GREEN DEAL EU CARBON REGULATION MECHANISM AT THE BORDER
One of the biggest threats facing the world is climate change. Various efforts to combat climate change and the global transition to a low-carbon economy shape the sustainable development goals of countries. In many countries, various environmental regulations have been put into practice with the increase in awareness on environmental protection and climate change. The Paris Climate Agreement, the European Union ("EU") Green Deal and the COP26 Conference are among these regulations to reduce greenhouse gas emissions. Within the framework of the Green Deal, broad and effective regulations were envisaged to combat climate change. The Green Deal roadmap includes many implementation areas such as clean energy, sustainable industry, construction and renovation, more sustainable food systems, pollution elimination, and tools for these areas (European Commission, 2022). One of these tools is the "Carbon Regulatory Mechanism at the Border" (CCRM). The CCSM was created to limit and reduce carbon emissions to zero.
As part of the Green Deal, strategies have been set for the targets to reduce carbon emissions by 55% by 2030 and to achieve zero carbon emissions by 2050. The Border Carbon Regulation is one of the applications within the "Fit for 55" draft proposal that supports the EU's climate targets. The CBA envisages a "carbon emission tax" at the border on certain products imported into the European Union (EU), based on their carbon content.
The main objective of the Border Carbon Regulation is to prevent carbon leakage caused by companies shifting their production to countries with fewer emission restrictions. Thus, producers will be prevented from turning to countries with weak carbon regulations or no regulations at all, which negatively affect the targets for combating climate change. The regulations will apply to trade goods imported from third-party countries outside the European Union. During a three-year transition period until 2026, they will apply to direct emissions of greenhouse gases emitted during the production process of covered products.
As of January 1, 2023, transitional provisions on the reporting obligation of importers on imported goods under the SDDSM have started to apply. Accordingly, importers are obliged to report to any of the National Authorities, even if they import to different Member States. The reporting aims to ease the burden on importers and prevent major disruptions in trade. It is clear that these efforts towards SDCC will give a certain impetus to green transformation and sustainability policies in Turkey.
Within the scope of the SDGCC, the European Green Deal is seen as an important transformation tool for Turkey aiming sustainable development. Accordingly, significant improvements in carbon emissions can be achieved through an alternative Green Economic Transformation scenario that focuses on emission reduction, the use of the funds obtained for the green transformation of companies and renewable energy and energy efficiency. In line with the improvement and harmonization efforts, it is foreseeable that Turkey will support low-carbon production and increase its market share in exports to EU countries by gaining an advantage over high-carbon countries.
Considering the important role of the European Union in exports, the developments regarding the Border Carbon Regulation are of great concern to the exporting sectors in our country. In line with the "zero carbon" policy, both the state and the private sector are obliged to take structural measures by making the necessary renovations in their production processes.
In the first phase, the ESD covers products produced in the cement, fertilizer, electricity, iron and steel, hydrogen and aluminum sectors and imported into the EU. In this context, priority was given to sectors with high carbon leakage risk and high carbon emissions. Producers operating in the relevant sectors are required to hold ESD Certificates in their product sales to the EU. In addition, they are obliged to document that they have purchased free allowances at the carbon price traded in the ETS in the EU.
With the transition to SDCC, the production structure and reporting standards of companies are also expected to change. Within the scope of these changes, the concepts of "environment, social and governance" (ESG) are much more important in the reporting standards of companies. Therefore, companies need to adopt a more holistic reporting system that includes these concepts.
As the SDCC implementation directly affects businesses both in the EU and around the world, it is important for companies to measure these impacts. This includes assigning internal responsibility for the management of the regime, reviewing the EU import carbon footprint and potential impacts, taking into account the scope of the Carbon Tax Mechanism at the Border, and starting to prepare for the requirements of the SDCC transition period.
"IN THE NEXT 10 YEARS, WHEN THE RULES OF INTERNATIONAL TRADE WILL BE SHAPED BY CARBON EMISSIONS, TURKEY CAN INCREASE ITS COMMERCIAL COMPETITIVENESS AND TURN THE TRANSFORMATION INTO AN OPPORTUNITY BY IMPLEMENTING A LOW-CARBON ECONOMIC MODEL"
The Carbon Border Adjustment Mechanism (CBAM) aims to align the competitiveness of high- emission products, which are usually produced at a lower cost, with alternative products that have relatively lower emissions but can be produced at a higher cost. In other words, it brings the cost of high-emission products to the level of low-emission products through regulations such as carbon taxes. Although the design and implementation of this regulation is still under debate, the essence of this implementation is based on a tax on imported products based on their carbon content. This mechanism could take the form of tradable carbon credits, a tax, a prelevance or customs enforcement. The regulation responds to the risk of "carbon leakage", where the carbon price creates costs, i.e. it prevents production from shifting to countries with no carbon costs. External suppliers gain an economic advantage when they cannot cover these costs. If the mechanism is not put in place, over time production will shift to geographies that do not impose carbon taxes, and emissions will leak into these countries, delaying progress towards a net zero-emission planet.
