The European Union (“EU”) aims to prevent the risk of “carbon leakage” with the Carbon Border Adjustment Mechanism (“CBAM”), which is part of the green transformation, and imposes significant obligations on non-EU trading partners. Türkiye is projected to be among the countries which will be prominently affected by the CBAM, given the substantial trading volume with the EU. In this article, we review the reasons and objectives behind the CBAM and its functioning, as well as its potential impacts on Türkiye.
Origins and Objectives of the CBAM
In recent years, all actors of the global economy have been taking measures worldwide to facilitate transition towards a sustainable economy in response to global warming and climate change caused by carbon emissions and economic landscape is evolving accordingly. Nowadays, all actors adopt the goal of “green transition”, which envisions a circular economy and a reduction in dependency on fossil fuels and transition to renewable energy.
International regulations such as the United Nations Framework Convention on Climate Change (“UNFCCC”), Kyoto Protocol and Paris Agreement stipulate measures for combatting climate change, particularly by gradually reducing greenhouse gas emissions, and encourage the member states to develop policies in line with these objectives. The EU, which is taking steps in this regard, has set the goal of becoming the first climate-neutral continent by 2050 with the European Green Deal[2]introduced on 11 December 2019. As part of the Deal, the EU have introduced a series of legislative proposals, including the “Fit for 55 Package”, which aims to achieve 55% reduction in greenhouse gas emissions by 2030 compared to 1990 levels, along with the CBAM.
CBAM primarily emerged as a result of the additional financial burdens imposed on EU manufacturers due to practices such as Emission Trading System (“ETS”) in place in the EU since 2005, which sets certain quotas on carbon emissions of EU manufacturers and imposes high penalties for exceeding such quotas and also allows for the trade of the excess portions of these quota allocations through certificates. CBAM aims to prevent risk of “carbon leakage” by extending the practices applied to EU manufacturers to non-EU manufacturers, which are based in countries where climate policies are more flexible compared to the EU or where ETS is not implemented.
As a complementary and additional measure to the ETS implemented in the EU, CBAM is expected to become effective on 1 October 2023 to be applied to the manufacturers exporting to the EU and to impose additional costs on goods with intense carbon emissions exported to the EU in proportion to the carbon emission associated with such goods in their production process. Thus, the aim is to prevent EU manufacturers who are subject to additional financial obligations in line with the carbon emissions during the production process from falling into a disadvantageous position compared to the goods manufactured in non-EU countries and exported to the EU without being subject to such obligations. However, exports from non-EU countries where the ETS system or a carbon pricing mechanism integrated into the ETS system is applied, are excluded from the CBAM.
Although the scope of the CBAM includes sectors with high carbon emission, such as iron and steel, aluminum, cement, fertilizer and electricity, European Commission will, in the future, evaluate whether there will be a need to expand this list.
Functioning of the CBAM
CBAM will become effective as of 1 October 2023 and the EU has foreseen a transition period until 31 December 2025 to reduce CBAM’s disruptive impacts on trade with the EU. During this transition period, manufacturers exporting to the EU and manufacturing the foregoing goods will have the opportunity to measure, report and certify their carbon emissions and be encouraged to make necessary improvements towards reducing their carbon emissions. In other words, manufacturers exporting to the EU will not be facing any financial obligations until 2026, however will be under the obligation to report their carbon emissions.
During the transition period, the exporters will be under the obligation to notify the European Commission of the quarterly rates of direct and indirect carbon embedded in goods exported to the EU and carbon price paid in the country of origin.
After the transition period, only declarants authorized by the competent authority designated by each EU member state will be permitted to export to the EU. An authorization made by a competent authority of a member state will be recognized by all EU member states. While competent authorities will perform the authorization process of the exporters, each EU member state will be able to sell CBAM certificates to the authorized declarants (exporters). The European Commission will establish an electronic register for the certified authorized declarants and ensure their enrollment in this register. Starting in 2027 (for the year 2026), authorized exporters will have to declare by 31st of May each year: (i) the total quantity of goods exported to the EU in the preceding year, in tons or megawatts, (ii) the carbon emissions embedded in those goods, and (iii) the number of CBAM certificates corresponding to their carbon emissions. The price of CBAM certificates will be calculated based on the weekly average of the auction prices in the ETS and exporters may request for a reduction in the number of CBAM certificates due to the carbon pricing they have paid in their respective countries.
Exporters established in a non-EU member country, such as Türkiye, will make such applications and notifications through indirect customs representatives who will act on behalf of the exporters and fulfill the application and notification obligations under the CBAM.
On 1 July each year, the European Commission will cancel all CBAM certificates that were purchased during the year before the previous calendar year and remained in the account of the authorized CBAM declarant in the CBAM registry. Such cancellation of CBAM certificates will not result in any compensation.
