The Carbon Border Adjustment Mechanism (CBAM) and its Negative Impact on the Global South: A Case Study of Egypt

The European Union (EU) has introduced the Carbon Border Adjustment Mechanism (CBAM), which imposes carbon taxes on selected industrial sectors and goods imported into the EU to further its ambitious climate agenda. Through this landmark policy, the EU aims to curb carbon leakage and promote cleaner global production. However, countries across the Global South are facing a steep negative impact of this new policy initiative. This issue was analysed across 14 Southern countries in a paper (A GVAR analysis of the macroeconomic effects of the Carbon Border Adjustment Mechanism in the Global South) co-produced by the Partnership for Economic Policy (PEP) in collaboration with Centre for Econometrics and Applied Research (CEAR), Ibadan, Nigeria and as part of the Sustainability Performances, Evidence, and Scenarios (SPES) project.

Within the same EU funded project, PEP affiliated researchers, Jorge Davalos, Martin Henseler, and Helene Maisonnave provide country specific analysis: The distributional effects of European climate policies in the Global South: A model-assessment for Egypt.  In their paper the authors have deep dived into the macro and microeconomic impacts of CBAM on Egypt, a lower middle-income country with export exposure to the EU in carbon-intensive sectors, including iron and steel, aluminium, fertilizer and cement. This blog highlights the findings of this country level impact analysis along with possible solutions.

Why is the CBAM a stumbling block for the Global South?

CBAM is designed to level the playing field by placing a carbon price on imports of goods such as steel, aluminium, fertilizers, and cement — sectors known for high emissions. It is a policy step to promote an equitable framework for carbon pricing in the EU—one that captures both locally produced goods from targeted high-carbon-emission sectors and foreign products imported from the rest of the world. While the intent to mitigate the impacts of climate risk and climate change is commendable, this “green” initiative could mean high cost for countries in the Global South, which often lack the financial and technological capacity to decarbonise at the pace expected by CBAM, and are likely to end up getting marginalised from the EU market. This reinforces global inequalities. 

Egypt: A Case Study in Vulnerability

In the case of Egypt where researchers combined macro–micro simulation approach—the analysis showed that the overall macroeconomic effects were relatively limited. This was because the CBAM-covered goods occupy a modest share in Egypt’s total exports. However, the microsimulation results showed adverse impacts on poor and rural and households with income based on unskilled labour. In particular, men were affected more than women given their concentrated employment in the impacted industries.

Let’s understand these findings in more detail. Among CBAM relevant industries, the exports iron and steel, aluminium, and fertilisers comprise the largest shares. Despite a clear increasing trend, however, CBAM-related exports accounted for less than 5% of Egypt’s total exports in 2023. Thus, at first glance, even though the introduction of CBAM tariffs will make related products less competitive reducing their trade flows, the overall impact appears modest. After including oil as a product taxed by the CBAM starting in 2028, the real GDP is expected to decrease by 0.013% to 0.017% depending on carbon price scenarios. 

But the devil is in the details.

To capture the distributional consequences at household level, researchers conducted microeconomic analysis. They captured data against the indicators of changes in commodity prices, in wage and capital rental rate and unpacked the impact of CBAM at individual household and worker’s levels. 

At the micro level, the study shows that the main declines in production appear for the energy intensive sectors. Wages and employment shrink in these sectors negatively impacting male, unskilled labour who are primarily employed in these sectors. Further, there are welfare losses with rise in poverty and food insecurity especially among the most vulnerable in the lower percentile. Overall, there is a broad-based but uneven contraction in household expenditure driven by declining labour and capital incomes in affected sectors. 

The negative fallout is further compounded by the rural-urban divide with rural individuals impacted much more than their urban counterparts due to greater exposure to carbon-intensive activities and limited access to alternative income sources. Interestingly, women on the labour market are less impacted, largely due to their concentration in public services and domestic services. 

Skill level emerges as the strongest source of differentiation. Unskilled individuals face much higher losses due to their concentration in CBAM impacted sectors and because they cannot easily change the sector or employment.

Larger implications of Egypt’s vulnerability and the way forward

The findings for Egypt suggest that the CBAM can potentially exacerbate poverty and inequality at individual level even when the macroeconomy is not vulnerable. It, thus, highlights the necessity for targeted mitigation policies for countries bearing the burden of the new policy initiative while being disproportionately vulnerable to the adverse effects of climate change, despite having contributed minimally to global carbon emissions.

Recommendations at country level include targeted government support for vulnerable groups, which requires greater administrative capacity, and is, therefore, cost intensive. Cost effective measures include development of transition friendly measures supported by innovative policies that support diversification and can help create new economic perspectives. Importantly, policies addressing structural changes, including labour market policies to mitigate impact on male workers without increasing the gender gap, revenue redistribution, clean energy investments and more can help foster Egypt’s adaptation to the CBAM. 

On a larger scale, the EU should accompany CBAM with concrete aid—drawing on the revenues accrued—to finance climate action programs for poor and adversely affected countries. This could include capacity building (e.g.: carbon accounting training), financial support, technology transfer and more. It is also important for the EU to widen its exclusion net beyond low-carbon sectors to include less-advanced countries whose emission levels are below a certain predetermined threshold. Further, Egypt and similar economies could diversify trade routes and seek greener opportunities beyond the EU market as well as invest in green industries if external finance is made available.

With careful analysis, consideration and adequate policy responses balancing decarbonization with principles of fairness and equity, the CBAM can potentially be implemented in a manner that ensures that climate justice does not become synonymous with economic injustice.

Disclaimer: This deliverable contains original unpublished work except where clearly indicated otherwise. Acknowledgement of previously published material and of the work of others has been made through appropriate citation, quotation or both. Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the Agency. Neither the European Union nor the granting authority can be held responsible for them. The project SPES is funded by European Union’s Horizon Europe Programme under Grant Agreement No. 101094551.