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CBAM may endanger integration of Ukraine into the EU

28/ 10/ 2024
  Stanislav Zinchenko. Chairman of the Committee on Industrial Ecology and Sustainable Development of the European Business Association. Ukraine needs time to adapt to European regulation. CBAM is a game changer for international trade. Introducing CBAM the EU gave new impetus to “green” agenda – countries and companies are reviewing their climate goals to continue trade relations with the EU. Unlike the Paris Agreement, which is more declarative in nature, CBAM is a real instrument which can facilitate preventing climate changes. However, its design is not perfect, and we understand why – EU CBAM is a first kind of such instrument. European authorities said that CBAM would level the playing field for European producers and importers. But is it possible to reach this goal by increasing payments for imports? I am not sure. According to GMK Center’s estimations, European countries granted €10.5 bln for decarbonization of the steel sector in 2023-2024. Do other countries have similar possibilities to support local industrial production? European producers have been receiving financial support for decades, while producers in third countries have not had similar opportunities. So, EU CBAM could further exacerbate inequality between companies from different countries. European Commission declared that CBAM aims to facilitate reduction in carbon emissions outside the EU. From my point of view, CBAM is a kind of new carbon tax. Some researchers even calculated VAT equivalent of CBAM payment for different sectors and different counties. Can new tax help decrease CO2 emissions? Experts from World Bank says that carbon prices (carbon tax/ETS) should be coupled with complementary policy measures like investing in R&D, capital and operational subsidies, public support for green hydrogen infrastructure etc. Any carbon pricing alone is not enough to support decarbonization. Carbon taxes or emissions trading schemes solve only one problem – they make carbon intensive products more expensive, which means that “green” alternatives should become more competitive. However, to produce “green” products it is necessary to have appropriate technology and financial resources for industrial implementation of this technology. But carbon taxes do not facilitate development of new technologies, which are so needed in industry. Carbon taxes can not solve problem of attracting investment for decarbonization projects. In fact, CBAM does not offer solutions for advancing decarbonization in third countries. CBAM regulation does not include issues of implementing decarbonization projects outside the EU. Moreover, CBAM payments will be collected in the EU budget and will be spent on the needs of European producers and authorities. So, CBAM can effectively reach only the goal of protecting European producers from carbon intensive imports. It is good for European companies, but it is not enough to decrease carbon emissions globally. Of course, EU CBAM may become the first step to introduce global carbon pricing and other climate-related instruments, but now EU CBAM looks like a new trade barrier, which decreases access to European market for those producers who can not comply with European environmental regulations. CBAM may become a disaster for Ukraine as the EU is the biggest trade partner of our country. In 6 months 2024 56.2% of exported goods were sent to the EU. CBAM will be additional obstacle for Ukrainian exporters, which face shelling, logistical constraints, power outages, personnel deficit etc. The war conditions do not enable investment into “green” transition. The most damaged sector from CBAM will be iron & steel industry as 93% of Ukrainian exports which falls under CBAM is represented by iron & steel products. Despite the war, Ukrainian steel companies continue to invest and develop production. Export revenues are major source for investment in conditions of decreasing capacity of domestic market. Maintaining steel production in Ukraine is essential to both meeting current civil and military needs and post-war reconstruction of houses and infrastructure. Ukrainian and European authorities should pay more attention to negative consequences of CBAM as it creates risks for further integration of Ukraine into the EU. CBAM will lead to decreasing volumes of trade between the EU and Ukraine, while real integration should give opposite effect – increasing trade volumes due to creating new value chains. Ukraine is not ready for EU CBAM now. Period of the war is lost time for “green” transition. Ukrainian companies can not prepare for CBAM as they have to find ways how to continue production and supplies during the war. Ukrainian government can not introduce any climate-related financial tools since the main expenses of the state budget are connected with military purposes. Due to the war risks it is not possible to attract funding on international markets for any industrial decarbonization project in Ukraine now. I suppose Ukraine should be temporarily excluded from CBAM according to current regulation. The war caused big economic losses. Only direct losses succeeded $150 bln. Industrial infrastructure is significantly destroyed. We do not know exactly how many companies will be able to survive in the near future. Ukraine strives to join the EU and implements European regulation. Finally, Ukraine will have the same regulation field as the EU, so there will be no risk of carbon leakage and no danger for “green” transition in the EU. Ukrainian economy needs time to adapt to adapt to European regulation and this time could be provided through temporarily exemption from CBAM. Ukrainian companies should also get access to European decarbonization funds as it is not possible to decarbonize production without financial resources. The EU has the most experienced governmental institutions and the most developed public funding instruments, which can support decarbonization. Not only Ukraine needs the EU, but the EU also needs Ukraine. Together we can strengthen our economies and advance achievement of climate goals. In Ukraine both the authorities and business share commitment to “green” transitions and the EU can facilitate implementation of all these plans. Source: GMK Center

Stanislav Zinchenko Chairman of the Committee on Industrial Ecology and Sustainable Development of the European Business Association
Ukraine needs time to adapt to European regulation.

