On October 1, 2023, the EU launched a transitional period for the Carbon Based Import Adjustment Mechanism (CBAM), which is one of the main instruments of the EU's climate policy. Until 2026, importing companies, as well as local companies that use goods from third countries, will only have to report carbon emissions generated by the production of cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen. In the second stage, companies will start receiving CBAM certificates for their goods, and free emission allowances will be canceled for European producers.
Read more about the specifics of the carbon tax and its role in the fight against climate change in EcoPoltric's article.
What is CBAM for?
European lawmakers have introduced a carbon tax to stimulate global decarbonization, i.e., the reduction of greenhouse gas emissions. Thus, in the EU, companies have already gone some way to improving their environmental performance and pay the cost of quotas in the EU ETS greenhouse gas emissions trading system, which finances the green transition.
The CBAM should level the playing field for European producers and importers and prevent carbon leakage, i.e. the transfer of production to countries with less stringent environmental standards.
How CBAM will work
Importers of the EU's most carbon-intensive goods will buy certificates, where one certificate corresponds to one ton of CO2 equivalent (carbon or other greenhouse gas). The cost of the certificate will correspond to the cost of carbon emissions that would have been paid if the goods had been produced in the block. However, if a company has already paid a similar price in its home country, it will avoid the duty.
In 2023, the cost of allowances in the ETS reached about €76, while in Ukraine the cost of a ton of carbon emissions reaches 30 hryvnias.
The ETS will be introduced gradually from 2026 to 2034 at the same rate as the abolition of free emission allowances for European producers. Companies that delay reporting or submit false data in their annual report will face fines of €100 per certificate.
The EU also plans to expand CBAM to other products, including paper, glass, and chemicals. In addition, the carbon tax may also be extended to cover indirect emissions, i.e., the energy used to produce a product.
What importers should do until 2026
Until 2026, importers will only have to report their direct emissions and learn how to work with the reporting. Thus, the report should take into account all emissions generated during the production of products. However, this requires high-quality monitoring, and to give companies time to conduct it, the European Commission has published default values for greenhouse gas emissions for imported goods, except for energy. They are set based on the worst 10% of emissions levels for the production of similar goods in the EU.
This will help companies to report in case they do not have all the necessary information during the
- the first three quarterly reports (Q4 2023 and Q1 and Q2 2024);
- from the third quarter of 2024 to the end of 2025 – for complex products with a limit of 20% of total embodied emissions.
During this time, the EU will also work to facilitate the reporting process and identify errors in the system.
Importers of goods that are subject to CBAM, but have not registered in the system, or have not submitted reports, will not be able to conduct business in the EU.
Criticism of CBAM
Even before the CBAM mechanism was adopted in 2022, it was criticized by some countries, including China, and importing companies for its tax burden and overly ambitious modernization deadlines, which would harm economic development. After all, importers' production facilities often operate using outdated technologies with coal-fired generation and high emissions. This reduces their value in the EU markets, and their competitiveness with European goods decreases.
However, the CBAM has also been criticized in developed countries because of some protectionism of European producers. However, the European carbon tax has encouraged other countries to introduce their own analogues, such as the UK (starting in 2027) and the US (considering it).
Some experts also fear that the CBAM may slow down rather than stimulate global decarbonization efforts. In particular, the carbon tax may create two separate supply chains, one of which will be "clean" for countries with emissions trading schemes, and the other "dirty" for poor countries.
CBAM for Ukraine
Even at the beginning of the full-scale invasion, Ukraine sought to obtain separate rules for participation in the CBAM, as a significant part of its industrial facilities was destroyed or damaged. In addition, in times of war, investors are afraid to invest in eco-modernization projects, and available loan programs have too high interest rates. However, this has not been achieved.
Vladyslav Antipov, head of the Center for Ecology and Development of New Technologies, warned that the CBAM could create additional costs for traditional Ukrainian steel products of up to €100 per ton. In addition, approximately $6 billion of Ukraine's exports, almost 90% of which are mining and metals products, will be affected by the CBAM.
However, according to him, the carbon tax will also create certain opportunities, as it will apply to all countries and importers, who will also incur additional costs.
Stanislav Zinchenko, Chairman of the EBA Committee on Industrial Ecology and Sustainable Development and Director of GMK Center, said that Ukraine could potentially get a delay from CBAM, as it is provided for by European legislation in case of force majeure. A full-scale war is exactly such a circumstance. However, for this to happen, the Ukrainian government must intensify negotiations with the EU and have a strong position.
He explained that, according to EBA estimates, Ukrainian exports will lose at least €1.5 billion annually due to the CBAM. This could become an unbearable burden for war-affected industrial enterprises and "finally 'finish off' plants that are not operating at full capacity."
For a number of importing countries, the CBAM will be a real challenge, as will the abolition of free quotas for European producers. However, the fight to limit global warming to 1.5℃ is a critical need for all of humanity, and while the window of opportunity to curb climate change is still open, the world must unite around a common goal. To reduce or avoid the tax burden of paying the carbon tax, businesses can carry out environmental modernization and buy fewer CBAM certificates due to lower emissions. However, such projects require significant funding, which Ukrainian companies do not currently have access to.