Where does the idea of carbon regulation at the border come from?
The first mention of carbon regulation at the border in recent history was made in 2003 by the New Economics Foundation (NEF), a London-based think tank. The NEF's report covers the worrying period between 1997, when countries refused to ratify the Kyoto Protocol, and 2005, when it entered into force. The report equates production costs avoided by non-parties to the Kyoto Protocol under World Trade Organization (WTO) rules with incentives to undermine trade. During the Kyoto era, issues related to carbon regulation at the border were supported by civil society organizations such as Friends of the Earth Europe. In political discourse, however, it was often seen as 'a threat' to get countries to ratify the Kyoto Protocol. In the last 10 years, carbon regulations at the border have failed to gain traction, although several countries, including France and Italy, have floated the idea several times. But the UK, Germany and even former European Union (EU) commissioners have warned that the 'eco-protectionism' of the mechanism could inflame trade tensions with many countries, including the EU's two largest trading partners, the US and China.
In 2019, carbon regulations at the border are back on the agenda as part of the European Commission's European Green Deal proposal. In this proposal, the European Commission stated its intention to introduce a "carbon border adjustment mechanism" in 2021 if key trading partners do not implement strict climate targets. In July 2019, European Commission President Ursula von de Leyen expressed her support for the Political Guidelines, referring to "the need to avoid emissions leakage". In December 2019, the European Green Deal was made public, stating that "in the event of continued divergences in attitudes towards tackling climate change around the world at a time when the EU is strengthening its climate action, the European Commission will propose a mechanism for border carbon regulation for specific sectors to reduce the risk of carbon leakage".
The European Green Deal "baseline impact assessment" report, made public in March 2020, stated that "a carbon regulation mechanism at the border would provide a more accurate reflection of the carbon content of import prices". The "climate targets plan" presented in September 2020 included the following statement: "At a time when the EU is strengthening its ambition to tackle climate change, the Commission will propose a border carbon adjustment mechanism [...] as an alternative to the measures currently in place to mitigate the risk of emissions leakage, if the ambition to tackle climate change is not strengthened by our partners."
Since the beginning of the COVID-19 crisis, the European Commission has proposed financing the economic recovery package with instruments including an EU-wide tax on non-recyclable waste, a carbon tax at the border and a digital tax. The think tank Bruegel strongly recommended similar financing mechanisms in a paper published in September 2020. As of January 2021, the European Commission is taking up the issue of how to implement CBAM as an urgent matter and is bringing together many stakeholders. The Commission plans to present a draft law on CBAM in 2021, with the aim of having it in place by early 2023. US President Joe Biden included "carbon regulatory pricing" in his 2020 election campaign. The Biden administration has tabled setting carbon tariffs under Section 232 of the Trade Expansion Act of 1962, which allows the US Department of Commerce to initiate investigations that give the President "broad authority to regulate imports of any article injurious to the national and economic security of the United States." The Canadian government and the Bank of Canada had expressed support for the idea of carbon regulation at the border before Biden's election.
Winners and losers of carbon regulation at the border
Some experts suggest that it would be pragmatic to limit carbon regulation at the border to the most carbon-emitting sectors during the pilot phase. However, given WTO compliance, a carbon tax on all products under import duties would be an easier option. Emissions-intensive sectors such as export- oriented steel, chemicals and cement are expected to be hit hardest. The three largest aluminum exporters, China, India and Australia, also have the highest emissions intensity in the production of the energy needed to produce aluminum. They will be disadvantaged in this respect. Among the largest aluminum producers, China, Canada, India and Russia, Russia and Canada have a competitive advantage as they produce aluminum with lower carbon emissions as a result of the significant share of hydroelectric power plants in electricity generation.