CBAM is a game changer for international trade. Introducing CBAM the EU gave new impetus to “green” agenda – countries and companies are reviewing their climate goals to continue trade relations with the EU. Unlike the Paris Agreement, which is more declarative in nature, CBAM is a real instrument which can facilitate preventing climate changes.

However, its design is not perfect, and we understand why – EU CBAM is a first kind of such instrument. European authorities said that CBAM would level the playing field for European producers and importers. But is it possible to reach this goal by increasing payments for imports? I am not sure.

According to GMK Center’s estimations, European countries granted €10.5 bln for decarbonization of the steel sector in 2023-2024. Do other countries have similar possibilities to support local industrial production? European producers have been receiving financial support for decades, while producers in third countries have not had similar opportunities. So, EU CBAM could further exacerbate inequality between companies from different countries.

European Commission declared that CBAM aims to facilitate reduction in carbon emissions outside the EU. From my point of view, CBAM is a kind of new carbon tax. Some researchers even calculated VAT equivalent of CBAM payment for different sectors and different counties. Can new tax help decrease CO2 emissions?

Experts from World Bank says that carbon prices (carbon tax/ETS) should be coupled with complementary policy measures like investing in R&D, capital and operational subsidies, public support for green hydrogen infrastructure etc. Any carbon pricing alone is not enough to support decarbonization. Carbon taxes or emissions trading schemes solve only one problem – they make carbon intensive products more expensive, which means that “green” alternatives should become more competitive.

However, to produce “green” products it is necessary to have appropriate technology and financial resources for industrial implementation of this technology. But carbon taxes do not facilitate development of new technologies, which are so needed in industry. Carbon taxes can not solve problem of attracting investment for decarbonization projects.

In fact, CBAM does not offer solutions for advancing decarbonization in third countries. CBAM regulation does not include issues of implementing decarbonization projects outside the EU. Moreover, CBAM payments will be collected in the EU budget and will be spent on the needs of European producers and authorities.

So, CBAM can effectively reach only the goal of protecting European producers from carbon intensive imports. It is good for European companies, but it is not enough to decrease carbon emissions globally. Of course, EU CBAM may become the first step to introduce global carbon pricing and other climate-related instruments, but now EU CBAM looks like a new trade barrier, which decreases access to European market for those producers who can not comply with European environmental regulations.

CBAM may become a disaster for Ukraine as the EU is the biggest trade partner of our country. In 6 months 2024 56.2% of exported goods were sent to the EU. CBAM will be additional obstacle for Ukrainian exporters, which face shelling, logistical constraints, power outages, personnel deficit etc. The war conditions do not enable investment into “green” transition.

The most damaged sector from CBAM will be iron & steel industry as 93% of Ukrainian exports which falls under CBAM is represented by iron & steel products. Despite the war, Ukrainian steel companies continue to invest and develop production. Export revenues are major source for investment in conditions of decreasing capacity of domestic market. Maintaining steel production in Ukraine is essential to both meeting current civil and military needs and post-war reconstruction of houses and infrastructure.

Ukrainian and European authorities should pay more attention to negative consequences of CBAM as it creates risks for further integration of Ukraine into the EU. CBAM will lead to decreasing volumes of trade between the EU and Ukraine, while real integration should give opposite effect – increasing trade volumes due to creating new value chains.

Ukraine is not ready for EU CBAM now. Period of the war is lost time for “green” transition. Ukrainian companies can not prepare for CBAM as they have to find ways how to continue production and supplies during the war. Ukrainian government can not introduce any climate-related financial tools since the main expenses of the state budget are connected with military purposes. Due to the war risks it is not possible to attract funding on international markets for any industrial decarbonization project in Ukraine now.

I suppose Ukraine should be temporarily excluded from CBAM according to current regulation. The war caused big economic losses. Only direct losses succeeded $150 bln. Industrial infrastructure is significantly destroyed. We do not know exactly how many companies will be able to survive in the near future.

Ukraine strives to join the EU and implements European regulation. Finally, Ukraine will have the same regulation field as the EU, so there will be no risk of carbon leakage and no danger for “green” transition in the EU. Ukrainian economy needs time to adapt to adapt to European regulation and this time could be provided through temporarily exemption from CBAM.

Ukrainian companies should also get access to European decarbonization funds as it is not possible to decarbonize production without financial resources. The EU has the most experienced governmental institutions and the most developed public funding instruments, which can support decarbonization.

Not only Ukraine needs the EU, but the EU also needs Ukraine. Together we can strengthen our economies and advance achievement of climate goals. In Ukraine both the authorities and business share commitment to “green” transitions and the EU can facilitate implementation of all these plans.

Source: GMK Center

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