The EU’s Carbon Border Adjustment Mechanism (CBAM) acts as a tariff on carbon-intensive imports like steel, cement, and specific electricity types entering the European Union (EU). It’s a pivotal step toward climate justice, designed to stop countries from leveraging pollution as a competitive advantage. By incentivizing producers globally to embrace cleaner energy and low-carbon technologies, CBAM drives down worldwide emissions. It also reinforces the Paris Climate Agreement by shrinking the carbon footprint of traded goods and spurring the transition to a greener economy.
Introduced as part of the European Green Deal, CBAM is slated to take effect in 2026, following its approval by the European Parliament and the EU Council. Reporting requirements for affected products began on May 17, 2023. For exporting countries, CBAM presents both challenges and opportunities, potentially reshaping their policies to maintain competitiveness in the European market. Egyptian companies, in particular, will need to implement administrative measures to assess and activate reporting processes, reflecting improvements in their environmental impact and reducing carbon emissions from industrial activities.
The European Objective behind CBAM Implementation
At its core, the CBAM is designed to ensure fair competition between EU-made products and imports from countries with laxer environmental rules, by levying fees on high-carbon-footprint goods. The EU aims to motivate exporting countries to cut their carbon emissions and support global climate targets, while protecting its industries from unjust trade advantages. Beyond this, CBAM strengthens the EU’s pledge to the Paris Climate Agreement, which focuses on curbing global warming. By assigning a fair cost to the environmental harm caused by producing carbon-intensive goods entering the EU, the mechanism also pushes non-EU countries toward adopting greener industrial processes.
The Transitional Phase of the CBAM: A Stepping Stone to Full Implementation
The CBAM launched its transitional phase on October 1, 2023, with the initial reporting cycle for importers wrapping up on January 31, 2024. This phase is designed to roll out CBAM in a measured, transparent, and fair way, balancing the needs of businesses inside and outside the EU and enabling governments to prepare their commercial and industrial sectors.
The CBAM currently targets imports of specific goods and raw materials with carbon-heavy production processes and a high risk of carbon leakage, such as cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. When fully operational, it will account for more than 50% of emissions in sectors covered by the EU’s Emissions Trading System (ETS). The transitional phase acts as a testing and learning period for stakeholders—importers, producers, and regulators—while collecting critical data on embedded emissions to fine-tune the final methodology. During this time, importers of affected goods must report the greenhouse gas emissions embedded in their imports (direct and indirect) without the obligation to buy or surrender certificates.
To support this, the executive regulations offer flexibility in calculating embedded emissions during the transitional phase. Starting January 1, 2025, a new section in the CBAM registry allows operators of non-EU facilities to upload and share their facility data and emissions with declarants in a streamlined way, rather than submitting them individually to each declarant.
CBAM and Developing Countries
The EU has pledged to support developing countries in implementing the CBAM, aiding their efforts to green their industries and transition to renewable energy sources. The EU is also committed to assisting these countries in establishing or enhancing their carbon pricing systems. Given the current scope of goods covered by CBAM, developing countries are not the most heavily impacted by this measure. The World Bank’s Relative CBAM Exposure Index provides a preliminary tool to assess countries’ exposure to CBAM, based on carbon emission intensity and exports of covered goods to the EU.
Designed to identify countries facing significant challenges from CBAM, the Index uses carbon emission intensity and exports of CBAM-covered goods to the EU. Assuming a carbon price of $100 per metric ton, the Index measures the additional cost of CBAM certificates for exporters compared to the average European producer, focusing on emissions per exported unit rather than total emissions, adjusted for the share of exports to the EU market. The Index acknowledges cost shifts in the European market, where EU producers also bear emission costs, allowing exporters with relative environmental efficiency to gain a competitive edge despite needing to purchase certificates.
Figure 1 illustrates [1] the Index’s assessment of various countries’ positions in the initial industrial sectors subject to CBAM. Green indicates an increase in relative competitive advantage, while red signals a decline. The overall relative index reflects trade-weighted exposure across all CBAM-covered goods. Countries like India, South Africa, Egypt, Russia, and Ukraine face varying degrees of threat to their competitive advantages. Conversely, countries such as the United Kingdom, Morocco, and Chile see improved competitiveness due to the superior environmental attributes of their companies and products exported to the EU.
Figure 1: Aggregate relative CBAM exposure index
Source: Relative CBAM Exposure Index, World Bank
How Egyptian Products Fare Under the Relative CBAM Exposure Index
Data from the World Bank, updated through 2023, provides sufficient insights into the Relative CBAM Exposure Index for Egyptian companies operating in several industrial sectors targeted by the CBAM. Figure 2 illustrates [2] Egypt’s CBAM exposure index across various sectors. Green highlights sectors with a positive competitive advantage, while red indicates those facing challenges that hinder their competitiveness after CBAM’s customs duties are imposed.
The figures highlight strides in the Egyptian cement sector’s emission reductions, but the fertilizer industry faces the steepest challenge among Egyptian products under CBAM. Although the Egyptian government has outlined plans to leverage green hydrogen for green ammonia production to curb fertilizer emissions, these initiatives are still short of their full production targets.
Figure 2: Egypt’s Relative CBAM exposure index across different sectors
The Egypt Green Hydrogen project in the Suez Canal Economic Zone marked a significant milestone with its pilot production, leading to the world’s first green ammonia shipment exported to India in November 2023. In July 2024, a €397 million deal was finalized with the EU to supply renewable ammonia, enabling exports starting at 19,500 tons in 2027.
