The EU’s “Green Deal” or “Green Transition,” and the US’s “Green New Deal,” the European Commission published the European Green Deal (EGD) in December 2019, aiming to make Europe climate neutral by 2050 and to decouple economic growth from resource use, thereby making the European Union’s economy sustainable. The GEA includes sectoral approaches such as construction, agriculture, and energy, as well as strategies focusing on different policy areas such as a zero-pollution action plan, a biodiversity strategy, and climate, which support sectoral targets. While the GEA targets sustainable development goals, the focus of economic policies is sustainability and public welfare.
This important and fundamental transformation will begin in European countries, but they cannot achieve the goal on their own. The Carbon Border Adjustment Mechanism (CBAM), one of the tools of the Climate Action Plan, which is planned to be implemented by 2023 at the latest, is an important mechanism for this purpose. This mechanism aims to reduce the risk of carbon leakage resulting from the relocation of EU production, particularly in Energy-Intensive and Trade-Exposed (EITE) sectors, to countries with less stringent climate standards. The existence of carbon leakage is inconsistent with the overall objective of the CAP and the targets of the Paris Agreement. Although it is not yet clear which sectors will be most affected, it is considered likely that the SDK will take the form of an extension of the Emissions Trading System (ETS), one of the EU’s key instruments for combating climate change, to the international arena. Exporters operating mainly in carbon-intensive sectors are expected to be affected through the cost channel.
The Carbon Border Adjustment Mechanism is necessary because the European Union already regulates the carbon emissions of producers operating within its borders through carbon pricing mechanisms and carbon taxes. This situation has not been fully effective in reducing carbon emissions and has led to the relocation of production to other countries outside the EU where emissions are not regulated, i.e., carbon leakage. The relocation of production has resulted in a decrease in production within the EU and, consequently, a negative impact on the economy. While carbon pricing mechanisms such as the Emissions Trading System (ETS) and carbon taxes within the EU play a key role in reducing carbon emissions, they have also led to an unintended side effect of creating a competitive advantage for producers in countries where such mechanisms do not exist or are not implemented as strictly as in the EU. However, these measures have failed to address the disadvantages faced by EU producers when competing with non-EU producers. In this regard, the regulation of the Carbon Border Adjustment Mechanism (CBAM) by the EU aims to eliminate the disadvantages faced by commercial actors operating within the EU in terms of competition, primarily carbon leakage, to tighten climate targets, and to encourage other countries that do not have regulations as strict as those of the EU to move towards climate neutrality.
The transformation to be achieved through the CEF will be implemented through the CEF mechanism, which is planned to be applied by 2023 at the latest to prevent carbon leakage in the fight against climate change, and will affect exporters operating in carbon-intensive sectors through cost channels. The taxes to be imposed under the CEF will be a significant cost factor, especially for large companies in the coming period.
The SKD is a mechanism aimed at preventing producers in the EU from shifting production to countries with weak carbon legislation or no regulations in this area, and protecting EU producers from unfair competition by taxing products with a “carbon leakage risk” exported to the EU market according to their carbon intensity.
How does this mechanism work? The SKD is regulated by the EU Commission, requiring non-EU importers to purchase carbon credits from the EU ETS-linked carbon price pool to cover the carbon emissions generated by the products they import. In this way, the EU aims to prevent carbon leakage that negatively impacts both its economy and its climate change mitigation goals.
The Carbon Border Adjustment Mechanism currently applies to products produced in the cement, electricity, fertilizer, iron and steel, and aluminum sectors and imported into the EU. Producers operating in these sectors will be required to obtain CEC certificates for their imports to the EU and to document that they have purchased free allowances based on the carbon price traded in the EU ETS. Section B of Annex 2 of the proposal sets out certain conditions for exempting electricity imports from the CEC. The measurement of carbon emissions in the electricity sector is based on highly complex regulations, and discrepancies in the methodologies used by importers to prepare their declarations compared to the methodology within the EU could lead to disruptions in trade. A prerequisite for the electricity sector to be exempted from the SKD is the existence of an electricity market in the relevant country or region. The other condition is that the electricity market in the third country or region must be integrated into the electricity market within the EU through market coupling.
Although no list of exempted countries and regions is specified in Annex 2, Section B, countries that meet the aforementioned conditions and have committed to achieving climate neutrality by 2050 may benefit from this exemption. As of the date of this document, the SKD applies only to direct emissions. It is expected that indirect emissions will be included in the scope of the SKD following the completion of the regulation’s implementation phase. Indirect emissions are emissions resulting from the use of energy sources such as electricity, steam, and heat during the production processes of a product. These emissions are excluded from the scope of the SKD in accordance with the proposed text. The SKD is a unilateral measure aimed at encouraging countries outside the EU that do not have climate regulations as strict as those of the EU to become competitive in achieving their climate neutrality targets.
The EU Commission’s plan to tax imports from countries that do not implement carbon pricing is likely to have a serious impact on Turkey, which may have prompted it to sign the Paris Agreement. The European Bank for Reconstruction and Development has warned Turkish businesses about the additional costs they will face under the SKD, urging Ankara to ratify the Paris Agreement, establish an emissions trading system, and set net-zero emissions targets.
