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Carbon trading, which makes carbon a commodity, has been enormously successful in Europe for 20 years. It has enabled economy-wide investment in decarbonization, reducing the region’s carbon footprint by more than one-third compared to 1990.
Soon, Europe will export its climate policy through the new Carbon Border Adjustment Mechanism (CBAM).
Egypt stands to benefit, environmentally and economically. While CBAM will impose costs on Egypt’s exporters, it will also open opportunities to sharpen their competitiveness.
By embracing CBAM—its requirements and opportunities—Egyptian companies will join the growing momentum toward carbon markets worldwide. They will find new ways to thrive and to fight climate change.
Carbon trading began in Europe twenty years ago with the Emissions Trading System (ETS). It works by ‘carrots and sticks, rewards and penalties.
Companies have to determine their carbon footprint, accredited through a third party, to meet prescribed annual carbon reduction targets. When they can’t make it, they have to buy carbon rights, called allowances. The price of these allowances is determined in the huge EU carbon market.
Today this carbon market represents €1 trillion in volume. Last year the European Statistical Office reported that the European Union's carbon footprint reduced almost 40% compared to 1990. It’s an impressive result that could only be achieved with the private investment spurred by the ETS.
Soon CBAM will export the EU’s climate policy to regions beyond Europe, starting with iron, steel, cement, fertilizer, aluminum, electricity, and hydrogen. A CO2 price will be imposed on these energy-intensive products upon their import into the EU. It is equal to the carbon cost imposed on European production under the ETS.
Egypt will be impacted. Bilateral trade between Egypt and the EU is worth almost €40 billion annually. Egypt is the 6th largest country of origin for CBAM-covered goods imported into the EU, covering about 20 percent of the country’s exports to Europe. The aluminum, iron and steel, and fertilizer industries are significantly exposed to the tariff, although each may develop a different strategy for dealing with it.
CBAM will apply equally to developed and developing countries outside the EU. Exporters will not directly pay the tariff. Importers in Europe will pay the CBAM tariff in the form of a certificate that represents tonne CO2.
However, exporters will submit emissions data directly to importers, who must submit the data to the EU authorities. Companies whose products have large carbon footprints will lose competitiveness thanks to the higher tariffs.
The competitive edge is what you pay for. So if a Turkish competitor has done good work in reducing his carbon footprint and proves it with accurate reporting, or is part of the ETS scheme now being developed in Turkey, then he will be better off. Turkish steel, for example, may be cheaper and more competitive.
CBAM discriminates against those products for which nothing has been done in terms of CO2 reduction; it privileges those who have done carbon accounting and carbon allocation.
For now, it applies only to imports in the areas of scope, but the scope may expand. It is unlikely the European Commission will stop with 4-5 sectors; it’s just the beginning. This occurred with the ETS, which initially covered just the electricity sector but was expanded to cover many sectors.
So there’s not much time left for Egyptian exporters to prepare. European importers must begin to account for import-related emissions in 2026 and begin to purchase CBAM certificates the following year.
While some companies may seek different export markets, those committed to Europe will need to make assessments of production carbon footprints and have this verified by independent auditors.
CBAM will take into account a carbon price paid in the country of production, deducting this from the adjustment on imported goods (although free certificates may not reduce the tariff).
But what is the carbon price in Egypt? Currently there is none, although carbon price signals should emerge with new carbon markets.
The Egyptian Stock Exchange (EGX) is now host to a Voluntary Carbon Market platform, including an African Voluntary Carbon Market. The Egyptian Financial Regulatory Authority (FRA) has established a framework for trading carbon emissions reduction certificates.
The EGX market should support a central database of African carbon reduction projects, letting it service carbon credit trading for projects across the continent. Initial trading of agriculture-related credits has set a price of about $18 per ton, although it’s early, and a general price range for Egyptian carbon will need time to emerge.
It is critical that whatever is traded on this platform is internationally accepted, as Egyptian companies will want certificates that are also recognized by Brussels. Therefore, the government should have constructive engagement with EU policymakers now to negotiate recognition of Egypt’s national measures within the CBAM framework. This is especially important because, as noted, the current CBAM is not final; it will likely be expanded to more sectors.
Egypt could move toward a compliance ETS scheme, which it might link to the EU’s ETS in order to gain liquidity. However, the establishment of an ETS will take time, and its prices can be expected to be at a significant discount to the EU ETS for the foreseeable future.
But it could start as a trial. While defining its net-zero strategy, the Egyptian government will need to consider the possibility of cost inflation for products in scope at home.
In any case, the certificates issued in Egypt will need to work for Europe’s compliance market buyers.
As a carbon market develops, industries should work with the government to develop standardized national systems for tracking and reporting emissions under CBAM and ensure they are compliant with EU requirements. This work will have the added benefit of revealing carbon intensity and where emissions lie; it’s important information for Egypt’s National Climate Change Strategy 2050.
Apart from lobbying the government, industries must begin their own processes of carbon assessment, emissions reporting, and measurement, in line with standards agreed in Europe.
It can be tricky, as the supply chain analysis is quite complicated; there are a lot of supply chains, and companies don’t always have control over them, particularly for imported inputs. Moreover, companies will need assistance to utilize platforms that capture emissions data for CBAM and seamlessly distribute this to European importers in an agreed format.
The good news is that Egypt’s remarkable progress in new energy will tie into carbon credit systems. Companies such as Infinity, Hassan Allam Utilities, Scatec, and others with investments in renewable energy and the nascent hydrogen sector are well prepared to thrive in the new era of carbon-as-a-commodity. They can deploy long-term CBAM-compliant power purchase agreements (PPAs), International Renewable Energy Certificates (IRECs), and other such instruments.
ZETA is currently developing a CBAM-compliant PPA and invites companies to join us in this work.
While CBAM applies the ‘stick’ of tariffs, it also offers ‘carrots’ in the form of new commercial opportunities for Egypt. The country can gain from its unique strategic position in Africa, especially as carbon trading goes global under the UN’s recently approved Article 6 framework.
Egypt intends for the EGX-regulated carbon exchange to facilitate transactions for projects throughout Africa. This positions Egypt to lead Africa’s carbon market by determining eligibility criteria and fostering EU collaboration on mutual recognition of carbon credits.
This leadership will open other opportunities.
For example, Egypt can use its important transport asset, the Suez Canal, to pursue shipping emissions credits. The European ETS covers only 50% of international shipping emissions. Egypt can require offsets for the remaining 50% of emissions for vessels passing via the Suez Canal, requiring African credits for this while using EGX's regulated carbon exchange to facilitate transactions.
In this and other ways, Egypt can work with African countries to benefit from Article 6. Such opportunities should be further explored when the final text becomes available for study.
In summary, CBAM exports the EU’s Green Deal into new geographies, but in return, it offers new incentives and opportunities for countries with their own carbon policies.