These projects are steps toward greening the fertilizer sector, which should enhance its CBAM exposure index over time. By contrast, the cement sector has made earlier environmental gains. Geocycle Egypt, owned by the Holcim Group specializing in construction materials, leads in waste-to-energy solutions. Since 2010, it has managed about 500,000 tons of solid waste yearly, converting it into energy for cement factories, cutting emissions compared to cement from other countries.
Nonetheless, Egypt’s current trajectory underscores growing challenges from CBAM’s rollout, with the transitional phase proving too short to significantly bolster Egyptian firms’ competitiveness. Other variables, including export volumes from rival countries, shipping costs, and product quality, could shape the broader outlook when CBAM takes effect in 2026. Addressing these factors calls for a comprehensive action plan tailored to this challenge.
Exploring Opportunities to Expand Egyptian Exports
Egypt’s 2023 fertilizer exports to the EU reached $987.397 million, making up 5.58% of the EU’s $17.687 billion in global fertilizer imports. This underscores Egypt’s prominence in the EU fertilizer market, particularly as its exports in sectors like iron, steel, and cement stay below 1.2%.
These figures showcase Egypt’s trade volume with the EU and its ability to compete in meeting European fertilizer needs compared to global exporters. They also highlight potential for Egypt to expand its EU market share, especially when compared to countries with higher Relative CBAM Exposure Indices. For instance, Georgia exported $28.636 million in fertilizers to the EU in 2023, representing 59.5% of its global exports, but its exposure index is about three times higher than Egypt’s.
This creates a window for Egypt to grow its market presence, especially by enhancing production through technologies that further cut emissions. The difference in exposure indices suggests Georgia may divert its exports to other markets to counter CBAM’s impact, giving Egypt an opening to strengthen its foothold in the EU fertilizer market.
Recommendations for Egypt and Its Private Sector to Navigate CBAM
The Egyptian government has made significant strides in advancing its environmental sector and greening parts of its economy in recent years, including implementing initiatives and promoting activities to reduce emissions. These efforts have bolstered Egypt’s preparedness for the CBAM. However, several critical priorities remain for developing and implementing environmental and economic policies before the year ends and CBAM’s official rollout begins.
1. Strengthening Environmental Infrastructure: By reviewing the efforts of competing countries, Egypt must invest in improving production efficiency in high-carbon-emission industries, particularly those targeted in CBAM’s initial phase, such as iron, steel, and fertilizers. This can be achieved by adopting advanced technologies to cut emissions and promoting a shift to renewable energy, especially from solid waste fuels, beyond the state’s existing solar and wind power projects that connect heavy industries to renewable grids. Accelerating the completion of the new waste management system, which remains unfinished, is crucial, as it will increase the number of waste-to-energy plants.
2. Incentivizing Climate-Conscious Practices in Local Firms: The government should offer financial and regulatory incentives, including accessible loans and climate funding through sovereign funds and Egyptian banks, to spur companies to adopt clean technologies, innovate in eco-friendly production, and use low-carbon materials. Enhancing energy efficiency will also play a key role in cutting emissions.
3. Enhancing Environmental Monitoring and Reporting Capabilities: Establishing reliable systems for monitoring and reporting is essential to comply with CBAM’s reporting requirements. Egypt should develop accurate systems to track carbon emissions across various industrial sectors, in collaboration with local and international regulatory bodies, while training national personnel to use advanced emission measurement technologies. This requires intensified efforts from the Ministry of Environment, in partnership with the Ministry of Trade and Industry, to strengthen legislative and regulatory frameworks, update environmental protection laws to align with global emission reduction standards, and activate the role of environmental agencies in auditing and reviewing company reports.
4. Negotiating with the EU for Greater CBAM Flexibility: Egypt could pursue negotiations with the EU to explore exemptions or tailored adjustments for developing, African, and Arab countries. Leveraging its cooperative ties with the EU, Egypt could secure concessions or temporary exemptions to mitigate CBAM’s negative impact on its exports or delay its implementation, particularly for sectors struggling to adopt low-carbon technologies. These negotiations should include investment-focused provisions, such as allocating part of EU funding to environmental and climate projects in Egypt, enabling the country to gradually build green infrastructure to meet CBAM standards. Notably, CBAM revenues are not specifically earmarked for supporting green transitions in developing countries.
5. Exploring Export Market Diversification: After carefully studying competitors’ capabilities in the European market, Egypt should assess alternative markets where companies losing competitive advantages may redirect their exports. Egyptian firms could similarly expand into non-European markets to reduce risks associated with CBAM’s impact on their exports.
6. Developing a Long-Term Industrial Adaptation Plan: Egypt should craft a comprehensive, long-term plan to adapt to CBAM standards, extending beyond the initial targeted sectors, with a focus on gradually reducing emissions in heavy industries. This plan should support research and development programs for low-carbon industries, foster collaboration between the public and private sectors, universities, and research centers, and embrace digital transformation and Fourth Industrial Revolution technologies to enhance production efficiency, directly contributing to emission reductions.
In short, Egypt can reduce CBAM’s impact on its industries, strengthen its competitive edge in European and international markets, and turn the mechanism into an opportunity. Embracing a green economy and strategic environmental reforms will also drive sustainable climate and economic objectives in the long term.
References
[1] World Bank Group. (2023, June 15). Relative CBAM Exposure Index [Data Map]. World Bank. Available at: https://shorturl.at/qJslB
[2] World Bank. (2023). CBAM exposure index webpage final [Excel file]. The World Bank. Available at: https://shorturl.at/gPIdE [3] International Trade Centre. Bilateral trade statistics: Egypt – Fertilizers exports to the European Union. TradeMap (Retrieved April 11, 2025). Available at: https://shorturl.at/qva2T
