EU carbon border adjustment mechanism — how will it affect Ukraine?

On July 21, the EU agreed on a long-term budget 2021-2027 that aims to repair the economic and social damage brought by the coronavirus pandemic, kickstart the recovery, and prepare for a better future for the next generation. Also, new taxes were introduced. In particular, the carbon border adjustment mechanism, which corresponds to the position declared by the European Green Deal.

What is the main sense?

Europe’s efforts to go climate-neutral by 2050 could be undermined by a lack of ambition by our international partners. This would mean the risk of carbon leakage. This occurs when companies transfer production to countries that are less strict about emissions. In such a case, global emissions would not be reduced. This new mechanism would counteract this risk by putting a carbon price on imports of certain goods from outside the EU.

First of all, it will concern the import of steel, aluminum, cement, etc., most likely – electricity.

Tax features

The tax will be attached to tax greenhouse gas emissions in the country where the goods will be produced. Tax will be charged at the moment of goods crossing the border with the EU.

What we have as a result?

On the one hand, it prevents unfair competition with European goods, and on the other hand, it forces the EU’s trading partners to introduce carbon taxation mechanisms similar to European ones.

When will the tax be introduced?

It should be adopted no later than the second quarter of 2021 and introduced by 2023. The initiative is currently in the active phase of public consultation.

How will this affect Ukraine?

Ukraine’s losses due to the introduction of the EU carbon border adjustment mechanism are currently not accurately calculated. However, given the fact that about 50% is exported manufactured goods to the EU, we can predict that it will significantly hurt the Ukrainian economy.

For example, according to estimates by the Boston Consulting Group (BCG), if this mechanism is introduced, Russia’s export losses will range from $ 3 to $ 4.8 billion annually.

How to find the right way?

Only develop “green” energy and meet EU standards. Ukraine’s energy system needs effective solutions. Today traditional capacities need to be upgraded. It is necessary to prepare for the introduction of a carbon border adjustment mechanism now, in particular to introduce a tax on CO2 emissions or domestic trade in emission quotas in Ukraine, as well as transparent regulation and the establishment of clear rules for the energy market.