Context and Importance of CBAM for the EU
The European Union’s (“EU”) Carbon Border Adjustment Mechanism (“CBAM”) was conceptualized as an extension of the EU’s Emissions Trading System (“ETS”) well before the full-scale war in Ukraine started in 2022. The planning and modeling of CBAM did not account for the profound and unique challenges that Ukraine would face due to the conflict. Today, Ukraine is one of the most impacted countries by CBAM, given its economic ties to the EU and its struggling industrial sector, which the ongoing war has severely disrupted.
In light of these developments, it is imperative to reconsider how CBAM is applied to Ukraine, recognizing the extraordinary circumstances that have altered its ability to comply with the stringent requirements of this policy. The EU’s commitment to justice and fairness should ensure that Ukraine, amidst its recovery and rebuilding efforts, is not disproportionately burdened by policies designed under vastly different circumstances.
Economic Vulnerability and Industry at Risk
The war in Ukraine has created unprecedented challenges for businesses across the country, significantly hindering their ability to operate and compete on a global scale. Unlike their counterparts in the EU or other regions, Ukrainian companies are grappling with a unique set of circumstances:
Market Access: The ongoing conflict has severely disrupted access to both domestic and international markets. Transportation routes are compromised, supply chains are broken, and the threat of further escalations remains ever-present. This disruption limits Ukrainian companies’ ability to export their goods, directly impacting their revenue streams.
Funding Limitations: Access to funding is another critical issue. International investors and financial institutions are understandably cautious about committing resources to a region embroiled in conflict. Even when companies have the ambition to pursue decarbonization projects, securing the necessary capital to initiate such efforts is challenging, if possible. This financial barrier undermines the core intention of CBAM, which is to incentivize the adoption of low-carbon technologies in heavy industries.
Security Risks: The security risks associated with operating in a warzone cannot be overstated. From the threat of physical damage to industrial facilities to the personal safety of employees, these risks impose additional operational costs and challenges. Under such conditions, businesses are forced to prioritize survival over compliance with new environmental regulations, making it unrealistic to expect them to meet the stringent requirements set by CBAM
Given these circumstances, the likelihood of achieving CBAM’s intended goal of encouraging decarbonized production in Ukraine’s heavy industry is minimal. The policy, designed with peacetime conditions in mind, does not account for Ukraine’s extraordinary challenges.
Several critical national economy industries in Ukraine are particularly vulnerable to CBAM’s future phase after 2026 due to their reliance on energy-intensive processes and economic significance. The metallurgy sector, including steel and iron production, is highly energy-intensive and depends on fossil fuels, making Ukrainian steel less competitive in the EU market under CBAM costs. Similarly, the chemical industry, a significant contributor to Ukraine’s GDP, faces high emissions and struggles to transition to greener alternatives because of war damage and funding constraints. The energy sector has been severely affected by the war, with widespread damage to infrastructure making a shift to renewable sources challenging. This ongoing reliance on fossil fuels complicates compliance with CBAM. But can they realistically change anything at a large scale now and before 2026?
Given the current geopolitical and economic landscape in Ukraine, the intended goals of the CBAM are unlikely to be fully realized. Even if committed to decarbonization, Ukrainian companies face significant barriers that make compliance with CBAM impractical. The ongoing war has severely limited access to investment, as international investors are hesitant to commit resources to a conflict region, making it difficult for industries to fund decarbonization initiatives. Additionally, the competitiveness of Ukrainian producers, particularly in sectors like steel and cement, has diminished due to a sharp decline in trade with the EU. The war has reduced exports and increased economic strain on these industries. Moreover, companies are preoccupied with maintaining operations and ensuring employee safety, incurring high-security costs. Under these challenging circumstances, expecting Ukrainian producers to compete on equal terms with EU companies is unrealistic.
Not only that, but there is a certain dependency on Ukrainian Goods for the EU itself, and the ability of Ukrainian producers to deliver these goods is compromised by the ongoing conflict. This dependency underscores the interconnectedness of the EU and Ukrainian economies, making it vital for the EU to consider the broader implications of enforcing CBAM without flexibility.
The Case for Exemptions Under CBAM
The CBAM directive acknowledges that there may be exceptional circumstances where exemptions are necessary. Specifically, the directive states that in cases of “unforeseeable, exceptional, and unprovoked circumstances” causing severe impacts on third countries’ economic and industrial infrastructure, the European Commission should propose temporary, time-limited measures to the European Parliament and the Council[1]. The situation in Ukraine perfectly fits this description. The war, initiated by Russia, has inflicted catastrophic damage on Ukraine’s economic and industrial infrastructure. Ukraine or the EU could not prevent this conflict, and its ability to mitigate the damage is severely limited. But they can react to the current circumstances and revisit the issue.
