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EU’s carbon tax could cut yearly GDP by $25 bln in Africa (report)

Friday, 02 June 2023 19:03
EU’s carbon tax could cut yearly GDP by $25 bln in Africa (report)

(Ecofin Agency) - A report underlines that the European carbon tax could severely penalize African countries, most of which lack the financial and technological resources to rapidly decarbonize their heavy industries. 

The European Carbon Border Adjustment Mechanism (CBAM), applicable to seven economic sectors from 2026, could make Africa lose $25 billion yearly, according to a report published, on May 9, by the African Climate Foundation (ACF) and the Firoz Lalji Institute for Africa, a research center hosted by the London School of Economics and Political Science.

Entitled "Implications for African Countries of a carbon border adjustment mechanism in the EU", the report points out that this mechanism, better known as the European carbon tax, is both a means of achieving the target of a 55% reduction in greenhouse gas (GHG) emissions by 2035 (compared with 1990 levels) and a trade defense measure. It aims to level the playing field between companies in the European Union (EU) and those in third countries by assigning a carbon price to certain imported products. 

The CBAM is designed to complement the EU Emissions Trading Scheme (EU ETS), which applies to all EU member states as well as Iceland, Liechtenstein, and Norway since 2005. The EU ETS obliges European companies to acquire several GHG emission allowances corresponding to the actual amount of CO2 or equivalent gases they emit, to decarbonize their production processes. To avoid relocations caused by the absence of carbon taxation on imports, the EU decided to subject imported products to the same carbon price imposed on goods produced in the European area.

A 3-year transition period

The CBAM will initially apply to seven sectors (cement, steel, iron, aluminum, fertilizers, electricity, and hydrogen) and expand gradually to other sectors. The European carbon tax will become applicable on October 1, 2023, with a three-year transition period during which only reporting obligations will apply. Payments will only be required from 2026.

To estimate the impact of this tax on African economies, the African Climate Foundation and the Firoz Lalji Institute for Africa have used models that take into account several data, including the price of carbon, products exported to the EU, the GDP of African countries and their carbon emissions.

The models are based on two carbon prices. The first price is €40 ($43) per ton and the second, which is more realistic and the 2022 average, is €87 ($93.6) per ton. 

Based on those prices, several scenarios were developed. At 40 euros per ton, the European border carbon adjustment mechanism applied to the seven sectors concerned in the first phase would result in a 3.99% drop in African exports to the EU and a 0.58% decline in the continent's GDP.  At 2021 GDP levels, this equates to an annual decline of around $16 billion in Africa's GDP.

LDCs are particularly vulnerable 

One of the reasons Africa is so vulnerable to the CBAM is that the EU is a major market for African products. The EU absorbs around 26% of African fertilizer exports, 16% of iron and steel exports, 12% of aluminum exports, 12% of cement exports, and 33.1% of manufactured goods exports.

In the scenario based on a carbon price being around €87 per ton, the European carbon tax would cause a 5.75% drop in African exports to the EU, and cut the continent's GDP by 0.91%. At 2021 GDP levels, this equates to a fall of $25 billion in revenues yearly. 

Another scenario assumes the extension of the European carbon tax to all economic sectors and carbon priced at €87 per ton. Under that scenario, African exports to the EU would fall by 7.13%, and the continent's GDP would be cut by $31 billion yearly. 

Africa is home to 33 of the world's 46 Least Developed Countries (LDCs), and the report points out that these countries will be the hardest hit by the European carbon tax, mainly due to their very limited financial and technological capacity to decarbonize their production processes. There is, therefore, the need to initiate a dialogue on the most appropriate ways of reducing the negative impact of the European carbon adjustment mechanism on African economies, and on LDCs in particular.

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ECOFIN AGENCY offers a selection of articles translated from AGENCE ECOFIN. Founded in 2011, Agence Ecofin is a leader in Francophone Pan-African economic news, particularly in West and Central Africa. The agency publishes daily news on nine African economic sectors: Public Management, Finance, ICT, Agribusiness, Energy, Mining, Transport & Logistics, Communication, and Training.

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