A fee for climate indifference or protectionism?
Last December, the European Commission officially introduced the European Green Deal, a new EU economic development program aimed at achieving climate neutrality on the European continent by 2050. One of the intermediate goals of the European Green Deal is to reach a 50-55% greenhouse gas emissions reduction target by 2030 compared to the level of 1990. For its implementation, the document provides a number of tools, including the Carbon Border Adjustment Mechanism (CBAM).
This initiative has been actively discussed over the last year. Some see the BCA as a purely protectionist measure, while others consider it as an opportunity to effectively reduce greenhouse gas emissions and counter global warming. We at the European Business Association have decided to find out what consequences the new European program may have for Ukrainian business.
European taxation on CO2 emissions: where did the idea come from?
The need for a European eco-tax was first discussed in 1991 by the European Commission in preparation for the signing of the UN Framework Convention on Climate Change during the Earth Summit in Rio de Janeiro. Back then, it was a European eco-tax on energy, the purpose of which was to regulate CO₂ emissions by refusing to invest in polluting production methods. To implement this proposal, various measures were considered, including grants, investment incentives for the development of low-carbon technologies, energy efficiency, etc. This was the traditional EU approach to introducing environmental fiscalization with incentive regulation. However, some EU member states opposed it and so the initiative was rejected.
At the first conference of signatories to the UN Framework Convention on Climate Change 1995 in Berlin, the European Commission continued to advocate for the eco-tax idea. However, it eventually focused on quantifying CO₂ emission reduction targets, provided they were combined with “additional flexibility” mechanisms, namely binding quotas to national permit markets. The vector of negotiations was shifted under the pressure of some EU member states. For example, Germany has decided to hold voluntary negotiations with its industry representatives to modernize businesses in the Eastern regions instead of implementing the eco-tax. As a result, the EU’s second attempt to introduce the eco-taxation was again unsuccessful. Thus, the CO₂ emission tax project was completely rejected in 1997.
Subsequently, in 2009, France revived the idea of carbon emissions reductions at the EU’s borders and started to push it gradually to the European Parliament since 2014. The main proposal was to shift the focus from reducing emissions from production to reducing emissions from consumption. After all, it has become clear to everyone that the quota market is no longer enough, no matter what the goals are – protecting European industrial competitiveness, protecting jobs, or countering global warming.
Crucial to this story was the fact that French President Emmanuel Macron, who actively advocated carbon adjustment at the EU’s borders, managed to include it in negotiations with the European Parliament before appointing a candidate for the new President of the European Commission. Therefore, Ursula von der Layen, in her speech as a candidate for this position, promised to defend the reduction of carbon emissions at the borders of the European Union, which gave this initiative a political will despite the position of other EU countries.
BCA as an instrument of the EU’s new green economy
It is obvious that the adopted European Green Deal significantly strengthens the level of the EU’s climate ambitions. On the one hand, this may increase the gap between different countries in the context of achieving their climate goals. On the other hand, it should encourage countries to move towards climate neutrality. At the same time, the new EU economic program should provide equal competitiveness for all market participants and prevent the relocation of industries with a significant carbon footprint to countries with less stringent climate policy requirements.
The CBA mechanism is envisaged to become a special tool that will provide a possibility to estimate CO₂ emissions from the production of imported goods, as well as apply a certain price to them based on the amount of these emissions.
This environmental and economic impact tool aims at stimulating the market for low carbon products. In addition, it will promote the practice of paying for carbon emissions in countries outside the EU. At the same time, the EU envisages the need to consider the specifics of each sector of the economy, each country as a trading partner, and the probability of selective application of the BCA mechanism.
CBAM in the EU and Ukraine: the business view
The EBA experts have analyzed the possible consequences of the introduction of BCAand believe that its implementation may create a new form of trade restrictions for exports of goods from Ukraine to the EU. These include a likely increase in the price for the final consumer-importer, a decrease in the competitiveness of Ukrainian producers in the EU market, a decrease in exports in terms of quality and value. At the same time, the impact on Ukrainian exporters will be determined by the form of the CBA mechanism will be introduced, whether there will be a possibility of exemptions from this mechanism and other details of its implementation.
The Association supports the intentions of the Cabinet of Ministers to launch a structured dialogue with the EU on the possibilities, procedures, and potential ways to implement the European Green Deal initiatives in Ukraine. At the same time, business emphasizes that one of the main goals of such a dialogue should be to exempt goods/works/services exported from Ukraine to the EU from the scope of the BCA mechanism.
This EBA position is based on 5 important reasons:
First, as of 2018, Ukraine has already reduced greenhouse gas emissions by more than 60% compared to 1990, which is the highest reduction rate among all European countries.
Second, Ukraine has significant, even greater potential for further decarbonization than in the EU, but it should not be implemented through deindustrialization, but through increased energy efficiency in industry, housing, and transport, and the development of renewable energy sources.
Third, it is envisaged that Ukraine’s Second National-Defined Contribution to the Paris Agreement, to be submitted in late 2020 / early 2021, should be more ambitious and aligned with the EU’s climate goals.
Fourth, under the Association Agreement with the EU, Ukraine is obliged to implement a significant part of EU standards and regulations on combating climate change. This also applies to the system of greenhouse gas emission allowance trading, similar to the one operating in the EU. In fact, this will mean extending EU regulation to reduce greenhouse gas emissions to Ukraine’s economy. On the other hand, the introduction of the CBA mechanism for goods/works/services exported from Ukraine to the EU will not be in line with the objectives of the Association Agreement and may in fact put the existence of a free trade area between Ukraine and the EU under the question.
Finally, in the case goods/works/services exported from Ukraine are exempted from the BCA mechanism, it will be necessary to provide for the introduction of a similar mechanism in Ukraine for non-EU countries. This will prevent the import of products with a high carbon footprint to Ukraine. Otherwise, our domestic market risks becoming a kind of carbon offshore.
The business community calls on the Government to take into account the EBA position in preparation for negotiations with the EU and hopes that the conditions and procedure for non-application of the BCA mechanism to exports from Ukraine will be fixed in the form of appropriate amendments to the Association Agreement.
It will be possible to discuss the CBA mechanism in more detail with European and Ukrainian experts on September 17 within the EU-Ukraine Roundtable organized by the European Roundtable on Climate Change and Sustainable Transition (ERCST) in partnership with European Business Association. The registration for the event is available via the link.