Given these circumstances, there is a strong case for providing Ukraine with temporary relief from CBAM obligations. This relief would allow Ukraine to focus on overcoming the immediate challenges of the war, stabilizing its economy, and eventually rebuilding its industrial base. Only once these goals are achieved should Ukraine be expected to implement CBAM measures fully.
It is also worth questioning the fairness of imposing CBAM-related costs on Ukraine while simultaneously providing significant financial support through initiatives like the €50 billion Ukraine Facility Plan. Imposing additional financial burdens while offering aid could seem contradictory and counterproductive. By 2026, when CBAM is set to be fully implemented, Ukraine is unlikely to be in a position to bear these costs.
If exemptions are not granted, Ukrainian producers may be forced to seek alternative markets outside the EU, potentially reversing the shift from Russian markets to EU markets, which Ukraine has worked hard to achieve.
A flexible approach to implementing CBAM, one that considers temporary exemptions or relief for Ukraine, would align with the EU’s broader commitment to supporting Ukraine during these challenging times. Such an approach would allow Ukraine the time and space to recover, rebuild and fully participate in the EU’s decarbonization goals.
Suggestions for the Government of Ukraine (“GoU”)
While the CBAM is approaching its phase of actual payments in 2026, it is still time for the Ukrainian Government to prioritize detailed analysis and stakeholder engagement. Before making any decisions regarding CBAM implementation or seeking exemptions, the GoU must thoroughly analyze the potential impacts on key sectors of the economy. This analysis should include input from industry experts, economists and other stakeholders to clearly show how CBAM will affect Ukrainian businesses and the overall economy.
The government should establish a structured dialogue with significant industries, including metallurgy, chemicals and energy to understand their concerns and challenges. This engagement will provide valuable insights into the real-world implications of CBAM and help identify the most pressing issues that need to be addressed.
It is crucial to assess the economic impact and social implications of CBAM on employment, local communities and overall economic stability. Understanding these broader consequences will help the government make informed decisions about whether seeking exemptions or adjustments to CBAM is necessary.
While exemptions from CBAM may be one possible course of action, the GoU should thoroughly investigate all available options. This investigation should consider the feasibility of temporary exemptions, phased implementation or specific adjustments tailored to Ukraine’s unique circumstances.
If the GoU determines that seeking exemptions or adjustments is necessary, it must compile comprehensive data and build a strong case. This case should be based on evidence of the war’s impact on the Ukrainian economy, specific industry challenges and the potential risks of immediate CBAM implementation.
Engaging in seeking exemptions will require navigating complex legal and procedural frameworks within the EU. EU was planning to have reviews in 2025 even before the war changed so much, and of course, it should look precisely into Ukraine’s case as well. The GoU should prepare for the possibility that such efforts will involve extensive negotiations with the European Commission and securing the support of the European Parliament. This process is time-consuming and resource-intensive, requiring careful preparation and strategic planning.
Given the procedural complexity and the need for parliamentary approval within the EU, the GoU should initiate diplomatic efforts as early as possible. This includes discussions with EU member states, the European Commission and other relevant stakeholders to communicate Ukraine’s position and gather support.
Suggestions for Ukrainian Businesses
Ukrainian businesses should actively participate in government discussions and impact assessments to provide valuable data and insights that can help shape effective policies. Companies must prepare for various scenarios, including full CBAM implementation, potential exemptions or phased approaches, ensuring they remain adaptable and resilient regardless of the outcome. While ongoing discussions around CBAM exemptions continue, businesses should explore opportunities to reduce their carbon footprint through investments in energy efficiency, cleaner technologies and sustainable practices, enhancing their competitiveness in the EU market. Collaboration among businesses within the same sectors is vital; forming industry alliances can facilitate the sharing of information and resources and strengthen collective advocacy efforts. Additionally, engaging with international partners can provide access to necessary technology, expertise and funding, supporting Ukraine’s shift towards a low-carbon economy.
Conclusion
The decision to seek exemptions or adjustments under CBAM should not be taken lightly. It requires careful analysis, strategic planning, and a coordinated effort between the government and businesses. Ukraine must first conduct thorough impact assessments and gather the necessary data to build a compelling case. If it is determined that exemptions are required, Ukraine should be prepared for a complex and demanding process that will involve diplomatic negotiations and securing support within the EU framework. By proactively engaging in this process, Ukraine can ensure its economic stability and long-term environmental goals are balanced and aligned with its national interests.
Author: Olga Bielkova, Senior Advisor in our Energy team in Brussels.
The views expressed in this article are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.
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[1] https://taxation-customs.ec.europa.eu/document/download/c4b208a6-3945-4dcd-84d3-5f9551578851_en
