CARBON REGULATION AT THE BORDER IS IN FORCE…

Hüseyin Cahit SOYSAL
UGM BOARD MEMBER

CARBON REGULATION AT THE BORDER IS IN FORCE…

The European Union has been steadfast in its announcement for the past five years about the implementation of the CBAM (Border Carbon Adjustment Mechanism) regulation. While imports with CBAM certification are set to commence in 2026, the provisions concerning the embedded carbon calculation method, system mechanism, and record-keeping are already in effect. In essence, the CBAM mechanism will soon be a reality, significantly affecting our exports to the European Union.

"So what regulations have Türkiye put into effect in this field?" If you ask, we can say there is no action other than the "2021 Green Deal Action Plan", which includes some wishes.

The world has been warming at an unprecedented rate since 2000 due to dependence on fossil fuels. According to climate scientists, if no measures are taken, the world will warm between 2.3 and 4.1 degrees C by 2100.

If our planet experiences a temperature rise of 2.3 C to 4.0 C degrees, we will be confronted with unprecedented natural disasters and food shortages, including drought, not witnessed in the past 5 million years. This could lead to a surge in mass deaths worldwide.

For this reason, the "Paris Climate Agreement" was signed in 2015, taking into account the need to combat climate change on a global scale. Türkiye also became a party to the agreement in 2021. The Paris Climate Agreement aims to strengthen global socioeconomic resilience against the threat of climate change in the post-2020 period. The long-term goal of the Paris Agreement is to keep the global temperature increase below 2 degrees Celsius compared to the pre-industrial period. This target encourages the gradual reduction of fossil fuel (oil, coal) use and the transition to renewable energy. At the Glasgow and Sharm el-Sheikh Climate Conferences, an increase of 2 degrees was considered high; it was agreed that this increase should remain below 1.5 degrees as much as possible.

THE MOST SENSITIVITY TO THE CLIMATE AGREEMENT IS IN THE EU...

Since 2005, we have witnessed that the European Union (EU), which has been effectively combating the negative aspects of climate change, is the community most sensitive to the Climate Agreement. On 11 December 2019, the EU Commission published the EU Green Deal Declaration as the EU's new growth strategy. The declaration stated that we would be a pioneer in climate-friendly industries and a standard setter in clean technologies.

The "Emission Trading System" (ETS), which came into force in the EU in 2005, aimed to reduce the cost of emissions to society and to limit carbon emissions by placing a price on these emissions. In the first stage, to limit the high level of carbon emissions released by existing oil refineries, energy-intensive industrial enterprises where iron and steel, aluminum, metal, cement, lime, glass, ceramics, paper-cardboard, acids, and bulk organic chemicals are produced, carbon quotas were granted to these enterprises and these enterprises were given carbon quotas. The formation of a stock market allowed them to sell the parts of the quotas that they could not use to other carbon emitters within the ETS. In the following years, free allocation was abandoned, and carbon allowances were sold to businesses for a fee in the ton/carbon measurement unit.

"CARBON LEAK!" IN THE EUROPEAN UNION!

When the mentioned businesses were heavily pressured regarding emissions within the EU, they started to move their factories to nearby countries such as Turkey, Ukraine, Algeria, and Morocco. This situation was called "carbon leakage" in the EU. Businesses that continue production in the EU ask, "What did we understand from this? We pay the price for carbon emissions by respecting your regulations and making new investments to transition to green technologies. What about carbon leakage? Aren't we faced with unfair competition due to the goods they produce outside the Union and ship to the EU as imported products? They started to express their complaints at high levels. The European Union Council and Commission said, "Don't worry, we will eliminate unfair competition between you by charging carbon taxes on the imports of those products." He committed. 

START DATE HAS BEEN POSTPONED TO OCTOBER 1, 2023…

Prepared in this direction, the EU's draft text titled Border Carbon Adjustment Mechanism (CBAM- Establishing a Carbon Border Adjustment Mechanism) numbered 2021/0214 (COD) dated July 14, 2021, was distributed to member countries, and opinions were requested. The draft was intended to become law and start with a 3-year transition period that does not impose financial obligations as of January 1, 2023. However, implementation was postponed to October 1, 2023, in the first stage.

