Ukrainian economy to sustain big losses from additional tax in EU - study

MOSCOW. Oct 15 (Interfax) - The Ukrainian exporters to the European Union will sustain considerable costs in the framework of the Green Deal strategy, and in particular its Carbon Border Adjustment Mechanism (CBAM), an additional tax on goods produced at a high level of carbonization, effective from 2026.

The introduction of CBAM in the EU will lead to more losses for the Ukrainian economy, the Ukrainian media reported, citing a study by the GMK Center on how CBAM could weaken Ukraine's economy. Whereas Ukraine will lose $202 million of exports during the first year of the CBAM full implementation, the figure will rise to $1.44 billion per year by 2030.

"CBAM could cause Ukraine to stop exporting products such as cement, fertilizers, cast iron, square billets, rolled steel after 2030," the GMK Center's study said.

The CBAM transition phase began in 2023, during which companies must report on carbon emissions related to production. CBAM will fully come into force in 2026, requiring to make appropriate payments. Although initially CBAM will cover only a limited number of products, this might increase in future.

From the official standpoint, the EU introduced CBAM to equalize terms for European producers and foreign suppliers. In practice, CBAM is a new trade barrier reducing access to the European market for countries with low incomes and without a developed financial market to enable them to finance the decarbonization, the study said.

More than half of Ukraine's exports go to the EU, and 15-17% of them could be subject to CBAM. At the same time, the European market is vital for Ukrainian producers. Export enables them to continue manufacturing at a time when the domestic market has a reduced capacity.

"Ukraine's metallurgical industry will be hit by CBAM the most, because cast iron and steel products make up 93% of Ukraine's exports which fall under CBAM. At the same time, the metallurgical industry is the main exporter and makes substantial contribution in Ukraine's economy. For example, in 2023 it accounted for 5.7% of Ukraine's GDP, including supply chains," the study said.

Moreover, CBAM applies to the whole world, it said. Obviously, CBAM will be introduced both by big developed countries and by some developing countries, putting access to markets for Ukrainian exports under threat. Countries such as India, China and South Africa are trying to resist CBAM in order to find a solution to support their exporters.

Ukraine has taken a wait-and-see approach, which under current circumstances looks impractical, the study said. Ukraine continues to prepare to join the EU, but adapting to the European standards takes time and huge investment. Ukraine has launched a system for the monitoring, reporting and verification of greenhouse gas emissions, and continues working on a local system for emissions trading. This system will need to be connected to the EU's Emissions Trading System in future to prevent the threat of carbon leakage.

Ukraine is joining the long-term European trend for green transition, but right now it is important for its economy to get an exemption from CBAM. Such a decision could be made under Article 30.7 of the CBAM regulations, which allows the European Commission to change approach to how CBAM applies to countries faced with an unpredictable, exceptional situation, which has devastating consequences for its economic and industrial infrastructure, the study said.