- EU's carbon border tax to be imposed in Oct 2023
- Africa to lose $25bn annually, wiping out 0.91% of GDP
- Policy applauded in global north, criticized in South
Harare- The European Union's (EU) new carbon border tax, which will be fully implemented in October 2026, is set to significantly impact African economies. The tax will be applied to imports of products from countries with less strict carbon emissions regulations, such as those in Africa. This could lead to companies moving their production outside of the EU to avoid the tax, and then exporting products back to the EU, resulting in significant losses for African economies.
A new report reveals that the new policy will wipe out 0.91% of Africa's combined GDP, equivalent to a fall of $25 billion at 2021 levels of GDP. This loss represents three times the development cooperation budget that the EU committed to Africa in 2021. The affected sectors, including cement, iron and steel, aluminium, fertilisers, and electricity, are key drivers of African economies. The EU represents a significant market for many African economies exporting these products, making it the most affected region as a share of GDP.
While the impact of the new measures on African economies could be mitigated if they diverted their exports to other markets, including China and India, market diversification has been a challenge for most African economies. For example, Mozambique is particularly exposed to the new law due to its aluminium exports to the EU, while its exports to China are almost negligible.
The EU's new policy is a significant challenge for Africa, disproportionately affecting African economies, despite the continent having a limited carbon footprint. Still, measures like this are here to stay, and the EU needs to adopt a differentiated approach combined with appropriate finance to give breathing space for countries to adjust.
The anticipated revenue of €1 billion to be generated from the new policy is unlikely to compensate for the higher revenue loss of African countries. Therefore, African countries will need to urgently reach new export agreements and unlock new markets for their exports to reduce the shock from the EU's new carbon border law. However, most countries are not prepared for this, and access to other markets will depend on the policy direction countries take as they respond to what is seen as a trade war and increased protectionism by the EU.
Given the continent's limited carbon footprint and limited challenge to the EU's industrial base, a differentiated approach that allows countries to adjust, combined with appropriate finance, is needed. African countries should consider a pathway for green industrialisation and garner support around that agenda through investments. Costing the pathway to transition in combination with required policy adjustments should form the basis of an African response.
Africa could also gain from this policy if it adopts a green industrialisation approach. By investing in renewable energy, African countries can reduce their carbon footprint and become more competitive in the global market. The policy could also encourage African countries to innovate and adopt clean methods of production, making them leaders in the green industry. In this way, Africa could turn the EU's policy into an opportunity for growth and development.
The EU's carbon border tax is a double-edged sword for African economies. While it could lead to significant losses, it could also be an opportunity for growth and development if African countries adopt a green industrialisation approach. The EU needs to adopt a differentiated approach combined with appropriate finance to mitigate the impact of the new policy on African economies. African countries must urgently reach new export agreements and unlock new markets for their exports to reduce the shock from the EU's new carbon border law and consider a pathway for green industrialisation.
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