The European Parliament in May 2023 ratified the CBAM, aligning with the EU's ambitious climate objectives to reduce emissions by 55 percent by 2030 compared to 1990 levels. The CBAM is poised to compel non-EU countries falling under its purview to implement stricter emission regulations.
As many African countries do not currently meet the CBAM emission reduction standards, importers to the EU may redirect trade elsewhere to minimise cost.
A study by African Climate Foundation and the LSE Firoz Lalji Institute for Africa suggests that CBAM could lead to significant reductions in African exports to the EU, with estimates indicating declines of up to 13.9 percent for aluminium, 8.2 percent for iron and steel, 3.9 percent for fertilisers, and 3.1 percent for cement.
While the CBAM may initially pose challenges to Africa's trade relations with the EU, there is an opportunity for it to serve as a catalyst for enhancing intra-Africa trade. The focus of the CBAM is to tax direct and indirect embedded emissions of affected goods as well as embedded emissions in imported electricity.
The mechanism sets out the methodology for determining embedded emission levels, placing a burden on non-EU producers to provide such data to EU importers in affected countries. It is invariably in the interest of affected nations to harness input supply chains to curtail emissions within their production cycles.
As highlighted in a 2016 McKinsey study, supply chains represent a significant portion, up to 90 percent, of the carbon emissions and environmental footprint associated with consumer-packaged-goods companies.
While CBAM-affected goods may not fall directly within the realm of consumer-packaged goods, producers of such goods can draw insights from this finding. Embracing sustainable sourcing practices is invariably a strategic approach to reducing embedded emissions in CBAM-affected goods.
Such practices, which include procuring inputs from nations with competitive and comparative advantages whilst also undertaking rigorous vendor audits, can foster trade across borders and mitigate the potential impacts of CBAM on African nations.
Additionally, countries possessing an advantage may have made investments in cutting-edge emission-reduction technologies and enhanced installation units to export production processes to other countries.
With a mandate to account for embedded emissions from electricity sources in the production of CBAM goods, countries such as Mozambique, South Africa and Zimbabwe with high-emitting energy sources could potentially import low-carbon energy from Kenya, Ethiopia, and the Democratic Republic of Congo.
This strategic move would effectively reduce the carbon intensity of the production process, fostering sustainability and enhancing regional trade dynamics. However, countries must be committed to making investments in the needed infrastructure such as renewable plants, interconnected power systems, grid upgrade and expansion, and acquisition of throughways for transmission lines to facilitate clean power trade.
In the scenario where short to medium-term investments in green energy fall short, Mozambique might explore the prospect of selling its aluminium to Kenya. By leveraging Kenya's green energy resources for processing, the refined aluminium could then be positioned for sale in the EU market. The Aluminium Company of Egypt (Egyptalum) also stands poised to evolve into a pivotal processing hub within Africa, having recently forged a collaboration with Scatec, a Norwegian independent power producer, to deliver 1,000 MWp of solar energy to the Nag Hammadi aluminium complex.
By leveraging sustainable sourcing practices and adopting innovative strategies to reduce emissions within production cycles, African nations can both comply with CBAM requirements and establish a fragmented CBAM goods value chain to strengthen regional trade relations.
As Africa navigates the complexities of CBAM implementation in the coming years, proactive measures to enhance intra-Africa trade could pave the way for the much-desired sustainable economic growth and development across the continent.
Pauline Anaman and David Ofosu-Dorte both work with AB & David Africa in Ghana. Dr Olufunso Somorin works with the African Development Bank in Kenya.
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