EcoPolitic invited Stanislav Zinchenko, Head of the EBA Committee on Industrial Ecology and Sustainable Development, for an interview. We asked the expert in detail whether the implementation carbon border adjustment mechanism can really become an effective tool for combating climate change. Also, we discussed readiness of Ukrainian and European producers to fulfill CBAM requirements and future for the Ukrainian industry if CBAM rules are fully applied to our exporters from 2026.
- What is CBAM and what role does it play in EU climate policy?
CBAM, or Carbon Border Adjustment Mechanism, is a very innovative tool introduced by the European Union. It has never been used anywhere else in the world. This mechanism introduces a carbon duty on imports. This means that any country that produces its products with higher CO2 emissions than similar goods in the EU but wants to export them to the EU must pay for this difference in carbon dioxide emissions at the price that is observed in the EU.
Since the CBAM is a completely experimental instrument, even its authors cannot predict exactly how it will work, what effect it will have on European and global trade, and on the climate. It is expected to lead different countries and companies around the world to invest more in decarbonization.
The EU has been operating the EU ETS (European Union Emission Trading System) for 20 years. It accumulates funds for further investment in decarbonization projects and creates incentives for European producers. In addition, over the past 2 years, EU governments have allocated more than €10 billion in direct subsidies and grants for the green modernization of the largest steel plants. Ukrainian companies are eligible for the same support for decarbonization and the introduction of new technologies. This is exactly how we need to prepare for the CBAM – 20 years of preparation, incentives, and financial instruments from the state.
- Many people say that CBAM is an important tool for reducing CO2 emissions and fighting climate change. Is this true?
This is a very controversial issue. I personally do not see any direct connection between CBAM and the fight against climate change.
If we talk that CBAM will change the production and value chains of European companies, then, yes, they can become greener. On the other hand, we see also a scenario in which companies will buy the same amount of carbon quotas, but the funds from this duty will be accumulated and used for decarbonization.
Currently, there are many possible scenarios, but there is no direct link between the introduction of CBAM and the fight against climate change.
- How are CBAM and ETS related in the EU?
This is a very interesting connection. The price of a CBAM certificate will be based on the market price of СО2. In particular, it will depend on the so-called “free” allowances. Even after 20 years of the EU ETS started, European companies have free allowances. If a company's emissions are less than the amount of allocated free allowances, it can even sell the extra allowances on the market.
After 2030-2032, the number of free allowances will decrease. After 2035, they will be gone altogether. Accordingly, the price of CO2 on the European market will increase. This means that the price of the CBAM certificate will also gradually increase.
- Are European companies ready for CBAM? Are all importers reporting on time and are reports satisfactory?
First, you need to understand that CBAM reporting to the European system is submitted by the importer. It is based on the information provided by the manufacturer, but the responsibility still remains with the importing company. We are already seeing signals that many European companies are not ready for these changes, they warn of possible gaps in the value chain.
Second, the reporting process is not currently automated. Companies submit reports in paper form and in Excel spreadsheets. Therefore, there is a high probability of errors in the preparation of the report, its processing and evaluation.
Third, many companies say they will not submit data because it contains too much specific confidential information about production. Manufacturers do not want to share it and they have the right to do so.
Fourthly, the European market and economy is not growing and will not grow anymore, so this region is losing its former attractiveness for importers. Therefore, due to the introduction of CBAM, many producers, suppliers, and traders may reorient to the growing markets of India, Southeast Asia, or Africa.
- Where will funds from CBAM-fees be sent?
It is said to be for decarbonization, but we have heard also information that in the first years (and it could be 10 years), the funds received from CBAM will be used to cover the costs of administering the CBAM. There is a very high risk that this tax will only support the bureaucratic process.
From the perspective of the European budget, I do not expect large revenues from CBAM. In the first years, they will be small because of the free carbon allowances. Later, there are two options: either companies will start using other types of raw materials/products, or importers will reorient to other markets.
- What problems do Ukrainian companies currently have with CBAM reporting?
As the chairman of the EBA's Industrial Ecology and Sustainability Committee, I now see that only the largest companies that export a lot are able to prepare such reports. They have international offices, experience and competencies, they have the resources and they have the right specialists.
But even for the largest companies, CBAM presents additional challenges and problems, primarily because the administration and preparation of reports is very expensive.
For small and medium-sized companies, submitting CBAM reports seems almost unrealistic, as quite often these companies do not even have environmentalists, let alone specialists who are familiar with preparing such specific reports.
A separate difficulty is that such a small company may manufacture products that do not directly fall under the scope of the carbon border adjustment mechanism, but they contain materials which are subject to CBAM. And then, without a certificate, it will not be able to export its products to the EU.
This is a very big problem. I know that in other countries, governments have been preparing their companies for 3-4 years, conducting trainings and providing other assistance, because these countries are interested in supporting their exporters. Unfortunately, in Ukraine, no one cares about CBAM issues.
- Even before a full scale invasion?
Yes, even before the full-scale invasion. The Ukrainian government and ministries have considered and still consider CBAM to be a problem for Ukrainian businesses. This is my subjective opinion based on the lack of interest from representatives of various ministries over the past 4 years. The relevant representatives of the European Commission in Brussels are more interested in the EBA's research and positions on CBAM and the ETS than representatives of the Ukrainian government. In recent years, only Taras Kachka, Deputy Minister of Economy and Trade Representative of Ukraine, has been involved in these issues in the framework of protecting Ukrainian exports.
