The transition to a lower carbon economy is accelerating. This is leading important powers in the Global North to depart unilaterally from some neoliberal global trade rules. These are the same rules they themselves ardently promoted just a few years ago.

The transition to a lower carbon economy is accelerating. This is leading important powers in the Global North to depart unilaterally from some neoliberal global trade rules. These are the same rules they themselves ardently promoted just a few years ago.  The departures were Justified as necessary to combat the threat of catastrophic climate change. However, some of them could impact negatively on economies of the Global South in general and of Africa in particular. 

Some countries in the Global South have taken advantage of this trend to enlarge the policy space available to them to support local industrial development and raw material beneficiation. At the same time, the fossil fuel companies are threatening litigation against EU climate policies, and this is fuelling discontent in the Global North with the panoply of investment protection arrangements they themselves once enthusiastically promoted.  

This is occurring within a context where the global climate agenda has been effectively reduced from the “transformational change” called for by climate activists and scientists. This included acting to transform consumption patterns, promote greater equality and curb excesses of the “super-rich”. Instead, the focus has shifted to an almost exclusively technological process to propel an accelerating transition to a lower carbon economy.

This transition is not surprisingly leading to intensified competition between firms to develop and produce low-carbon products, technologies, and “solutions” and also to demonstrate “green credentials” in whatever activity they may be involved in. In a world undergoing a deeply contested transition from unipolarity to greater multipolarity, this firm-level competition is spilling over into inter-state rivalry. This is most evident in the contestation between the Global North and China, which has developed an early technological and manufacturing lead in batteries, solar energy equipment, and new energy vehicles, among others. This lag in the countries of the Global North is leading them to implement ambitious industrial policies. These are aimed both at “catching up” with Chinese technology and reducing dependence on it. This process is now defined not just as an economic policy objective but also as a matter of “national security”.  

Two such measures stand out: the European Union’s Carbon Border Adjustment Mechanism (CBAM) and the “green” industries support sections of the United States’ 2022 Inflation Reduction Act (IRA). 

CBAM 

CBAM came into force in October 2023. It applies to all importers into the EU of an initial list of aluminium, cement, electricity, fertilisers, iron and steel. They must report in detail on the carbon emissions involved in their production. Where no acceptable information is provided, default values will be applied. After a three-year transition period (in 2026), CBAM certificates will have to be purchased at a price set in the EU’s ‘cap and trade’ system for imports of all designated products whose carbon content exceeds the internal EU threshold. This is known as the European Trading System (ETS). The value of these certificates will be calibrated to make up the difference between the carbon emissions involved in the imported product and the EU norm at a price set in the ETS.

CBAM is ostensibly a measure to “avoid carbon leakage” by pegging the emissions content of imported products to levels set for domestic equivalences as part of the EU’s “net zero” commitments. The CBAM will apply equally to all designated imported products, with no differentiation for products from developing or least developed countries.

While the requirement to purchase CBAM certificates is not strictly a tariff, it will, as a levy on imports, have a similar effect. It will restrict market access and reduce the value of preferences available under various arrangements.  

Its impact depends on the extent to which the carbon content of the import exceeds the norm established in the EU’s carbon cap and the ETS auction price. So, the exact impact cannot be predicted with any certainty at this time. Nor can the rate and pace at which the list of products affected will grow beyond the initial list — it is clearly seen as eventually covering all imports.                                                    

A study commissioned by the African Climate Foundation measured the potential impact based on different scenarios for ETS carbon price per tonne and product coverage. It found that, even in the ‘lightest’ scenario with the most limited impact, “Africa’s economy will be negatively affected by the CBAM, with exports to the EU declining by 4% in total…Africa will be worse affected than any of the other major economies analysed… even at €40 per tonne, the CBAM will raise EU import tariff revenue substantially but have little impact on global CO2 emissions”. With a higher carbon price and more extensive product coverage, Africa’s exports to the EU would decrease by 5.75% “with Africa’s GDP falling by 1.12% (almost twice the initial scenario of a partial CBAM and a lower carbon cost)”.  

The IRA

The Inflation Reduction Act of 2022 is a US Federal Law dealing with several issues. It includes a section authorising $391 billion of federal funding over several years to support climate-related measures, including incentives for manufacturers of clean energy equipment and new energy vehicles. To put that figure in context, in 2021, South Africa’s GDP was valued at $419 billion.

The IRA also provides for a $15,000 tax credit for consumers who buy electric vehicles with batteries manufactured in the United States. This appears at face value to be incompatible with the WTO’s Trade-Related Investment Measures (TRIMs). TRIMs’ ‘illustrative list’ of prohibited measures includes imposing ‘local content’ requirements on private sector transactions. Following a threat by the EU to mount a challenge in the WTO, the US agreed to extend the coverage to products from any country with which it has a Free Trade Agreement – a carve-out which is also probably in violation of the WTO’s “most favoured nation” provisions.

Growing Discontent with the Investor-State Dispute System

The fossil fuel companies are threatening litigation against EU climate policies, and this is fuelling discontent in the Global North with the panoply of investment protection arrangements they themselves once enthusiastically promoted.

Another area seeing partial departures from established systems is that of the Investor-State Dispute System (ISDS). It has been long recognised in the Global South that investment protection arrangements in bilateral investment treaties (bits), some Free Trade Agreements and other arrangements were becoming increasingly litigious. They were also allowing private investors to challenge public interest regulation in costly arbitral panel proceedings. Now discontent is emerging with the system in the Global North. Hydro-carbon companies brought this to a head by threatening to challenge EU “green” policies and regulations using investor-state arbitral panel provisions. These existed in a variety of bilateral and treaty arrangements, which the EU was at the forefront of promoting just a few years ago.

