Establishment of carbon borders not supported by climate finance commitments

The European Union (EU) is one of the first regions to establish a Carbon Border Adjustment Mechanism (CBAM) scheme, with the current requirement that companies report on the total carbon footprint of products imported into the EU.

The six products currently being subjected to the CBAM requirements are iron, steel, fertiliser, aluminium, cement and electricity and many developing countries, including South Africa, view CBAM as a non-tariff barrier to trade, speakers noted during a webinar hosted by Creamer Media on July 10.

"Historically, developing countries have not created the mess we're in, but now we are faced with the consequences of the industrialisation of the global North. However, we are committed to climate change action and developing countries have created concrete decarbonisation strategies and pathways.

"Under the UN Framework Convention on Climate Change (UNFCCC) and the Paris Agreement, there is specific recognition for common but differentiated responsibility and respective capabilities within national circumstances," said Department of Trade, Industry and Competition international trade policy and trade policy negotiations directorate director Mahendra Shunmoogam.

The CBAM also goes against the principles of the Convention and the Paris Agreement, which state that developing countries should be enabled to decarbonise with technology, financial and capacity-building capabilities, he added.

"The UNFCCC climate responses working group will again discuss climate change response measures that are not enabling developing countries to decarbonise, and instead are preventing them from decarbonising," he noted.

Further, the $100-billion a year promised by developed countries to the developing countries to enable them to decarbonise was only met in 2022, according to the Organisation for Economic Cooperation and Development.

"Financial mechanisms enable decarbonisation and these must take the form, not of loans with significant interest, but concessional loans that enable developing countries to invest into sectors that will bring about their decarbonisation strategies.

"This is what is needed. Not punitive measures that are actually non-tariff barriers to trade," said Shunmoogam.

Further, if CBAMs fall under World Trade Organisation (WTO) rules exceptions, then such mechanisms would be considered discriminatory in terms of the rules, because European Free Trade Association nations are exempted from the EU CBAM, noted trade bloc African Continental Free Trade Agreement (AfCFTA) Secretariat technical assistance, capacity building, trade policy and trade negotiations chief technical adviser Dr Tsotetsi Makong.

However, owing to the lack of an appellate body in the WTO, measures that otherwise would have been rendered inconsistent are not, he added.

The continent is trading widely with the EU, including in the majority of the current products under the mechanism, which means that African countries cannot help but see this mechanism as facilitating trade diversion.

"This can trigger divestment because companies will need to comply with CBAM and may be unable to do so. The little foreign direct investment that we have may fly away, and the technology transfers associated with such investments may also be lost, meaning CBAM has broad implications for the continent," he said.

Further, the average cost of capital for renewable solar, wind and hydropower energy for African countries was 8.2%, while it was 4.4% for developed countries, said research organisation Firoz Lalji Institute for Africa strategic director Professor David Luke.

"Between 2015 and 2021, the amount of capital for renewable energy in Africa declined by 55%. In terms of nationally determined contributions (NDCs), there is a significant amount of work to be done. For example, only 60% of Kenya's NDCs between 2020 and 2030 are funded and a gap remains. This seems to be the pattern across other African countries as well.

"Adaptation is a big challenge for African countries, but this is an area where the issue of capital is clearly not getting to the targets," he said.

Additionally, the scope of products subject to the EU CBAM regulations is expected to expand.

"In moral terms, no one will save Africa or other developing economies. We have to save ourselves. There is no way that a country or bloc, like the EU, will willingly provide an opportunity for a third-party country to create unemployment in their region," said Makong.

While African countries must assess trade with the Global North as prime markets to earn foreign exchange currency, the continent cannot merely wait for the scope of products subjected to the CBAM to become more expansive, and even basic commodities may be affected.

"If other jurisdictions are more favourable in terms of costs, investors will simply go to these places. This will lead to trade diversion. Our assessment of trade under the AfCFTA highlighted some products that have been excluded from this agreement, and some of them are being imported from other jurisdictions, including the EU.

"There is calibration to be done in terms of trade rules, but the AfCFTA provides opportunities for the private sector in Africa to diversify markets. Let us not wait until more products are added to the CBAM and we are left high and dry," he advised.

Meanwhile, the EU was an important market for African countries, with the EU accounting for 26% of Africa's exports of fertiliser, 16% of its iron and steel, 12% of its aluminium exports and 12% of its cement, said Luke.

"While there are differences between countries, these are significant trade flows and, in our modelling, we found that CBAM would cause a fall of exports to the EU from Africa of up to 13.9% of iron and steel, 88.2% of fertiliser and 3.9% of cement exports," he said.

This would have a 0.91% impact on GDP, which translates to about $25-billion impact on Africa's collective GDP.

"To put this figure into perspective, $25-billion is more than three times the €6.3-billion development cooperation commitment made by the EU in 2021."

The characteristics of global trade flows meant that there was a nexus between trade and climate actions, Shunmoogam noted.

"Therefore, we are arguing that CBAM is not a climate measure, but a punitive trade measure because, if you were to support climate actions through this mechanism, you would consider the risks and ramifications.

He noted that the new European Commission trade director-general Sabine Weyand has stated that the EU needed to do a risk assessment of its policies before it started implementing them, which had not been done for the CBAM regulations.

However, companies could help to close the existing climate action finance gap because resource-rich economies were transitioning from high-carbon economies to mineral-rich economies, said financial advisory and audit services company Moore Johannesburg senior manager Kayla Jackson.

"This trend is being supported by the financial services sector, and there is money to be made in lithium, copper and cobalt. This is an emerging markets trend. These minerals are being used in Europe to rewire its economy," she said.

Banks and development finance institutions in Africa are promoting green finance and have come on board as part of this energy transition trend.

Africa's private sector can place pressure on governments to transform the economies and prepare the grids to support more renewable energy, while the financial sector is willing to step in, whether for local, international or pan-African projects.

However, Africa needed to find a way to use its minerals as close to their sources as possible, said Shunmoogam.

African countries have made NDC commitments, but companies can also look at how to make their production systems and processes cleaner and greener, he added.

"While there is the challenge that the multilateral rules are not helping us, we can find ways to make supply chains work better for us. Some of the actions could be buying more locally and sourcing more from Africa.

"We must start looking at onshoring products as one of the ways our companies and economies can become more efficient and competitive. This will help us to make economic growth jumps and can contribute to sustainability of the products that we have and our own socioeconomic sustainability," he said.

Africa needs to look at how it can integrate more effectively into value chains.

"We must think about the broader good that we are aiming to achieve, and we can offer goods and products to the world that will help us with our decarbonisation strategy," he said.