European Union: Carbon Border Adjustment Mechanism: An Innovative Approach In The Fight Against Climate Change

A. Introduction

Global climate change stands out as one of the most significant threats for humanity. Increasing greenhouse gas emissions, rising temperatures, rising sea levels, and the frequency of extreme weather events are causing serious impacts worldwide. Therefore, the global community is in pursuit of innovative and effective solutions to fight climate change.

The Carbon Border Adjustment Mechanism is fundamentally a policy and economic instrument that considers the carbon footprint of goods or services' production and consumption processes. Traditional carbon regulations typically target and restrict emissions at the national level. However, the Carbon Border Adjustment Mechanism changes this perspective and involves carbon impact of trade and import-export activities between countries.

When considered that the European Union is considered Turkey's most significant export partner, it is essential to grasp the significance of the concept of border carbon regulation and understand its impact on our country.

B. Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism (CBAM) is a regulatory system that involves applying a cost equivalent to the carbon expenses incurred during the production of commercial goods within the boundaries of the European Union ("EU") to goods imported into EU countries. The primary objective of this regulatory mechanism is to prevent carbon leakage, which may arise from European Union-based companies relocating carbon-intensive production to countries with less strict policies than the EU or substituting EU products with more carbon-intensive imports. This is articulated as a measure to safeguard the competitiveness of European production sectors.

In the context of the European Green Deal, a draft proposal titled "Fit for 55" has been published in order to achieve a 55% reduction in emissions. One of the significant measures included under "Fit for 55" is the Carbon Border Adjustment Mechanism. The European Council issued a document titled "Regulation of the European Parliament and of the Council Establishing a Carbon Border Adjustment Mechanism " on March 15, 2022, and this regulation came into force.

The implementation of the Carbon Border Adjustment Mechanism has commenced as of October 1, 2023, initially involving a transitional period that includes only reporting obligations. Verification and obligations related to carbon pricing will begin as of January 1, 2026.

In the initial phase of the Carbon Border Adjustment Mechanism, there ara six sectors with a high risk of carbon leakage:

Over time, as suitable methodologies for measuring product-specific carbon footprints are developed, it can be anticipated that additional user sectors or products will be included in the scope of the Carbon Border Adjustment Mechanism (CBAM).

CBAM Emission Scope:

• Scope-1 Direct emissions: Carbon emissions from the production processes of the product (including emissions from the production of heating and cooling consumed in the production process)

• Scope-2 Indirect emissions: Emissions emitted during the production of electrical energy used in production.

• Scope-3 Indirect emissions from inputs: Emissions emitted during the production of inputs/intermediate goods used as inputs in the production of the product and included in the CBAM product list. (To be obtained from suppliers and included in the calculation.)

The Implementing Regulation on these reporting methods has been published, and it is seen that flexibility is provided in the transition phase in terms of stationary emissions in imports. According to the Regulation, until the end of 2024, companies have three reporting options: full reporting based on the new methodology (EU method), reporting based on an equivalent method (three options), reporting based on default reference values (only until the end of July 2024).

In addition, it should be noted that the Commission has developed and implemented specific IT tools to help importers to make and report the relevant accounts, as well as detailed guidance programs and training materials to support businesses in the transition mechanism.

The importers of goods belonging to the relevant sectors are obliged to report only the greenhouse gas emissions in their imports based on the data they receive from the producer companies. Regarding this obligation, the main reason why the obligation belongs to the importing company is that the fee to be incurred within the scope of the CBAM will arise on the importing company in the EU. It is not predictable whether the importing companies will reflect the cost paid to them within the scope of the CBAM to the exporting company, as it will vary according to the company's pricing policy. However, there is no doubt that this situation will impact the profitability of exporting firms.

C. Consequences of Carbon Border Adjustment Mechanism

The Carbon Border Adjustment Mechanism will clearly lead to a comprehensive transformation in Turkey's trade with the European Union. The most significant consequence of implementing this mechanism is expected to be that exports to the European Union will face certain costs if the relevant sectors do not make the necessary transformations. Therefore, the relevant sectors need to focus on transformation and harmonization processes.

Research by SHURA Energy Transition Center reveals that Turkey is a significant exporter to the European Union, especially in sectors such as aluminum, iron, and steel. Turkey is the third largest exporter to the EU, especially in aluminum, iron, and steel. Exports to the EU market in these products are around five percent of Turkey's total exports. This shows the importance of harmonization for companies in the transition process in the relevant sectors. It will be crucial for these sectors to take measures to transition to low-carbon production technologies and increase energy efficiency in order to maintain their competitiveness. Moreover, considering the proportion of Turkey's exports to the European Union, it is clear that if Turkey implements a carbon pricing system in line with the EU, it will maintain its competitiveness and market share. On the contrary, it should be considered that Turkey may face serious losses in the EU market in the future.

The outcomes of the Carbon Border Adjustment Mechanism are expected to stimulate investments in emission reductions and accelerate the adoption of cleaner production technologies. Tightened ETS implementation to meet emission reduction targets within the EU will also support this process.

The European Union (EU) is taking various regulatory measures to achieve its emission reduction targets. One of these measures is to update the ETS (Emissions Trading System), a carbon pricing tool to limit greenhouse gas emissions. Emissions in the sectors covered by the ETS are targeted to be reduced by 62% in 2030 compared to 2005. In line with this target, it is planned to remove 90 million tons of allowances in 2024 and 27 million tons in 2026. At the same time, market traded allowances are projected to be reduced by 4.3% annually in 2024-2027 and 4.4% in 2028-2030. Free allocations will also be reduced by certain percentages in the 2026-2034 period and then completely abolished. With these regulations, reducing the amount of allowances traded in the market will lead to an increase in the carbon price and encourage companies to increase investments in cleaner production technologies and emission reductions to reduce costs.

Considering that the CBAM covers the iron and steel, aluminum, cement, fertilizer, electricity, organic chemicals, plastics, hydrogen and ammonia sectors; they may face a competitive disadvantage due to carbon cost and it is clear that organizations operating in these sectors will have to make plans to achieve reductions in the short term within the scope of the net zero standard.

D. Conclusion

The Carbon Border Adjustment Mechanism is an important step in the fight against global climate change. The European Union aims to equalize opportunities in terms of commercial competition and costs by collecting carbon fees from producers within its borders and equivalent fees from companies exporting to its territory and producing outside its borders. Turkey's adaptation to this mechanism and balancing environmental goals with economic competitiveness is critical for a sustainable and green future. In this context, the focus of policymakers and industry stakeholders on collaboration and transformation processes will play a critical role in building a successful border carbon regulation mechanism.

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