On 2 June, the European Commission announced it will embark on negotiations with its member states to impose fees on their imports. In the first stage, the fees would be applied to steel, cement, and aluminum products, manufactured in countries that lack strict environmental policies or are short in their application. 

Why the European Union is Imposing Taxes on Carbon?

The European Union aims to push the entire European continent to be the first in the world to reach its carbon goal. This is to be achieved progressively by reducing its emissions by 2030, by 50 percent compared to 1990, then it would reach carbon neutrality by 2050. EU countries have adopted what is known as the Emissions Trading System which has significantly changed the rules of the industry in the continent. 

1- The EU’s Emission Trading System 

In 2005, the European Union launched the EU Emission Trading System (EU ETS), to regulate the thermal emissions market. Alongside the EU countries, Norway, Iceland, and Liechtenstein are also included in the system. Moreover, under the ETS, there are around 10 thousand enterprises in the energy and manufacturing sectors, as well as airlines operating between these countries. The ETS also covers 40 percent of thermal gas emissions in the European Union. 

The gist of the system is that the European Union establishes an annual decreasing share of thermal emissions from all the States included in the system, and distributes these quotas on the 10 thousand included enterprises, where each company has to stick to its share of emissions and not exceed it. In the case that one of the enterprises or companies has to exceed the limit of its emissions, it must purchase the share of another company. Consequently, the total emission would still be consistent with the one established by the EU at the beginning of the year. Additionally, if any company exceeded its share, substantial financial penalties are imposed. 

2- The System’s Effect on EU Companies 

The system has increased the cost of European products for two reasons:

• The companies’ commitment to their emission quotas, or the purchase of shares in case they need to exceed them, which determines the production and increases the cost in the event of buying extra shares. 
• High demand on products is another reason. At the same time, the European Union is gradually decreasing the quotas, where the prices rose from $7.08 per ton on 1 January 2019 to $64.03 per ton in October 2021, as shown in the following figure:

Figure 1: Carbon prices between January 2015 and October 2021

• This increase has reduced the competitiveness of European Union products with companies exporting from outside the EU. Moreover, in particular, in countries that do not impose environmental conditions on overall economic activities, especially industrial activities, specifically those from China.

The Likely Effects of the Taxes on the Egyptian Economy

Egypt will be affected by the prospective system if it fits the conditions for its application. Among its exports is one of the products targeted by the tax. In this context, it has to be noted that:

1- Trade Between Egypt and the European Union

Egypt exported a total of $7.053 billion of the European Union’s goods in 2020, as shown in the following figure:

Figure 2: Egyptian exports to the European Union from 2011 to 2020

Egypt’s exports were negatively affected by the coronavirus pandemic and the decline in global demand in 2020, where it decreased from $9.3 billion to $7.05 billion. This means that, if the taxes were introduced, it would be subject to a further decline. Consequently, this would result in the Egyptian economy being further affected, especially since Egyptian exports of the three commodities included in the first stage totaled about $757 million, as shown in the following chart: 

Table 1: The evolution of Egypt’s exports of phase one goods to the European Union from 2011 to 2020

2- The Effect on the Egyptian Economy 

The impact was not limited to the total Egyptian exports to the European Union, but extends to the following items:

• If this tax is applied, the Egyptian economy will be affected, with the profitability of Egyptian exports falling by about $750 million from targeted exports. If Egypt responds to European environmental pressures and raises its environmental standards and requirements, this will result in the reduced competitiveness of the Egyptian economy as a whole due to Egypt’s leniency towards environmental requirements as one of the attractions to direct foreign investments.
• Egypt’s revenues from the Free Trade Agreement (FTA) with the European Union will decrease drastically after the Egyptian goods are taxed. In the medium and long terms, Egypt may lose a large number of jobs, as well as foreign exchange flow. 

It’s safe to say that negotiations between European countries will take more than two years, owing to their external commitments. This should be exploited early on, by applying pressure through the European partners closest to Egypt, such as France, Greece, and Italy, to either exempt Egypt from the tax or delay it. 

Egypt is one of the neighbors of the European Union that has helped it implement policies to combat irregular migration, while these requirements would jeopardize these efforts. Egypt could also impose similar taxes on Union imports totaling $16.8 billion, depending on any quantitative restrictions or other regulatory obstacles.