Life after the СОP26. What eco requirements the Ukrainian business to prepare for today?
Author: Redcliffe Partners
This November’s UN Climate Change Conference (СОР26) in Glasgow has become a global eco event . Unlike the international mass media, who paid special attention to the СОР26, the Ukrainian media world contributed only a few words to this historical event, which gives the impression thatUkrainian society does not fully understand what a significant impact these new eco requirements will have on business. Let us further consider what documents have been signed by Ukraine following the СОР26, how exactly the EU carbon fee will affect Ukrainian exporters, and why eco-transformation of business creates financial benefits.
СОР26 results for Ukraine
Following its participation in the СОР26, Ukraine has signed the Glasgow Climate Pact along with 196 other countries and has committed to:
- reconsider its carbon pollution reduction scheme in 2022 to keep the global warming level at up to 1.5 degrees Celsius until 2030;
- gradually reduce the use of unmitigated coal that is produced without any neutralisation of polluting emissions.
As a participant of the СОР26, Ukraine has also supported a number of international initiatives, such as the Global Methane Pledge, the Power Past Coal Alliance, and the Sustainable Forest and Land Management.
Only a few days after the СОР26, certain countries started to change their business rules to enable a gradual switch to the new decarbonisation standards. The UK, for example, has introduced a requirement for companies to publish detailed decarbonisation schemes starting from 2023 in view of the nation-wide goals to reach zero carbon emissions by 2050.
As for Ukraine, only a short summary on the documents signed within the СОР26 was published on the Ministry of Ecology’s website. In the meantime, the government does not give any exact information about the consequences for Ukrainian businesses under the newly implemented global climate policy supported by Ukraine. And it is crucial for businesses to understand the new requirements and possible ways of preparation, as the adoption of the new eco standards will require a lot of time to change certain processes or even the entire business model, rather than large investments only.
What eco requirements does the agenda bring for Ukrainian exporters to the EU?
One of the critical issues discussed at the СOP26 was the EU proposal to introduce the Carbon Border Adjustment Mechanism (CBAM). Despite expectations that this initiative might be strongly opposed by the participants, the EU representatives managed to stand strong. If everything runs smoothly, Ukrainian producers will export certain goods to the EU under the new rules of carbon adjustment starting from 2023.
What are the obligations set by the CBAM?
To export a product to the EU, producers will need to buy carbon certificates at the price they would pay had the goods been produced within the EU territory. This “fee” currently applies to five product categories: iron and steel, cement, aluminium, fertilizers, and electricity. The list is planned to be expanded.
A “carbon fee” is one of the instruments aimed at implementing the ambitious goals of the European green agenda to reduce carbon emissions by 55% by 2030 compared to 1990. The СBAM’s main purpose is to prevent the risks of so-called “carbon leakage”. If no such tool is available, the EU’s decarbonisation efforts might fall flat, because EU-based companies could move their carbon-intensive production to countries with lower eco standards to avoid payments for carbon emissions. But given that the “carbon fee” will put local EU producers and importers in the same position, both the EU and other countries will be encouraged to invest in “green” production.
“Carbon fee” introduction period and how will it actually work?
It is scheduled that in 2023 the new CBAM reporting rules will be in place: in the first three years importers to the EU will only have to report on the carbon emissions of the imported products. However, the payments for carbon certificates will be gradually introduced starting from 2026. Companies will declare the volumes of the products imported to the EU for the previous year as well as the related carbon emissions, and on this basis the number of certificates to be acquired will be determined. Only direct emissions related to the production of imported goods will be considered for the time being. Should the importer have already paid СО2 tax in its country, a respective amount can be deducted from the certificate price subject to the confirmation of its payment.
What are the steps if a Ukrainian exporter cannot give information on the actual emission volumes? In that case, the payment will be made based on the average index of carbon emissions that was declared by the producers of similar goods from Ukraine. Thus, the lack of data might put Ukrainian producers at a disadvantage.
At the same time, certificate prices might vary significantly since they will be determined based on CO2 emission permit price in the EU ETS system.
A threat for Ukrainian exporters
As seen from the statistics for 2019, Ukraine is among the five largest importers of products subject to the CBAM certification (after Russia, Turkey, China and the UK). Hence, the new requirements might put the Ukrainian products at a disadvantage in the EU.
Ideally, Ukrainian producers will adjust to the new requirements in advance and decarbonise their production processes in order to stay competitive. This transformation is time consuming and will require a lot of financial resources as the changes can be needed at different stages of the supply chain, requiring the involvement of suppliers, partners, and the producer.
Thus, to ensure a smooth switch to a “green” business, the Ukrainian government’s main task is to inform businesses of the new requirements beforehand, explain how they will be applied, develop a transparent guide on implementing the reporting rules and certification procedure, as well as all the relevant formalities. Ukrainian producers have no time to spare in this regard, and the sooner the government proceeds with the preparation and information campaign, the more chances businesses will have to complete the transformation at minimum cost. Not to mention the fact that governments of many other countries provide economic preferences and tax benefits to simplify a switch to the “green side”.
Financial incentives for eco transformation
As we all know, the carrot (financial incentives and benefits) and stick (mandatory regulatory requirements) approach is the best way to induce businesses to change. One piece of good news for eco-friendly companies is that in addition to regulatory pressure aimed at facilitating the investments in green technologies, we can see now a big global trend on strengthening financial investments in the green and sustainable business.
The results of the 2020 BlackRock Global Sustainable Investing Survey show that businesses failing to comply with the sustainable development criteria will face more and more challenges when attracting private investments. In this survey, 86% of the respondents in EMEA stated that sustainable investing has already become or will be the top priority in their investment strategies. Sustainable investing means a so-called “socially responsible investing” under the ESG principles— ecology, society, governance— in other words, investments prioritising environmental, social and corporate governance factors when making investment decisions. Moreover, 88% of all the respondents emphasised during the survey that the environmental factor is the most predominant one among the three ESG factors in investing and for the longest period of 3-5 years. 425 investors from 27 countries, with the total value of assets under management of USD 25 trillion, were interviewed.
Therefore, the companies will have to facilitate their switch to sustainable and eco-friendlier business models either by a “regulatory” stick or a “financial” carrot. The sooner such steps are taken, the better the benefits will be for the companies from switching to the “green side”.
