What is the Carbon Border Adjustment Mechanism?

Through Regulation No 2023/956 dated 10 May 2023, the European Union established a Carbon Border Adjustment Mechanism (CBAM).

The aim of this mechanism is to restore fair competition between European companies and foreign importers, as the European Union has decided to implement ambitious environmental regulations with the goal of reducing greenhouse gas emissions, particularly from its industry.

In this context, there was a dual risk of “carbon leakage”: a risk of substituting European production with imports from outside the EU on one hand, and a risk of relocating certain industries outside European states on the other. The CBAM was conceived to address this dual risk. It involves extending European environmental standards to companies exporting to the EU, thereby ensuring equivalent carbon pricing for both imports and EU-produced goods.

In practical terms, the CBAM will allow an additional cost to be imposed on importers of products whose production is polluting and for which there is no carbon price in the country of production or, the carbon price is low.  EU importers of products from third countries will need to acquire certificates from European Member States based on the carbon emitted during the production of the imported goods, and the price of these certificates will be linked to the price of CO2 within the European carbon market.

The European importer will have to account for carbon emissions on imported goods based on data provided by the exporting company. Without that data, default values will be applied.

The CBAM is implemented progressively. Thus, from 1 October 2023 until the end of 2025, only a reporting obligation is in effect: European importers must only declare the carbon emissions of the products they import.

Certificates will have to be bought from 2026, with a progressive application of CBAM's mechanism  until 2034.

To date, the CBAM only applies to six pilot sectors (steel and iron, aluminium, cement, nitrogen fertilisers, electricity and hydrogen) as well as certain products (such as screws, bolts and nuts). In 2026, however, the list of sectors concerned may be extended by the European executive. 

What implications does the CBAM have for African countries and businesses?

The CBAM is expected to have significant implications for the competitiveness of developing countries exporting products to the European Union, particularly for the economy of the African continent, which is a major exporter to the EU. Some studies suggest that the implementation of the CBAM could lead to a nearly 6% decrease in the continent's exports and reduce the African GDP by approximately USD 25 billion, i.e. around 0.9%. According to a June 2023 World Bank study, countries such as Mozambique, South Africa and Cameroon could be most exposed to this new mechanism, as well as the Maghreb states.

The CBAM could also reshuffle the deck of competitiveness among African states. Some states that employ less polluting production methods would see their export offerings become more competitive compared to their counterparts on the continent.

Finally, it is worth highlighting the risk of the CBAM having an adverse effect on certain African exporting economies, which could be dissuaded from processing their raw materials locally by the sectors currently targeted by the CBAM. For example, a quarter of the world's bauxite (the ore used to produce aluminium) comes from Guinea. However, bauxite is excluded from the CBAM (in order to encourage bauxite exports to the EU), while aluminium is subject to it.

Given its decisive impact on the African economy, the CBAM must be taken into consideration both by African states in defining their industrial and energy policies and by the continent's businesses in their productive investment strategies, aimed at maintaining competitiveness for exports to the European market.

However, initial observations suggest that various actors in the African market have not anticipated the implementation of the CBAM, just as European importing companies from these markets seem unprepared, even though the cost of the affected imports is expected to increase.

What actions should be considered in response to the implementation of the CBAM?

In response to the implementation of the CBAM, two levels of actions can be considered to mitigate its negative effects on the African continent:

• At the state level, by establishing a legislative framework conducive to the development of decarbonisation actions in their industries (energy policy, investment promotion, etc.). This includes enhancing the expertise of administrations in calculating carbon emissions for products covered by the CBAM and raising awareness among industrial stakeholders on this matter.
• At a corporate level, by implementing investment plans for the decarbonisation of production methods, as well as by providing training in calculating the carbon emissions of their production.

These various actions require a whole infrastructure, know-how and considerable resources. It will be essential for African governments to finance this transition, with the support of the European Union and development banks.

It is also incumbent upon European companies to support their exporting partners in this capacity-building for emissions calculation and in the decarbonisation of production processes.

Otherwise, given the cost implications of the CBAM, there is a risk that African companies may turn away from the European market to redirect their exports toward markets with less stringent environmental requirements, notably in Asia.

The consideration of the CBAM should also play a role when drafting import contracts, where it will be necessary, in particular, to organise the transmission of carbon emission data and manage the consequences on pricing.