Potential Impacts of the CBAM on Türkiye
According to the data from the Ministry of Trade, 40.6% of Türkiye’s total export in 2022 was made to EU countries. Türkiye is among the countries that will be the most affected by the CBAM due to its high export volume, especially in the iron and steel, aluminum, cement and fertilizer sectors. Taking the necessary actions to meet the carbon emission criteria under the CBAM, and ensuring that the CBAM does not become a barrier to EU-Türkiye trade relationship, is crucial for Türkiye to maintain its place in the EU market.
Türkiye’s initial step as part of the European Green Deal was the announcement of the preparation of an action plan through a Presidential Circular.12 In this regard, the Green Deal Action Plan (“Action Plan”) published by the Ministry of Trade constitutes a “roadmap” to support green transition in all relevant policy areas to attract green investments to Türkiye, and includes 81 actions to achieve 32 targets under 9 key topics. “Carbon Border Adjustment” section of this Action Plan, sets out number of actions to limit the impacts of the CBAM on Türkiye-EU trade relationship. As such, establishing a “national carbon pricing mechanism” by taking the CBAM into account, evaluation of developing support mechanisms for additional costs to be incurred by the sectors due to the CBAM, and providing technical support for monitoring and certification of greenhouse gas emissions are considered among the steps to be taken towards compliance with the CBAM.
In addition, the “Draft Climate Law” which is currently undergoing the drafting process, aims for a transition to a low-carbon economic model in line with Türkiye’s 2053 net zero target. Within this framework, the objective is to establish an “Emission Trading System” to enable cost-effective reduction of greenhouse gas emission nationwide in a measurable, reportable and verifiable manner. Furthermore, in parallel with the CBAM, “monitoring the risk of carbon leakage” is among the principles included in the Draft Climate Law.
In 2020, Türkiye shared “The Views of the Government of Türkiye on the Carbon Border Adjustment Mechanism within the Framework of the Inception Impact Assessment” (the “Views of the Government”), which is an important document in terms of providing insights into Türkiye’s position regarding the CBAM, with the European Commission. In the Views of the Government, Türkiye highlighted the EU’s obligations under the Association Council Decision 1/95 (“Customs Union Decision”), alongside the Free Trade Agreement between Türkiye and the European Coal and Steel Community and Association Council Decision 1/9818 and also the EU’s obligation to consult Türkiye due to its distinct position as a Customs Union partner of the EU, distinguishing it from third countries. Türkiye, in particular, emphasized the obligation to “refrain from introducing new customs duties on imports and exports or any charges of an equivalent effect” imposed on the parties under the Customs Union Decision, as well as the violation of this obligation if the CBAM includes additional customs duties.
In addition to bilateral agreements, Türkiye also highlighted the need to align the CBAM with the UNFCCC, Paris Agreement and the multilateral regulations of the World Trade Organization. In fact, as per the principle of “common but differentiated responsibilities and respective capabilities” outlined in the aforementioned international regulations, it is necessary to consider the countries’ development priorities and special circumstances for reducing greenhouse gas emissions. Türkiye particularly emphasized that the limited access to low-carbon finance and technology in developing countries poses the risk of constituting trade barriers through unilateral action of the EU, the CBAM.
Conclusion
CBAM has a significant importance among the regulations introduced by the EU as part of its green transition, as it serves as an incentive for non-EU countries to take necessary steps in this regard. Trading partners, in order to maintain their trading relations with the EU, are required to undertake measures such as restructuring their production chains and establishing adequate systems for monitoring and certifying carbon emissions to ensure compliance with the CBAM.
Another important issue in terms on Türkiye-EU trade relations, as highlighted in the Views of the Government, is the need to align the financial obligations introduced by the CBAM with the regulations under the Customs Union Decision. In this respect, CBAM is also seen as an opportunity for the long-debated “update of the customs union”. CBAM will also play a crucial role in Türkiye’s achievement of its 2053 net zero emissions target.
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Müşavvir Enerji / Elektrik Petrol ve Doğal Gaz Madencilik Taşımacılık ve Lojistik Kamu Özel İşbirlikleri ve İmtiyazlar İnşaat ve Altyapı Finansal Hizmetler Projeler ve Proje Finansmanı Bankacılık ve Finans Şirketler ve Ticaret Hukuku Sermaye Piyasası Hukuku Kamu İhale Hukuku Gayrimenkul Hukuku
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Avukat Tüketim Ürünleri Enerji / Elektrik Madencilik Savunma Şirketler ve Ticaret Hukuku Birleşme ve Devralmalar Dava ve Uyuşmazlık Çözümleri
INTERN LAWYER
Stajyer Avukat
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