How EU carbon Border tax will impact Russia

 УДК 339. 5

Kozelkova Ekaterina Yurievna
Lomonosov Moscow State University
Russia, Moscow
e-mail: k. kozelkova75@gmail. com

HOW EU CARBON BORDER TAX WILL IMPACT RUSSIA

Abstract: This article discusses the potential effects that introduction of the European Carbon Border Adjustment Mechanism will have on Russian economy, climate plan and legislation. In this work, the author also analyzes the legislative framework for regulation of greenhouse gas emissions that currently being developed in Russia. For this purpose, the mechanism of the.

CBAM, reaction of the Russian establishment and biggest market players and possible consequences for the country will be examined.

Keywords: green economy, European Union, carbon tax, European Green Deal, sustainable development, carbon emissions.

On July 14^th 2021, Carbon Border Adjustment Mechanism (CBAM) developed by the European Commission (EC) came into existence. This measure is a part of the European Green Deal, an extensive pull of tax and non-tax measures setting the target to reduce carbon emission of the EU by at least 55% compared to 1990 until 2030. (European Commission, 2021) In fact, before 2020, the key target was 40%. However, in order to boost the transition to a climate-neutral economy and meet the requirements under the Paris Agreement, more ambitious goals were set. Amid the targets to increase the share of renewable energy and energy efficiency, greenhouse gas (GHG) emission cutback and tools for its implementation are considered the most ‘’interesting’’ for the world community, as they will significantly affect the world trade.

Amid the pledges to tax plastics, extend the Emission Trading System and hold the Reform of the Energy Taxation Directive, EU is also going to introduce CBAM. This is a tax reform aimed to ensure equivalent carbon costs between imports and exports and ensure that local producers will not move their production to other locations with lower standards of emissions in order to eschew carbon taxation, or so-called ‘’carbon leakage’’ that could potentially undermine EU’s efforts to meet its goals. This will be a special tax imposed on imports of particular products (primarily carbon intensive ones) that will equalize the price of carbon between domestic products and imports. It means that importers will have to purchase carbon certificates at the carbon price thatwould have been paid, if the imported goods had been produced in the EU and had fallen under EU’s regulations of carbon pricing. However, when a foreign producer shows that it has already paid a price for the carbon dioxide emitted during the production process of the imported goods in a third country, the above-mentioned cost is fully deducted. According to the EU, the additional advantage of the CBAM is that it will also motivate non-ES manufacturers to make their production more sustainable. Although it should not be a problem for the countries that has already been levying a carbon tax or are on their way to introduce it, those still hesitating over implementation of such a strategy risk being trapped.

The specific example of how the CBAM could affect export-oriented countries with no ambitious low-carbon strategy is Russia. Until 2021, Russia did not have a firm strategy in this direction. However, in August, The Ministry of Economic Development published an updated basis scenario that aims at reducing yearly amount of carbon emission to 1, 19 billion tones (compared to 2, 12 billion tones in 2019). Moreover, during last few months, first attempts to create a GHG emissions framework have been made through passing several regulations. The only problem is that the greatest contribution to the emission reduction is planned to be achieved through sequestration by forests. It means that the emphasis is made on a natural process rather than on additional efforts applied by the government and business. Nevertheless, such a strategy may play a trick on Russia because this method of carbon offset risks not being accepted by the EU as the carbon dioxide offset measure. Moreover, as there is no carbon emissions trading system mentioned in the document, Russian exporters will still have to pay the CBAM while trading with the EU. For now, the following sectors fall under the CBAM regulation: electricity, cement, fertilizers, black steel and aluminum (excluding oil, gas, coal and other carbon-intensive products constituting a great share of Russian export). Although it amounts to half the initial prediction on the volume of Russian exports being subject to the CBAM, the overall monetary losses are still high due to the increase in price for quotas from? 50-60 to? 100 per СО₂-tonne (Bloomberg, 2021).

Without drastic and urgent measures (especially in the form of carbon trading system and carbon tax), the consequences for the economy until 2030 will amount up to? 1, 24 bln a year. However, if such a system is implemented, it will be possible to reduce costs to? 0, 93 bln a year. (ERCST, 2021: 12)  According to the other estimations, by 2030, the cost paid by Russian exporters annually can reach $2, 34 bln per year. (KPMG, 2021: 11) Unfortunately, the precise ‘’carbon burden’’ cannot be estimated due to the uncertainly in the ultimate tax rates and carbon price. The only thing is clear – the tax burden will be heavy. Moreover, until 2030, other industrial sectors as well as extended carbon footprint, including the full value chain of the product, may be included in the CBAM scope. This could significantly increase carbon tax burden. Nevertheless, for any scenario, monetary losses will be destructive because the EU is the main export market for Russia (38, 5% share as to 2020), where mineral products and metals (potentially taxed products) constitute more than 80%. (The Ministry of Economic Development of the Russian Federation, 2020)

These predictions probably became the deciding factor for the Russian government. As to October 2021, the following regulations have been passed: legal criteria for the amount of carbon emissions produced by regulated entities; the federal law defining the legal framework for limiting emissions of greenhouse gases and the regulatory framework for the system of concessional financing of ‘’green’’ and sustainable development projects. Among them, the most interesting legal act is Federal Law “On limiting greenhouse gas emissions” that will come into force on December 30^th, 2021. It aims at creating a regulation system for emissions in Russia. According to the law, companies (‘’regulated organisations’’) emitting more than 150, 000 tons of CO₂ a year will have to annually report their GHG emissions starting from 2023. Those emitting 50, 000-150, 000 tons per year will have to report their emissions starting from 2024. (Federal Law “On limiting greenhouse gas emissions”, 2021: 7) In addition, legal entities and individual entrepreneurs may also voluntarily submit their emissions reports. Based on the collected information, a state GHG accounting system will be created. It will enable verification of emissions reports, emissions register maintenance, information storage and analysis, and will raise awareness among governmental agencies, businesses, and the society in general. (Deloitte, 2021: 2) Moreover, the law also introduces the system of carbon units that regulated companies will receive for their contribution to fighting against climate change through implementation of climate projects. The regulated entities will also be able to sell carbon units to third parties that should create the stimulus for emission reduction. However, it is not clear yet what types of projects are included in the list, whether it is possible to implement a project through an external agency that does it professionally and whom exactly extra carbon units can be sold to. What is more, participation in the process of acquire and sale of the units is voluntary and there are no target indicators on this point. Thus, however innovative such measures for the Russian economy are, they will not bring the expected effect due to their non-binding nature.

In conclusion, the current state of affairs cannot be considered tough because the passed regulatory acts lack an emission-related tax system that could definitely become a significant incentive for the reduction of emissions. It is understandable that Russian business needs time to reconsider its corporate principles and develop a low-carbon strategy. However, as it was shown above, introduction of the CBAM will significantly affect Russian economy, particularly its export goods. This is why the carbon tax is especially relevant for business that exports its products to the EU. Consequently, this in its interests, to promote the development of carbon taxation in order to reduce the potential tax burden in the EU. Nevertheless, the trend for changes is obvious. It was declared that Russia would become carbon neutral by 2060. It means that there are clear concerns about the potential effect of the CBAM and other measures on decarbonisation taking place in Russian trading partners. Hopefully, it will not be long before the subsequent reforms come.

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