States, the United Kingdom, Japan and Canada.

Using a partial equilibrium model, the paper assesses the impact CBAMs would have on exports for some African countries across five sectors associated with high carbon emissions: cement; electricity; fertilisers; iron and steel; and aluminium. One of the key findings of the paper is that the iron and steel sector will be the most impacted given the volume of trade in the sector with the potential CBAM implementing countries. The exports of iron and steel represent approximately 45% of export revenue derived in Africa in the five sectors that might be initially impacted by CBAMs. This has huge ramifications for the continent, especially in countries heavily dependent on iron and steel production for their export revenue and overall GDP. Assessing the impact of the EU CBAM on South Africa’s exports, the analysis reveals that implementing a carbon tariff of US $10/tCO2e could decrease South Africa’s cement exports to the EU by nearly 38%, while a higher carbon tariff of $90/tCO2e, as applicable currently in the EU, could reduce South Africa’s exports to the sector entirely. However, in value terms, the iron and steel sector remains the most impacted, with trade declining by more than USD 148 million if a carbon tariff of $90/tCO2e is applied.

While CBAMs may be a potential game-changer in addressing the impacts of climate change, they undeniably entail numerous challenges for developing countries, especially when they are applied unilaterally by countries. For instance, at least 18.9% of Mozambique’s total exports were from CBAM sectors. As such, possible exemptions or preferential CBAM rates must be discussed between Africa and their trade partners in order to mitigate any negative impacts on trade and development in African countries. Given the considerable ramifications of the proposed CBAMs on Africa’s economy, the paper puts forward a series of practical recommendations for African countries to devise their response to CBAMs while also ensuring that they improve their resilience in combatting climate change. The paper can be accessed here.

International Economics Consulting Ltd won the Best Paper Award at the 17th edition of the African Economic Conference 2022 that was organised by the African Development Bank Group Development Bank, United Nations Economic Commission for Africa and UNDP.

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