TRANSITION PERIOD WILL LAST UNTIL JANUARY 2026

The CBAM Regulation came into force as a joint regulation of the European Parliament and the European Council, receiving issue (EU) 2023/956 and published in the Official Journal of the EU dated May 16, 2023. According to the regulation, CBAM will begin to be implemented as of October 1, 2023. The transition period will continue until January 2026, and during this period, importers will need to report greenhouse gas emissions of products falling within the scope of CBAM. The first reporting period for importers will end on January 31, 2024. The rules and requirements for reporting emissions will be determined in detail by an implementing law to be adopted by the EU Commission.

FIRST APPLICATION IN CEMENT, IRON-STEEL, ALUMINUM, FERTILIZER, ELECTRICITY AND HYDROGEN…

CBAM, a game-changing measure, will initially be applied to the cement, iron and steel, aluminum, fertilizer, electricity and hydrogen sectors. These sectors, known for their intense carbon emissions during production, pose the most significant risk of carbon leakage. Once fully integrated, CBAM, with its expanded scope, is projected to cover more than 50 percent of emissions under the European Union Emissions Trading System (EU ETS). This underscores the urgency for these sectors to prepare for the upcoming changes.

We can list the basic regulations of Regulation (EU) No. 2023/956 as follows:

• Each member state will appoint a "Competent Authority" for CBAM. It would be apparent to state that these authorities are the member countries' environment ministries.
• People who operate or control businesses with carbon emissions in a third country will be defined as "Operators."
• Importers authorized by the competent authority to import inputs or final products containing embedded carbon by Union law will be called "Authorized CBAM Declarant."
• The certificate in an electronic format corresponding to one tonne of CO2e of embodied emissions in the goods will be called a "CBAM Certificate."
• Customs authorities will not allow goods imported by anyone other than an authorized CBAM declarant.
• The competent authority shall consider "direct emissions" arising from the production processes of goods and released during the production of goods, including emissions from the production of heating and cooling consumed during production processes, regardless of where the heating or cooling is produced, and "embodied emissions" arising from the production of electricity consumed during the production processes. By determining an annual quota for "emissions," CBAM will allocate a "CBAM Certificate" to the declarants in exchange for this quota.
• The Commission will calculate the price of CBAM certificates as the average of the closing price of EU ETS allowances on the appropriate auction platform for ETS arrangements for each calendar week and publish it on the Commission's website.
• CBAM certificates will be sold to authorized CBAM declarants at prices calculated by the Commission.
• Goods containing embodied carbon can only be imported into the EU's customs territory by an authorized CBAM declarant.
• Embodied emissions in goods will be calculated according to the method in Annex IV of Regulation (EU) 2023/956.
• Beginning in 2026, by May 31 of each year, the CBAM declarant will use the CBAM registration to file a CBAM Return for the previous calendar year.
• The customs administrations of the member countries will also notify the competent authority of the information regarding the goods imported with the CBAM certificate and the CBAM declarants and will keep these notification records for four years.
• The Commission will create a standardized electronic database containing data on CBAM certificates of authorized CBAM declarants. It will also add the "CBAM register" of authorized CBAM declarants to this system.
• The authorized CBAM declarant will submit its request for CBAM certificates that it cannot use and return them by June 30 of each year in which the CBAM certificates are delivered. The competent authority will pay the cost and take back the certificates, limited to one-third of the CBAM certificates.
• On July 1 of each year, the Commission will cancel, without paying any compensation, CBAM certificates purchased during the year preceding the previous calendar year and remaining in the account of an authorized CBAM declarant in the CBAM registry.

