NEW ERA IN INTERNATIONAL TRADE IN 2023, RULES ARE REWRITTEN THROUGH CARBON EMISSIONS

The EU is at the forefront of international efforts to combat climate change, both due to a lack of resources and the rise in temperature at the earth's surface due to greenhouse gases. The EU Green Deal sets a clear path towards achieving the EU's ambitious goal of reducing carbon emissions by 55% by 2030 compared to 1990 levels and being a climate-neutral continent by 2050. In this context, the EU; has published the draft “Fit for 55” proposal to align with its target of reducing emissions by 55%. An agreement was reached with the "Regulation of the European Parliament and of the Council Establishing a Carbon Border Adjustment Mechanism" letter dated March 15, 2022, regarding the Carbon Border Adjustment Mechanism, which is one of the applications within the scope of "Fit for 55".

The main purpose of the Border Carbon Regulation Mechanism (SKDM) is to reduce the risk of “carbon leakage”. To understand the mechanism, we must first understand what "carbon leakage" means. While the EU has set a number of targets to prevent climate change, there are countries outside the EU that have less strict environmental and climate policies. Climate leakage simply refers to the carbon released by companies when they shift their production to countries with less environmental policies and export their goods to the EU. The EU's goal with SKDM can be summarized as equalizing the carbon price between domestic products and imports, and preventing the EU's climate targets from being undermined by shifting production to countries with less ambitious policies. EU importers will purchase carbon certificates that correspond to the carbon price they would have paid had products been produced under EU carbon pricing rules. If a non-EU manufacturer can show that it has already paid a price in a third country for the carbon used in the production of imported goods, the relevant cost may be deducted from the total. In this way, manufacturers in non-EU countries will be encouraged to make their production processes more environmentally friendly, helping to reduce the risk of carbon leakage.

SKDM will be implemented gradually for the cement, fertilizer, iron-steel, aluminum and electricity sectors, which are the sectors with the highest carbon leakage in the first place, and will cover other sectors in the coming years. As a matter of fact, the European Parliament put into practice the SKDM against the risk of carbon leakage and the shift of production out of the EU, and ending the free allowances provided to the industrialists in the EU Emissions Trading System (ETS) until 2030, putting the ETS into practice in all sectors until this date, SKDM' They also agreed on the inclusion of organic chemicals, plastics, hydrogen and ammonia in addition to the first 5 sectors, the inclusion of indirect emissions, the EU's support of underdeveloped countries with the budget collected through SKDM, and the establishment of a central SKDM authority. In the first place, a reporting system will be implemented for the products within the first 5 sectors, starting from 2023, in order to launch them smoothly and to facilitate dialogue with third countries, and importers will start to pay a financial arrangement in 2026 and the revenues will be transferred to the EU budget.

The Role of Carbon Leakage in the Emissions Trading System (ETS)

The EU's Emissions Trading System (ETS) is the world's first international emissions trading plan and is the EU's most important policy in combating climate change. While the ETS sets a cap on the amount of greenhouse gas emissions that can be emitted from industrial facilities in certain sectors, allowances must be purchased from the ETS trading market. However, a certain number of free allowances are distributed to prevent carbon leakage. This system is effective in reducing the risk of leakage, but also reduces the incentive to invest in greener production at home and abroad. It is thought that SKDM will become an alternative to this over time. However, the EU Commission has prepared a new study on the ETS in order to ensure the maximum benefit of the ETS to achieve the EU climate targets and stated that it will reduce the number of free allowances for all sectors over time. It is also stated that free allowances for SKDM sectors will be phased out from 2026. SKDM will then rely on a certification system to cover established emissions from products imported into the EU to complement the ETS. However, SKDM differs from ETS in some limited areas, especially as it is not a 'border trading' system. SKDM certificates will reflect the ETS price, to ensure a level playing field between EU and non-EU businesses, when the SKDM regime is fully operational in 2026, the system will be adjusted to reflect the revised ETS, especially when it comes to reducing existing free allowances.

How will SKDM work in practice?

SKDM is similar to ETS in that it is based on the purchase of certificates by importers. The price of the certificates will be calculated based on the average weekly auction price of EU ETS allowances, expressed in €/tonne of CO2 emitted. Within the scope of SKDM, importers or their representatives will be obliged to notify the EU customs of the products they import. This notification can be made by the “Authorized Declarant” authorized by the National Authority to make a declaration. Thanks to this authority, Authorized Declarants submit to the National Authority until 31st May of each year; It will declare the amount of greenhouse gas emissions found in the products imported in the previous calendar year and the number of SKDM certificates they have previously purchased to meet these emissions (Each certificate corresponds to 1 ton of carbon emissions). In order to become an Authorized Declarant, an application will be made to the National Authority established by the EU Commission, and SKDM certificates will be purchased from this authority. Authorized Declarants must have purchased at least 80% of the certificates they are obliged to purchase until that period in each calendar year quarter. If importers purchase more certificates than they need to purchase, refunds of up to 1/3 of excess certificates may be requested after Authorized Declarants have completed their annual certificate delivery. Unlike ETS, SKDM Certificate holders will not be able to buy and sell these purchased certificates between each other (a market will not be established). SKDM Certificates that are over-purchased by the importer and are not returned to the National Authority can be deposited in a bank for use within the next calendar year. However, certificates that are not used in the next year will be revoked or returned. In this way, the Commission aims to prevent importers from buying and keeping their SKDM Certificates at a lower price. Free allowances granted under the proposal will remain constant throughout the transition period until the end of 2026 and will be reduced by 10% from 2026. Under the EU ETS, SKDM will ensure that importers pay the same carbon price as local producers, ensuring equal treatment for products made in the EU and imports from elsewhere, and preventing carbon leakage. Countries already in the Emissions Trading System or countries with other emissions agreements with the Union may be exempted from the application, provided they achieve meaningful results in reducing carbon emissions.