Among the largest steel exporters, China, Japan and Russia have the highest emissions per ton of steel produced. In contrast, South Korea, one of the largest steel exporters, currently produces steel with the lowest carbon intensity. The countries with the lowest emissions intensity of steel production on a global scale are Mexico and Canada, which do not currently export steel but have low emissions from arc furnace factories and grid electricity generation. They are followed by the US and Germany, which have implemented arc furnace plants in steel production on a large scale. In the
case of cement exporters, China and Mexico, which produce high emissions in this sector, appear to be at a disadvantage. Within the EU, France, Switzerland, Germany and Italy will stand out by producing cement with low emissions.
Cement producers in Turkey will join the competition; the Turkish Cement Manufacturers' Association has adopted a zero emission target for 2050 and announced that it is preparing a "Carbon Roadmap". Australia and Russia stand out as affected economies that have expressed concerns about the introduction of carbon regulation at the border. However, the US had expressed concerns about carbon regulations at the border before the Biden administration and before the UK strengthened its climate change targets. In addition, it is still being debated whether carbon regulation at the border will cover the agricultural sector. If the regulation is extended to this sector, it could make it impossible for the EU's agreement with the Mercosur trade bloc to enter into force, especially if it is ratified by Brazil. Regarding possible regulations on the export of agricultural products, Turkey has stated that they should be in line with the principles of EU foreign trade with Turkey under the Customs Union.
Possible effects of carbon regulation at the border on Turkey
Along with major economies such as China, Russia, India and the US, the carbon regulation at the border will definitely affect Turkey's foreign trade relations with the EU. TÜSİAD's "Report on the New Climate Regime through the Lens of Economic Indicators", published in September 2020, reveals that sectors exporting from Turkey to the EU will be affected by increased costs when the Border Carbon Regulation envisaged under the European Green Deal comes into effect. The study, which considers the price per ton of carbon in two different scenarios of 30 euros and 50 euros, calculates that if measures are taken in line with the EU's green economic transformation, gross domestic product will be 5.7% and 6.6% higher, respectively, and greenhouse gas emissions will be 16.5% and 15% lower, respectively.
The macroeconomic findings and conclusions of the report can be summarized as follows:
- The European Green Deal can be seen as a risk for Turkey, but also as a brand new opportunity as a tool for transformation towards sustainable development.
- An alternative Green Economic Transformation scenario that focuses on emission reductions, the use of funds for the green transformation of companies, and renewable energy and energy efficiency, within the framework of a well-defined strategic transformation, could lead to significant improvements in both national income and greenhouse gas emissions.
- A green economic transformation strategy demonstrates that emission reduction targets can be achieved by increasing production and employment in the national economy and offers an important alternative to Turkey's search for a sustainable development strategy. In Turkey, whose largest trading partner is the EU, carbon regulations at the border have recently entered the political and private sector agenda, and the advantages of green transformation have been frequently mentioned by political leaders, private sector representatives and opinion leaders.
In February 2021, Minister of Industry and Technology Mustafa Varank said, "If we can read these developments in the EU well and implement the necessary measures in a timely manner, we can turn this transformation into a great advantage" regarding the EU's carbon regulations at the border.
Deputy Minister of Trade Gonca Yılmaz Batur also expressed her support for the private sector's green transformation at the Foreign Economic Relations Board (DEİK) event: "As the DEIK family, with the awareness that not only governments but also private sector organizations have responsibilities
in areas such as climate change and carbon regulation at the border, we think it is important to launch the 'Supporting the Transition Process of the Industrial Sector to a Carbon-Free Economy' project. Our aim is for industrial organizations to closely follow the developments within the scope of the memorandum and to be involved in a process such as guiding us to take the necessary steps." Prof. Dr. Mehmet Emin Birpınar, Deputy Minister of Environment and Urbanization and Chief Climate Change Negotiator, stated that it is necessary to rapidly adapt to the green economy and touched upon the impact of carbon regulations on the competitiveness of countries: "Considering the international regulations that also affect us, such as the EU's Green Deal and the mechanism for carbon regulations at the border, the establishment of this system will probably become essential in terms of integration into the global economy in the long term and will be very important for the competitive advantage of countries".
