The economic impact of the EU’s new climate and environmental, social, and governance (ESG) standards will most likely be felt in emerging markets more so than in Europe, and only a few EMs are ready for what’s about to hit them. A few of the EU’s most significant reforms that pertain to climate could — if not swiftly addressed by companies in emerging markets — cause many companies in EMs to be completely shut out of their primary export markets, according to a report by Boston Consulting Group (BCG).

The Egypt angle: Of the EU’s new standards, the Carbon Border Adjustment Mechanism (CBAM) that is set to fully go into effect starting 2026 could have a considerable impact on Egypt’s exports — particularly from the country’s notoriously energy-intensive steel, aluminum, cement, and fertilizer industries.

CBAM IN A NUTSHELL-

What exactly is the CBAM? Often referred to as the carbon border tax, the CBAM is a carbon emission tax imposed on goods that are imported into the EU. It is designed to put a “fair price” on emissions from the production of carbon-intensive goods that are imported into EU member countries, and aims to “encourage cleaner industrial production in non-EU countries,” according to the EU Commission.

The goal is to prevent carbon leakage: With the CBAM, the EU aims to de-incentivize companies from moving production to countries that have less ambitious climate regulations to avoid additional expenses and taxation, European steel industry association Eurofer told Reuters.

Starting this year, the CBAM requires that importers must document and report the carbon footprint of the aforementioned goods that they import, or risk facing penalties — measures that companies in the EU, UK, and Ukraine told Reuters will have little initial impact.

But this is all set to change in 2026, as importers will also have to pay the levy on the emissions that come from these goods. The carbon border tax will make up the difference between the local carbon price — if there is one — and the EU’s carbon price.

The cost of carbon: Companies in the EU currently pay c. USD 85 for every metric ton of carbon dioxide they produce.

The mechanism will fundamentally shift the way many businesses source goods and materials: The CBAM will alter production costs by imposing a “brown penalty” on high-carbon goods. In effect, “the combination of higher carbon costs and lower prices for green hydrogen fuel” could lead to a shift in how companies evaluate their investments in goods with large carbon footprints, BCG argues.

And more goods could be added to the list: Chemicals, polymers, mineral oil products, pulp, paper and other goods could also make the list by the end of the decade — and even high-emissions finished and semi-finished goods by 2040, according to BCG.

Some of the most affected economies have challenged the CBAM: The South African government penned a letter (pdf) to the European Commission expressing concerns over the mechanism, claiming that the tax “has the effect of transferring the burden of climate action onto developing economies.”

WHAT THIS MEANS FOR EGYPT-

The CBAM will have a big impact on Egyptian industry and our export revenues: The EU is our largest trading partner and EU countries accounted for 31.1% of our exports in the previous fiscal year, according to data (pdf) from the central bank. EU-bound exports of aluminum accounted for 79% of our total aluminum exports in 2022, along with 36.7% of iron and steel exports, 30.6% of fertilizer exports, and 4.1% of cement exports, according to World Bank data.

But we won’t be the only the emerging market effected: The tax could also apply to 10% of the value of the EU’s imports from China and Brazil, 25% of its imports from India, and could single-handedly lose Mozambique as much as 1.6% of its GDP, as more than half of the country’s aluminum exports currently go to EU member states, BCG notes.

No exemptions, even for least developed countries: The CBAM will provide no exceptions to low- and middle-come countries — which includes Egypt — or even for the world’s least developed countries (LDCs) like Afghanistan, Yemen, and Chad.

And don’t expect any of that the revenue raised from the carbon border tax to help the rest of the world to decarbonize: CBAM’s revenues won’t be used to finance LDCs’ efforts towards de-carbonisation, despite the European Parliament having called for the financing LDC’s efforts towards decarbonizing “with an annual amount corresponding at least to the level of revenues generated by the sale of CBAM certificates,” according to a report from the Center for Global Development.

EGYPT NEEDS TO ADAPT-

Local companies will have to take swift measures to maintain their positions in global value chains —measures that include developing systems for disclosing information on their products’ carbon footprint, documenting the amount of emissions associated with their production, distribution, and consumption, and keeping track of carbon taxes paid for their raw materials, the BCG says.

Taking action to decarbonize at a company level: Companies in emerging markets need to “develop a holistic sustainability transformation roadmap” so they can decarbonize their operations and reduce their environmental footprint so their imports to the EU can remain competitive by avoiding as much as the CBAM levy as they can, the BCG suggests.

A carbon tax of our own to match the EU: Because the tax is calculated on the difference between the local carbon price and the EU’s, some countries around the world are considering implementing their own tax on high-carbon goods to avoid the levy. India is considering locally collecting the tax itself instead of the EU so it can use it for its own green energy transition, Reuters reports.

Your top green economy stories for the week:

  • Green hydrogen incentives are officially law: President Abdel Fattah El Sisi ratified a decision putting forward a package of green hydrogen incentives.
  • Egyptian climate projects in their pre-feasibility study stage can now apply to take part in the Climate Finance Accelerator and receive access to investors, coaching, and networking. The application door closes on Monday, 12 February.
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