- How do you think the problems created by CBAM can be prevented?
Europe has realized that it is not ready for new carbon prices and new challenges. Over the past two years, the EU has begun to actively finance decarbonization projects through direct grants and subsidies. Those companies that manage to decarbonize by 2030 will not pay this carbon tax, or it will be very insignificant for them.
From my point of view, there are three components of the Ukrainian recipe for CBAM:
- A balanced and adequate state climate policy that will be accepted by our European partners. And this does not mean ambitious and naive. There should be a roadmap with specific resources and institutional changes. Slogans and declared goals alone will not do.
- Connecting Ukraine to European decarbonization funds. But I want to emphasize that the connection to these funds should not be through the mediation of the state, but through the interaction of European institutions and private business in Ukraine. Unfortunately, our system of state funds is discredited due to corruption and inefficiency.
- Application to Ukraine of clause 30.7 from the CBAM regulation which makes possible to exclude a country from the CBAM in case of force majeure. Such circumstances include the war that is currently taking place in Ukraine. Therefore, policy makers should raise the issue of applying the declarative principle of CBAM to Ukrainian producers, whereby companies will report their own emissions but will not pay the cost of certificates.
If this rule is not applied to Ukraine, the country that has suffered the most from the war in recent years will also be the most affected by this duty.
- What will happen if the products of Ukrainian companies are not competitive due to CBAM payments? What are your predictions?
My forecasts are negative. According to estimates, the losses of Ukrainian GDP in 5 years of CBAM could reach $5 billion per year. In 2032, it could be minus $1.5 billion in commodity exports.
The key problem today is that Ukraine has very limited export destinations due to the war. If we don't have the opportunity to sell products to the EU through CBAM, the Ukrainian economy and industrial production may shrink even further, perhaps by another third.
- Which industries in Ukraine need the most investment to adapt to the new carbon regulations?
In my opinion, the 4 key areas are:
- Energy, because green energy is at the heart of everything. First and foremost, it means investments in renewable energy.
- Steel industry, which has always been the backbone of Ukraine's economy. It has suffered significantly, but despite the war, last year it accounted for 6% of GDP and 15% of Ukrainian exports.
- The cement industry.
- Chemical industry, in particular fertilizer production.
In my opinion, these are the key areas that need to be invested. Energy, steel and cement, in my opinion, will be the three most important components for rebuilding the country.
I would like to emphasize that the green transformation of the Ukrainian economy is very important for Europe in terms of its contribution to the fight against climate change. The European Union will be able to achieve its ambitious climate mitigation goals faster if it integrates Ukraine and invests in its eco-modernization.
For example, our country's solar and wind potential can help Europe increase its production of green energy and hydrogen. The domestic steel industry is ready to produce low-carbon steel and raw materials for the production of green European steel. In other words, we are ready to support the EU and be part of green value chains, but investments are needed.
- Can Ukrainian enterprises allocate sufficient funds for eco-modernization in the context of war? Are there any mechanisms in place in Ukraine to support companies in switching to environmentally friendly technologies under the CBAM?
Unfortunately, they were not envisaged before the war, and we can hardly rely on them after the war. I am sure that we cannot advance without getting access for Ukraine and Ukrainian private enterprises to European funds. It would be advisable to develop a mechanism involving business representatives and associations.
Before the war, Ukrainian companies had decarbonization plans and approved investment programs. But all these plans were destroyed by the war. The only source of funds and incomes for the future decarbonization of Ukrainian industry may be export revenues. And if they are not available due to the implementation of CBAM, then there will be no source of funds for eco-modernization – at least partial – on our own. This is a direct link.
- In your opinion, what mechanisms can encourage businesses to invest in decarbonization?
The role of the state should be to create a favorable investment climate and conditions for co-financing. In a number of countries, the scheme of temporary tax exemption or tax reduction has proven to be a good practice, provided that the released funds are used for decarbonization projects.
Prior to the full-scale war, there was a discussion about accumulating part of the CO2 tax revenues at the same enterprises that pay it and using them for decarbonization projects. But this approach was never implemented, as in Ukraine, the main purpose and function of eco-taxes is to fill the budget, not to stimulate eco-modernization.
This is the biggest problem – we have no incentive system as such. Only if state change paradigm of environmental and economic policies from punitive and fiscal to incentive-based (as in the EU), it can fundamentally change the vector. But, unfortunately, the state exists in its own universe – it assumes some obligations, writes plans, and forms strategies without real sources of funding and plans to work on its own.
- What is the role of Ukraine in the green transformation of the EU and do we have prospects within the framework of the EU Green Course?
The first role I see is Ukraine as a major producer and supplier of green renewable electricity (demand for it is only growing in the EU). In particular, our country has great potential as a producer of hydrogen, not only green hydrogen, but also hydrogen produced by nuclear power.
The second role is as a supplier of materials for the green transformation of the steel industry. We can be a very good place to produce green steel or semi-finished products.
If we produce both green raw materials and green energy, production in Ukraine to supply products to the European market may be more benefitable for the EU than importing from more distant and less friendly countries. In other words, Ukraine can be a very important element of the European economic space and a place for the production of green products.
It is extremely important that the European Union treats Ukraine as a part of itself, not as a third country. We have a production culture, raw materials, and a favorable geographical location. Therefore, Ukraine's role in achieving the EU's ambitious climate goals can be very important.
