In June 2021, the European Union (EU) committed to reducing its greenhouse gas emissions by at least 55% by 2030 compared to 1990 through the adoption of the Fit for 55 package. Among the 12 proposals in this package, the implementation of a Carbon Border Adjustment Mechanism (CBAM) stands out. By taxing the carbon content of its imports, the EU seeks to protect the competitiveness of its industry and prevent the phenomenon of carbon leakage. This occurs when companies relocate their production to countries with less ambitious environmental regulations.
During the phase that begins in October 2023, importers must only declare the carbon content (direct and indirect emissions) of imported goods. Starting from January 2026, the CBAM will have a particular impact on the sectors of cement, iron and steel, aluminum, fertilizers, electricity and hydrogen. More concretely, to import goods from these different sectors, importers will have to pay an additional tax proportional to the carbon content of these products. The amount of this tax is linked to the EU Emissions Trading System (EU-ETS) carbon quota trading market EU-ETS.
These sectors were chosen for two reasons. On the one hand, they represent a high risk of carbon leakage and high carbon intensity (measured in kg CO2 per € of added value). On the other hand, their importance is paramount for European industry. However, the upcoming milestones of the mechanism provide for the extension of this tax to other sectors of the economy.
By increasing the cost of imports of products from countries outside the EU, the implementation of this mechanism therefore constitutes a potential risk of loss of competitiveness for Moroccan exports. This risk is first a function of the exposure of Moroccan exports, that is to say the share of exports destined for the EU for goods covered by the CBAM compared to the country's total exports. Next, this risk can be quantified by measuring the vulnerability of the country - which is understood as a loss of competitiveness - in the face of this new regulation.
Fertilizers, the Main Sector Exposed to the CBAM
To assess the exposure of Moroccan exports, we based ourselves on data from the World Integrated Trade Solution (WITS) for the year 2019, which provide detailed information on all trade flows between countries. This data allows us to calculate the share of Moroccan exports subject to this new regulation. We first studied the exposure of the sectors of cement, iron and steel, aluminum and fertilizers (Base CBAM scenario), before extending the analysis to other scenarios (Scenario 0, Scenario 1, Scenario 2) progressively including more and more sectors that could be integrated in future CBAM revisions. For details on these scenarios, we invite the reader to consult this article from which the majority of our analyses are drawn.
In the base scenario, the share of Moroccan exports subject to the CBAM is around 1.6% (with the fertilizer sector accounting for 1.4%) and could reach more than 10% if the mechanism is extended to other sectors of the economy. In response to the European CBAM, the U.S. Congress mentioned the introduction of a carbon border adjustment mechanism in July 2021. Assuming alignment of the U.S. CBAM with the European CBAM, nearly 13% of Moroccan exports could ultimately be impacted by an additional tax. This figure could increase if we take into account electricity and hydrogen exports not included in this study and which are expected to increase in the coming years.
Greater Vulnerability for the Cement and Aluminum Sectors
After the implementation of the CBAM, Moroccan exporters will have to pay an additional tax to enter the European market. This additional tax will be a function of the carbon content of production (measured in tonnes CO2 per unit of goods produced), so that the most efficient producers (those with the lowest carbon content) will see their competitiveness increase. Exporters unable to calculate the carbon content of their production will be allocated a tax equal to that paid by the 10% least efficient facilities in the European Union.
Using carbon intensity data from the GTAP database, we compared the carbon content of the different sectors subject to the CBAM across different countries to determine which ones are most likely to lose competitiveness. In the fertilizer, iron and steel sectors, Morocco has one of the lowest carbon contents among the main exporters of goods to the EU. This translates into potential competitiveness gains for the country. Conversely, in aluminum and cement, payment of a carbon border tax risks harming the country's competitiveness.
Note: For reasons of data confidentiality, we have omitted the carbon content values on the ordinate axis.
To avoid being disadvantaged in the European market, Moroccan aluminum and steel exporters might decide to redirect their exports to other markets. This is all the more plausible given that there is currently a high diversity of trading partners for these exports. To account for the concentration (or diversity) of trading partners for regulated goods, we will calculate the Herfindahl-Hirschman Index (HHI). In the case where all exports are destined for a single trading partner, the HHI value is 1. In a situation of strong diversification of trading partners, the HHI value tends towards 0. The HHI for the aluminum and cement sectors are 0.58 and 0.52 respectively, attesting to a moderate diversification of trading partners. Due to the low level of exports from these sectors to the EU, the risk remains limited for now but could increase if other trading partners decide to align with European environmental regulations.
In Conclusion
The impact of the CBAM on Moroccan exports across all sectors remains limited in its first phase (cement, iron and steel, aluminum, fertilizers, electricity and hydrogen) but could impact nearly 10% of exports if the mechanism is extended to other sectors. This decline in exports risks reducing the availability of foreign currency and could lead to broader macro-economic effects.
Focusing on the first phase of the CBAM, we can see that Morocco's fertilizer sector - thanks to its low carbon content relative to other countries exporting to Europe - could gain competitiveness in the coming years. However, due to Moroccan electricity still being largely dominated by coal, the high carbon contents of aluminum and cement risk degrading Moroccan competitiveness in these sectors. The country could then turn to other markets that do not implement this type of regulation, or work to reduce the carbon content of its electricity production. In this regard, the inclusion of hydrogen in the final phase of the European CBAM revision reinforces the importance of producing low-carbon (green) hydrogen in Morocco.
As mentioned earlier, industrialists unable to quantify the carbon content of their production will have to pay a tax equivalent to that paid by the least efficient European industrialists. There is therefore a national imperative to measure, inventory and track the carbon emissions of Moroccan industries across their entire value chains. Beyond helping to reduce national emissions by increasing the cost of polluting activities, the implementation of a carbon tax could accelerate the country's capacity-building on carbon emissions assessment issues.
Article by Mehdi Mikou