Posts Global Market CBAM 498 26 June 2024
The optimal option is to recognize force majeure and apply a declaratory approach to Ukrainian imports subject to CBAM
The first results of the launch of the Carbon Border Adjustment Mechanism (CBAM) showed the presence of technical and organizational challenges. Their elimination will take time. Since CBAM is a completely new instrument, no one fully understands the consequences of its implementation. In time, other countries, taking into account the EU experience, will also start to introduce similar mechanisms.
A full-fledged launch of CBAM from 2026 could lead to a reduction of Ukrainian exports to the EU and a breakdown of value-added production chains. To protect Ukrainian exports and production, the Ukrainian government should intensify consultations with the European Commission on recognizing force majeure and applying a declaratory approach to goods imported to the EU from Ukraine and subject to CBAM.
Difficulties of the start
From October 1, 2023, to December 31, 2025, there is a transitional period during which the importer only reports on CO2 emissions embedded in the import of goods subject to CBAM. From January 1, 2026, the mechanism must be fully operational, i.e. importers must pay for CO2 emissions by purchasing the appropriate number of CBAM certificates. Thereafter, the growth of the burden on importers will take place at the same pace as the phase-out of free allowances in the ETS (2026-2034). Naturally, the introduction of such a complex mechanism as CBAM could not do without problems and overlaps, among which the following were discovered at the reporting stage:
- Technical difficulties. The CBAM reporting platform was not ready for the high load. Many companies were unable to upload reports in time due to technical problems. Some difficulties arose even for those who were able to log on to the platform. In addition, the platform is not available in all European languages.
- Weak awareness, insufficient information campaign. The majority of European importers were unaware of CBAM. In the case of Ukrainian exporters, EU counterparties have already started demanding CBAM certificates from them, confusing them with quality certificates or other product documents.
- Difficulties in determining the CBAM of the declarant. It is difficult for companies to figure out who can file a report on behalf of the person responsible for the correctness of the information (the signatory).
- Difficulty in collecting the necessary data, complicated procedure for calculating emissions (embedded emissions). Companies note that there is a need to develop clearer methodologies for calculating emissions, to simplify the collection of data on long global supply chains.
- The problem of collecting data on CO2 emissions from all participants in the supply chain. Many suppliers outside the EU are reluctant to share information because providing such data may violate confidentiality rules and/or national legislation.
The European Commission has to fix “bugs” online. CBAM is a completely new tool in the world practice and the possible consequences of its application are not yet fully understood even by its initiators.
«The launch of CBAM may have a negative impact on European exporters. With the launch of CBAM, free emission quotas will be reduced. The costs of European producers to buy carbon credits will be higher than those of their global competitors. As a result, European exports will become less competitive and will decrease,» says Stanislav Zinchenko, Director of GMK Center.
It is expected that the launch of CBAM in the EU will lead to the emergence of similar mechanisms in other countries. The US, UK, Australia, Canada, etc. already have plans or ideas to implement their own CBAM. CBAM analogs will be implemented, possibly in a more stringent version than the European one. A new wave of CBAM could affect 60-70 million tons of steel trade by 2030.
Consequences for Ukraine
The implementation of CBAM will significantly complicate Ukrainian exports for producers in iron and steel, cement, glass, and chemical industries, as well as the energy sector, when it is able to resume electricity exports to Europe. Only up to one-third of Ukrainian exports to the EU will be subject to the new mechanism.
CBAM impact assessments show different figures – it is impossible to predict what exports to the EU will be in the context of the war. This will particularly affect producers of electricity and fertilizers, as well as steelmakers. According to GMK Center’s calculations, CBAM will lead to the loss of 1.6 million tons of Ukrainian exports of long products and semi-finished products to the EU, as well as 1.4 million tons of pig iron. Financial losses for the industry may amount to approximately $1.4 billion per year.
The scale of negative consequences of CBAM for both the industry and the entire Ukrainian economy will deepen every year as the price of certificates will increase.
The full launch of CBAM from 2026 will have an extremely negative impact on exports in the form of increased costs, reduced competitiveness of products, forced reorientation to other markets, etc. The effect of this mechanism is much stronger than that of CBAM. The effect of this mechanism will have a much stronger impact on Ukrainian steel companies than on their competitors from other countries, as the industry’s dependence on the EU market in the conditions of war and logistical difficulties has only increased.
«In 2021, 45% of all Ukrainian exports were to the EU. Today this figure is 80-85% with smaller volumes. Our dependence on EU markets has grown 2 times. The most affected economy from the launch of CBAM will be the Ukrainian economy. I am sure that the European Commission does not have the goal of destroying the Ukrainian economy. That is why there is a force majeure clause in the regulations,» comments Stanislav Zinchenko.
Necessary steps
In light of European integration, Ukraine needs a new level of relations with the EU. So far, Europe annually extends the abolition of duties on Ukrainian goods (with a toughening in relation to agro-products this year), but this in no way replaces the provision of other support for Ukrainian exports under war conditions, in particular, in the CBAM issue.
Ukrainian business approached the government with a proposal to initiate negotiations with the EU on the procedure for applying CBAM to Ukraine back in 2020. In 2021, the government formed a working group to agree on an approach to CBAM and hold relevant consultations with the European Commission. In fact, not a single meeting of this working group was held.
In addition, based on public information, Ukraine is currently not conducting permanent negotiations on CBAM. At the same time, other exporting countries are actively consulting with the European Union -–for example, Turkey, Korea, and others.
In the current circumstances, the Ukrainian authorities need to return to active consultations with the EU on the application of CBAM. The current CBAM regulation allows the EU to change the procedure for applying this mechanism in exceptional circumstances, which by all accounts include a full-scale war, which has been going on in Ukraine for the third year already.
One approach could be to apply a declaratory approach to goods imported from Ukraine to the EU and subject to CBAM. That is, in fact, it will be the same approach as for the rest of the countries (reporting), but without charging for CBAM certificates. This will help to reduce the financial burden on businesses, help enterprises to keep the price competitiveness of their products, and maintain production and exports.
A little less than a year and a half is left before the full-fledged introduction of CBAM, and this is quite enough time to find a compromise solution to mitigate the application of the mechanism to Ukrainian exports. For this purpose, it is only necessary to intensify negotiations with the European Commission on this issue. Otherwise, the passivity of the Ukrainian authorities may later cost the entire economy of the country dearly.
«The deindustrialization of the Ukrainian economy is the result of economic policies over the past 30 years in Ukraine. While the EU and the US are fighting to preserve the national producer, give huge subsidies for decarbonization and infrastructure projects, Ukraine shows systemic passivity in protecting national interests,» summarizes Stanislav Zinchenko.