What will the transition process be like?

The regulation was intended to enter into force on 1 January 2023 and to be implemented gradually through a transitional period until 31 December 2025. However, on 13 December 2022, it was decided that the transition process would start from 1 October 2023. In the transition period, which will start on 1 October 2023 and will end at the end of 2025, it will have to report only the embedded emissions of its products and the origin of the product to the National Authority, at no financial cost, in order to allow time until the final system is put into operation. facilities will be provided until 2030 at the latest). Indirect emissions will also be reported during the transition period. When the definitive system is fully operational in 2026, EU importers will have to declare annually the amount of goods and the amount of embedded emissions in the total goods they imported into the EU in the previous year and submit the corresponding amount of SKDM certificates. The SKDM will apply to the direct greenhouse gas emissions emitted during the production process of the products belonging to the first 5 sectors included in the scope. At the end of the transition period, the Commission will decide how SKDM works and whether it will expand its scope to more products and services, including the entire value chain, and cover so-called 'indirect' emissions (e.g. electricity used to produce the good).

How will SKDM be calculated?

Forecasts on the calculation of SKDM show that greenhouse gas emissions will be priced at €30 or €50 per ton. The tax liability will be found by multiplying the greenhouse gas emission (in carbon) price (€30 or €50) by the tonnage of the exported product. (Direct emissions will be calculated at first, then indirect emissions can be included). According to these calculations, it is thought that up to 750 billion Euros of financing can be provided to the EU from the markets. For importers who deliver the SKDM certificate incomplete within the specified period, a fine of €100 per each missing certificate is expected (the price of 1 ton of carbon in the ETS market is around €50). Experts agree that the penalty in question is equivalent to the penalty applied to producers in the EU, and it is an appropriate practice in terms of being in line with the principles of equality adopted by the World Trade Organization. There are also countries that are exempted from the SKDM application. These; Products originating in EFTA countries including Iceland, Liechtenstein, Norway and Switzerland and products originating in Büsingen, Heligoland, Livigno and the region called Ceuta or Melilla. However, although we have a Customs Union Agreement with the EU, Turkey is not exempted from the implementation.

SKDM and Its Impact on Trade

With the SKDM application, it is expected that emission-intensive sectors such as export-oriented steel, chemicals and cement will be most affected. Among the largest aluminum producers, China, Canada, India and Russia, Russia and Canada have a competitive advantage as they produce aluminum with lower carbon emissions as a result of the significant share of hydroelectric power plants in electricity production. As a matter of fact, China, India and Australia will be at a disadvantage as they have the highest emission intensity in aluminum production. The largest steel exporters, China, Japan and Russia, have the highest emissions per tonne of steel produced. On the other hand, South Korea, which is among the countries that export the most steel, is the country that produces steel with the lowest carbon intensity today. China and Mexico are the countries with high emission production in cement export. France, Switzerland, Germany and Italy will stand out by producing cement with low emissions.

SKDM and Its Impact on Turkey

With the Presidential Circular No. 2021/15 published in the Official Gazette, Turkey announced that necessary studies will be carried out to ensure compliance with these new regulations published by the EU. The SKDM application is also of critical importance for our country. While Turkey ranks 6th among the countries that export the most to the EU in 2020, Turkey is among the countries where SKDM poses the highest risk, according to the Institute for Advanced Sustainability Studies (IASS) report. As a matter of fact, the EU has a share of 41.3% from our exports with 93 billion dollars in 2021 and ranks first in our total exports. It is seen that the EU has a share of 61.5% in the aluminum sector, 36.7% in the Iron and Steel sector, 69.3% in the electricity sector, 27.9% in the fertilizer sector and 14.7% in the cement sector in 2021.

According to the "New Climate Regime Report Through the Lens of Economic Indicators" published by TÜSİAD in September 2020, SKDM will affect Turkey's exports to the EU with a serious tax increase. Calculations show that in scenarios where the carbon price is €30/tonne, Turkey would have to pay €1,074 billion annually to the EU. In the case of €50/ton, the estimated figure reaches €1,777 Billion. The sector that will be most affected by the tax in the first place will be the cement sector. After cement, the chemical sector will be one of the sectors that will be taxed in the first place due to electricity, iron-steel and fertilizer production. In the chart below, the percentage of possible tax costs for 24 sectors included in the report is given.

The EU market is very important for our country's industry. Being prepared for practices such as the green agreement and, accordingly, SKDM will give our companies an advantage. We must make good use of the transition period until 2026. Even though they are not included in the 5 sectors announced, their intermediate product supplier sectors should also evaluate the process well. In terms of integration into the global economy and competitive advantage, our companies need to adopt sustainable development principles in this transition period, already have their emission calculations done and determine production systems that will produce lower emissions. In international trade, the rules are now being rewritten over carbon emissions…