ARTICLES 9 AND 10 OF REGULATION EU 2023/956…

In short, this is how we will encounter the CBAM mechanism during our exports to the European Union. "So, won't we be able to export to EU countries without paying this price?" The answer to the question is contained in Articles 9 and 10 of Regulation (EU) No. 2023/956. Accordingly, an authorized CBAM declarant can claim a reduction in the number of CBAM certificates to be delivered in the CBAM declaration to consider the carbon price paid in the country of origin for the declared embodied emissions. However, for the discount to be accepted, it will be necessary to prove that the carbon price has been calculated and effectively paid in the country of origin using the methods determined by the EU Commission. The CBAM declarant will also keep records regarding this.

AMOUNT OF CARBON RELEASED IN PRODUCTION IN THIRD COUNTRIES…

On the other hand, at the request of a business operator established in a third country, the Commission will record information about this business in the CBAM register. The amounts of carbon released in production processes in third countries and the embedded emissions in products will be documented by a "verifier" accredited by the Commission by the verification principles set out in Article 6 of Regulation No 2023/956. The operator will accept the obligation to keep these records for four years.

EVEN THOUGH IMPORTS WITH CBAM CERTIFICATE WILL START IN 2026…

The European Union has been announcing to the world for five years that it will implement the CBAM regulation. Although imports with the CBAM certificate will start in 2026, the embedded carbon calculation method, system mechanism, and record-keeping provisions have already come into force. Therefore, many countries have begun to take measures in this direction.

Although we have yet to have the opportunity to mention examples from all countries in one article, it is helpful to mention studies in a few countries briefly.

• The ETS pilot implementation, a significant development, commenced in 2021 in the People's Republic of China, the world's largest exporter. This move holds immense potential for influencing global emissions trading. However, due to escalating prices, the demand for ETS in China waned in the second year. During this period, 51 million tons of emission allowances were traded, marking a 70% decrease from the previous year. The pilot is being implemented in an area with a market value of EUR 385 million. It is anticipated that industrial sectors beyond the pilot application will be gradually incorporated into the Chinese ETS system.
• Indonesia, demonstrating its commitment to environmental sustainability, initiated the implementation of the ETS system in 2021. Notably, it has raised its carbon reduction target from 29% to 31.89%. Regulations pertaining to green energy in electricity generation facilities were enforced in 2021. The announcement of the second target calendar is slated for 2024, further underscoring Indonesia's progressive approach to ETS implementation.
• Chile has taken a comprehensive approach to combatting climate change, implementing multiple climate policies. In 2014, it introduced the 'green car' criteria for passenger cars, a pioneering move in Latin America. The issuance of 'Green Bonds' commenced in 2019, further bolstering its environmental initiatives. The government, in a voluntary agreement with the sector, has decided to phase out coal power plants by 2040. The country also approved the Climate Change Framework Law in June 2022. Since the introduction of the Green Tax, local pollutants emitting an average of 33 million tonnes of carbon dioxide per year have been subject to taxation, highlighting Chile's commitment to reducing carbon emissions.
• In Mexico, the goal is to reduce greenhouse gas emissions by 35% by 2030 and 50% by 2050. The Mexican ETS started as a two-year pilot application in 2020, and the operational phase started in 2023. The application covers sectors that emit 40% of carbon dioxide. Ton/carbon prices are updated in US dollars.
• With the ETS implemented in Argentina in 2021, sectors covering 15.8% of greenhouse gas emissions were taxed. Fossil-burning subsidies have begun to be reduced. In the ETS implemented in Argentina, ton/carbon dioxide prices are set at 10 US dollars.

As ETS practices in countries like China, Indonesia, Chile, Mexico, and Argentina align with EU standards and businesses in these countries gain accreditation from authorized verifiers, their products will gain easier access to the European Union market. This means that these products will not be subject to any CBAM application, potentially boosting international trade. Moreover, the carbon taxes collected on these products will contribute to the treasuries of the European Union member states, fostering economic cooperation and shared responsibility in climate action.

"So, what regulations has Türkiye put into effect in this field?" If you ask, we can say there is no action other than the "2021 Green Deal Action Plan", which includes a set of wishes.