In a landmark decision, the European Parliament voted to withdraw from the Energy Charter Treaty (ECT), under whose provisions several of the threats of litigation were made. Members of the European Parliament who spearheaded this move are increasingly aware that it is not just the ECT that poses a challenge in this regard. The EU and its member states have more than 1,000 bilateral investment treaties with countries across the globe, which include similar provisions.

Identifying Africa’s interests in the low-carbon transition 

First, we must understand Africa’s interests, which encompass both the climate crisis and the ongoing transition to a low-carbon economy. 

Africa is among regions contributing least to global warming, but among those most affected by it.

Africa is among regions contributing least to global warming, but among those most affected by it. Temperatures will rise in Africa by more than the global average. A dedicated part of IPCC reports has identified the threats of floods, droughts, and sea rises specific to the continent’s various sub-regions. These are not just future possibilities. The continent is already experiencing more frequent extreme weather events. 

Africa has thus an immediate interest in rolling out ambitious “adaptation” programmes to defend itself against already impacting “extreme weather events” that will only get worse. This needs to involve, inter alia, massive programmes to climate-proof communities and existing infrastructure as well as build new, more climate-resilient infrastructure. If this is not done proactively, it will have to be done after costly disasters, with loss of life. Many climate resilience projects are suitable for public employment programmes and could also create demand for locally manufactured inputs and materials.  

While adaptation is the biggest and most immediate issue facing Africa, it cannot ignore the accelerating transition to a lower carbon economy. This will be disruptive to several existing activities. There will be losers, but the transition will also bring new opportunities to the continent. Consultants from the Global North most commonly identify two such opportunities: the supply of critical minerals, which the continent has in abundance, and the use of its ample sunlight to produce “green hydrogen”, using solar power to electrolyse water.

Africa must occupy key higher value-added niches

It is in the continent’s interest to realise whatever benefits it can from its resource endowment, but it cannot do so merely by remaining a producer and exporter of raw materials. There is a long-recognised, fundamental development challenge facing the continent. It is to “break from the apron strings” of its colonially defined role as producer and exporter of primary products and move to higher value-added production through industrialising. This applies equally to the continent’s strategies for the transition to a lower carbon economy. 

One key opportunity that stands out is the beneficiation of critical minerals. Sending out a clear message that defined levels of beneficiation will be required before export could become an important lever to promote African value-added production of various low-carbon products. 

In a similar vein, Africa needs to identify its role in green hydrogen value chains as more than just using its sunlight to electrolyse water and produce fuel that is frozen and exported to the Global North; more than supplying the raw material used as catalyst in fuel cells (platinum). It needs to become a significant manufacturer of both fuel cells and products using them, including transport equipment and energy generators.   

In addition, it is important to identify and seize opportunities in the immediate focus of the lower carbon transition – renewable energy. It is estimated that the roll-out of renewable energy, narrowing the continent’s “energy gap”, will require a doubling of investment in electrical energy by 2030. Will this be spent merely on imported technology and equipment or directed to boost manufacturing capacity on the continent? There is already the capacity to produce many of the components in wind and solar as well as hydro-power generation. 

These opportunities will certainly not be realised “automatically”. Industrial policy interventions – including beneficiation and local content requirements – will be essential. 

Unilateral measures and departing from established rules and procedures 

Back to the issue of responding to the Global North’s “climate justified” unilateral measures: CBAM needs to be recognised as a direct barrier to market access, with a similar effect to a tariff. Avoiding paying CBAM levies will depend on meeting the same carbon standards as those set in the EU. This will require large additional investments that would push developing country exporters and LDCs way beyond the nationally determined contributions they have tabled at UN FCCC COPs. CBAM undermines the principle of “common but differentiated responsibilities”, which is supposed to underpin climate-related commitments. Moreover, research points to huge disproportionality: the gains in emissions reduction are small compared to the loss of export earnings and incomes in any of the scenarios.  

CBAM needs to be rejected, opposed, and challenged in any way or form possible. One possibility would be to impose a countervailing, climate-justified measure – a levy on imports from CBAM-implementing countries to fund adaptation projects on the continent.

The other measures indicate a trend that needs to be understood and then responded to proactively. The unilateral partial departures from neoliberal trade policies are replete with hypocrisy. They are not presented as something that all should follow. Rather, they are seen as exceptions, justified unilaterally by national security or the climate agenda of the Global North.  The Global South, thus, continues to be told to follow the rules and measures the Global North is abandoning. This suggests that we need to learn more from what the Global North does than from what it says. 

However, this does not mean necessarily acting in exactly the same way. Enforcement of WTO rules was weakened to avoid any disciplining of the Global North’s restrictions on Chinese imports, justified by “national security”. Both Indonesia and India have taken advantage of this to implement other departures shaped by their own industrial policy needs. Indonesia appealed to a non-functioning appellate body against a ruling that struck down its regulations on the export of unprocessed nickel. This allowed it to continue with a measure that has led to significant investments in beneficiation. Similar processes enabled India to thwart a ruling against the deployment of incentives for exports from its Special Economic Zones. Analysts have concluded that  “…the policy space that had previously been progressively restricted by WTO rules and procedures is now potentially being expanded through actions by developing countries”.

Africa, like other parts of the Global South, urgently needs to reclaim the policy space required to advance its own low-carbon industrial policies. Likewise, the discontent and weakening of the ISID system need urgent attention. Without the development of a progressive alternative in the Global South building on initiatives that already exist, the risk is the emergence of a new system that carves out the “concerns” of the Global North while retaining much that is problematic in the current system.

Rob Davies is a member of the Central Committee of the SACP and an Honorary Professor at the Nelson Mandela School of Public Governance at UCT.