Why is Ukraine losing the climate trade war and how to protect the national producer?
Today, January 31, is the deadline for submitting the first report under the Carbon Border Adjustment Mechanism (CBAM).
Even before the full-scale invasion, the EU identified Ukraine as one of the countries that would be most affected by the implementation of CBAM. According to pre-war estimates by EY, the CBAM could potentially cost Ukrainian producers $300 million. Under current conditions, such a financial burden would be excessive for the Ukrainian economy. The industries and enterprises subject to the CBAM are already among the most affected by the hostilities. It should also be noted that due to the blockade of the Black Sea ports, Ukrainian companies have limited options for exporting to countries other than the EU. For example, before the war, 45% of mining and metals exports went to the EU, and in 2023, 85% of exports went to the EU.
On March 24, 2021, Cabinet of Ministers Resolution No. 265 established a working group to agree on an approach to applying the carbon border adjustment mechanism to Ukraine for consultations with the European Commission, but unfortunately, the public is not aware of the activities of this group.
At the same time, other countries are actively negotiating the CBAM. For example, on November 15, South Korea, represented by the First Deputy Minister of Finance, asked the European Union to recognize its carbon credit certification system under the new CBAM mechanism to avoid double taxation. In turn, Indian officials are discussing two possible alternatives to ensure that exports are not affected. By the way, officials in all Indian ministries are in favor of the EU returning to India any carbon tax levied on Indian exporters when it comes into force. In other words, the EU’s trading partners are in constant and active negotiations with the European Commission, responding quickly to the regular changes and updates issued by the European Commission on the CBAM.
Is it still possible to save Ukrainian exports and industry? The answer is unequivocal: it is possible to influence the situation, and this requires strengthening the work of public authorities. The EBA Industrial Ecology and Sustainable Development Committee proposes to focus on the following two tasks:
Achieve the application of the CBAM to Ukraine on a declarative basis.
The current CBAM regulation allows the EU to take into account exceptional and unprovoked events that have caused devastating consequences for the economy and industrial infrastructure of a country exporting goods covered by the CBAM to the EU. Thus, according to Article 30(7) of the CBAM Regulation, “If an unforeseen, exceptional and unprovoked event occurs that is beyond the control of one or more third countries covered by the CBAM and this event has devastating consequences for the economic and industrial infrastructure of such country or countries, the Commission shall assess the situation and submit a report to the European Parliament and the Council, accompanied where necessary by a legislative proposal, amending this Regulation, identifying the necessary temporary measures to address those exceptional circumstances.” According to the business, one of the approaches that can be proposed under this provision may be to apply a declarative approach to goods imported from Ukraine to the EU and subject to the CBAM. In other words, this would be the same approach as for other countries, but without charging emission fees. This will help reduce the financial burden on businesses and help them accumulate resources to partially restore production levels affected by the hostilities.
Develop and implement a CBAM in Ukraine.
Annex III to the CBAM Regulation contains a list of countries exempt from the CBAM. The list includes exclusively countries that are members of the European Free Trade Association, including Norway, Liechtenstein, Iceland, and Switzerland. This has forced other countries that actively trade with the EU to think about their national CBAM. On December 18, 2023, the UK government announced that it would implement a CBAM by 2027. The UK government’s information letter states that the UK CBAM will put a price on carbon for some of the highest-emitting imported industrial products, including aluminum, cement, ceramics, fertilizers, glass, hydrogen, iron, and steel. In addition, Australia is considering the feasibility of introducing its own CBAM, which would apply to imports of carbon-intensive products such as steel, aluminum, and cement. In the United States and South America, governments are discussing the need for local analogs of the CBAM that would protect the market from carbon-intensive imports. As Ukraine will be implementing the EU’s climate block of the EU acquis, we propose to immediately start work on the introduction of the CBAM in Ukraine. And, similar to the EU, this work should be led by the financial and economic block of the Government.
The EBA hopes for a prompt response from the Government and the Government’s measures (we are talking about fulfilling all obligations, in particular, to achieve the application of the СВАМ to Ukraine on a declarative basis and to develop and implement its own СВАМ to support the domestic industry.
On May 10, 2023, Regulation (EU) 2023/956 of the European Parliament and of the Council establishing a Carbon Border Adjustment Mechanism (CBAM) was adopted. Starting from October 1, 2023, a transitional period of CBAM is in effect, during which the importer only reports on the CO2 emissions embedded in the import of goods subject to CBAM without charging a corresponding fee. Starting from 1 January 2026, the mechanism will be fully operational, namely: the importer of goods subject to CBAM, when importing them into the European Union, must pay for CO2 emissions by purchasing the corresponding number of CBAM certificates at the market price formed in the European Union Emission Trading Scheme (EU ETS). In the first stage, the СВАМ will cover iron and steel, aluminum, cement, organic chemicals, fertilizers, electricity, and hydrogen, and by 2030 the СВАМ should cover all sectors included in Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a greenhouse gas emissions trading system within the Union and amending Council Directive 96/61/EC.