Evaluating the transformation as an opportunity, TÜSİAD President Simone Kaslowski emphasized the importance of companies quickly becoming ready for the requirements of the Green Deal: "First of all, we need to understand and analyze the EU's goal of becoming a climate neutral continent by 2050. In order to achieve this goal, the plan includes security of energy supply and access to clean and low-cost energy, the orientation of industry towards a clean and circular economy, energy and resource efficient construction and renovation processes, and accelerating the transition to sustainable and smart mobility." Prof. Dr. Kerem Alkin, President of the Renewable Energy Research Association; "Turkey already has a Customs Union partnership with the EU, but this partnership needs to be updated. On the other hand, the agreement, which includes the application of carbon border tax on products coming from countries according to the country's carbon footprint, requires a review of the production processes in Turkey."
Ali Karaduman, Vice President of the Renewable Energy Research Association, drew attention to Turkey's advantageous position and its contribution to the national economy: "Turkey is in an advantageous position especially in terms of implementing carbon border tax according to the carbon footprint of countries. Turkey's low carbon footprint compared to countries such as India and China, and the increase in renewable energy studies day by day will contribute to easier exports to EU countries and thus contribute to the development of the country's economy."
As a result, the EU's high-level declarations of intent for carbon regulation at the border indicate that the full details of this regulation will be finalized in 2021. The European Commission plans to present a draft law on carbon regulations at the border in 2021, to be launched in early 2023. This is also expected to be on the agenda of the Biden-led US administration. In the next decade, when the rules of international trade will be shaped by carbon emissions, Turkey can increase its commercial competitiveness and turn the transformation into an opportunity by implementing a low-carbon economic model.
Implementation started on October 1, 2023. Financial obligations will start on January 1, 2026.
The Border Carbon Regulation Mechanism entered into force on October 1, 2023. The first reporting period for importers will end on January 31, 2024. Under the Regulation, the EU will apply a transition period for the CCSM from October 1, 2023 to December 31, 2025, with a quarterly reporting obligation. This means importers will have to report the total verified greenhouse gas (GHG) emissions from imported goods in a given calendar year. Financial obligations will start on January 1, 2026.
Aiming to become a carbon neutral continent by 2050, the European Union (EU) has introduced a carbon tax and Emissions Trading System (ETS). However, as the carbon tax and ETS may impose
serious costs on companies, there is a risk that companies may move their production outside the continent and cause "carbon leakage".
Carbon leakage, on the other hand, refers to "high carbon emissions that occur when a country or business with strict climate policies shifts its production to other countries with more flexible practices on carbon". Countries that do this can cause global emissions to increase while reducing their own local emissions. Therefore, today, developed countries can cause carbon leakages by transferring their energy-intensive industrial activities to underdeveloped or developing countries. In order to prevent carbon leakages, the European Union launched the Border Carbon Regulation Mechanism (BCRM). The CCSM is a landmark measure to put a fair price on carbon emitted during the production of carbon-intensive goods entering the EU and to encourage cleaner industrial production in countries outside the EU.
With the SDCC, the existing EU Emissions Trading System is being extended to imported goods. In fact, this process started with the Paris Agreement and the European Green Deal.
The proposal for a Carbon Regulatory Mechanism at the Border was first raised on July 14, 2021 in the European Commission's "Fit for 55" package, which includes various proposals to transform the EU's economy and society to meet climate targets. The package aims to reduce emissions by 55 percent by 2030 compared to 1990 levels, in line with the goal of a climate-neutral Europe by 2050.
Transition process started on October 1
The Border Carbon Regulation Mechanism entered into force on October 1, 2023. The first reporting period for importers will end on January 31, 2024. Under the Regulation, the EU will implement a transition period for the CCSM from October 1, 2023 to December 31, 2025, with a quarterly reporting obligation. This means importers will have to report the total verified greenhouse gas (GHG) emissions from imported goods in a given calendar year. Financial obligations will start on January 1, 2026. By 2034, the costs of the GDRM will gradually rise.
When the SDCC comes into full force on January 1, 2026, importers will have to declare each year the quantity of goods imported into the EU in the previous year and their embedded greenhouse gas emissions.
On the other hand, the EU ETS will be expanded in the aviation and maritime sectors, while the new ETS II will cover transport and heating fuels. Free allowances under the EU ETS will be phased out from 2026. As of 2026, the purchase of SCCM certificates will be required. The system will thus incentivize non-EU countries to raise their climate targets. Only countries with the same climate targets as the EU will be able to export to the EU without purchasing SCCM certificates.
The price of the certificates will be calculated based on the average weekly auction price of EU ETS allowances, expressed in €/tonne CO2 emissions. The phase-out of free allocation under the EU ETS will take place in parallel with the phase-in of the SDCC over the period 2026-2034.