Challenges and opportunities caused by carbon border tax for Russia and Europe

April 23, 2021

On April 16, 2021, Russian International Affairs Council (RIAC) and CREON Group held a seminar titled «Prospects for cooperation between Russia and the EU in the ecology sphere». Diplomats, experts and business representatives discussed the possible impacts of the Carbon Border Adjustment Mechanism (CBAM) to be introduced by the EU on the European and Russian economies.

Source: CREON Group

CBAM, which will be adopted soon as part of the European strategy to decarbonize the economy, is a serious challenge for Russia: the EU accounts for more than 40% of all Russian exports, or 137 billion Euro in 2020. Moreover, half of this volume belongs to carbon-intensive products like oil, gas, fertilizers, ferrous and non-ferrous metals, and coal.

Large opportunities amid risks

“Russia is closely monitoring the implementation of the European Union’s Green Deal proclaimed by Brussels. Any change in the European economic policy cannot but affect the interests of Russia, given the high level of economic interdependence”, said Igor Ivanov, President of RIAC, in his opening address.

At present stage, innovations in European economic policy are considered in Russia mainly in the context of potential risks. “It is important however, along with expressing legitimate concerns, to jointly consider the new opportunities for cooperation that are opening up. This is also important for economic reforms in Russia itself”, the President of RIAC suggested. At the same time, it is quite obvious that environmental issues are an important element of economic transformations that are gaining momentum in the world, underlined Mr. Ivanov: “The task of Russia and the European Union is to keep up with these processes and to use the new opportunities for cooperation that are opening up”.

Russia’s position on the issues of interaction with the EU on the environmental track was presented by Artem Bulatov, Deputy Director of the Department of European Cooperation of the Ministry of Foreign Affairs of the Russian Federation.

“Combating climate change is about building bridges, not barriers between peoples and countries. Regrettably, some countries choose to instrumentalize the climate agenda for the benefit of their economies by introducing protectionism and restrictions”, he said. The Russian side expects CBAM to fully meet the standards of international trade and WTO rules, to take into account the efforts of Russian producers to reduce greenhouse gas emissions and increase their carbon absorption capabilities, as well as the contribution of our country into global climate actions.

CBAM as a decarbonization driver

Laurent Bardon, Head of the Economics and Trade Section of the Delegation of the European Union to Russia, presented the EU’s position in the discussion on carbon border tax. In his opinion, Russia should have no fear of CBAM, since it will be WTO-compatible. The goal of the carbon tax is to encourage neighboring countries, including Russia, to develop their own plans to achieve carbon neutrality. Mr. Bardon noted that, according to the EU, Russia is not ambitious enough in decarbonization of the economy compared to its neighbors: at present, not only the European Union, but also China, South Korea and Japan have already presented their strategies to achieve carbon neutrality by 2050-2060.

Nevertheless, Mr. Bardon expressed confidence that the EU’s Green Deal would encourage Moscow and Brussels to actively develop cooperation in this area: “The EU and Russia have to cooperate on climate in order to have understanding of each other. The EU wishes to work with

Russia to promote effective methods of decarbonization from technological innovation to market-based approaches in climate and renewable energy to achieve common carbon-neutral goals,” Mr. Bardon said.

Climate change is a worldwide challenge

It is logical that Russia raises questions regarding the introduction of CBAM, and assesses the mechanism as a risk to its economy, says Rem Korteweg, Senior Research Fellow at the Clingendael – the Netherlands Institute of International Relations. The carbon mechanism is perceived in such a context not only by Russia, but also by the United States and other EU partners, who are still unhappy with the prospects of installing the mechanism, the expert emphasized. Nevertheless, CBAM is still in the process of formation and being debated, while a number of key points of the new tax require bilateral discussion.

However, the expert believes, there are also some foregone conclusions that need to be accepted by both parties. First, the EU Green Deal is a fact of life, a policy that is already being implemented by the European countries. Second, reducing reliance on hydrocarbons is a trend in one direction that the EU will not deviate from. Third, the countries include climate security issues in their agenda: “Climate change can affect meteorological, geographic and other aspects of human life. They can cause large-scale displacement of people and even have an impact on the international security architecture,” said Korteweg.

Business considers Russia to be ‘greener’ than it seems

Business representatives believe that more and more companies adhere to sustainable development principles in Russia every year, by introducing environmental and social management in accordance with international ESG standards. But they still lag behind, compared to European counterparts.

Ernesto Ferlenghi, Chairman of the Energy Committee, Chairman of the Steering Committee of the Green Initiative project of the Association of European Businesses noted that the European countries had started their climate-change activities over 15 years ago, and have achieved a twofold reduction in per capita emissions. In Russia, there are also positive examples of companies that have chosen the path of sustainable development. However, general data suggest that the environmental situation is deteriorating, with Russia lagging far behind in per capita figures.

“Russian government is preparing to adopt a law on monitoring emissions and is launching pilot projects in regions. But unless the carbon tax is introduced (while the planned measures do not provide for it yet), the road to decarbonization will be long”, Mr. Ferlenghi said. That is why Russian companies need to accept the logic of the energy transition as an inevitable path of development towards competitiveness. “Of course, there must be motivation from the state, and then niches for cooperation with Europe will open up. Localization, joint ventures, technology development and financing are areas for cooperation that will benefit all parties”, the expert said.

Participants of the discussion agreed that large Russian companies are willing and doing a lot to be as environmentally friendly as possible along the whole production chain.

Anastasia Lavrentieva, Managing Director Green Finance, Gazprombank, considers that the Russian business is on the way of switching to new, non-conventional principles of development. More than 50% of the bank’s clients already adhere to ESG principles, according to a study presented at the recently established Council for Sustainable Development. At the moment, the bank participates in financing of over 60% of Russian renewable energy projects and continues to receive dozens of inquiries regarding the issuance of “green” bonds.

However, the demand for environmentally responsible capital in Russia is based on different triggers compared to European realities. It is more of a private initiative in Russia, rather than the result of pressure from society and the state. “The government can create additional demand for green investments by offering clear incentives to the businesses,” Ms. Lavrentieva summed up.

Alexey Spirin, Director of Environmental and Climate Risk Management Department, En+ Group, mentioned already existing environmental projects run by his company. Since 2019, over 1 million trees have been planted in the Krasnoyarsk Krai and Irkutsk Oblast, and an aviation firefighting program was financed covering 500,000 hectares with future expansion. With respect to CBAM, the business has no reason to positively assess it so far. “There is a lack of accurate baseline information to assess risks and opportunities. We hope that the mechanism will be company-specific in term of the environmental efforts, and also take into account a comparison with the industry average,” Mr. Spirin said.

In any case, be it introduction of tax or the emissions trading system, a balance must be maintained between incentives and regulation. Any new regulation will be negatively perceived if it turns out to be a punishment and an additional burden. Mr. Spirin believes that a smart decision would be to provide a choice between paying the fee and making a targeted investment in sustainable development. In such case, the business would invest based on the interests of both the owners and the society, instead of paying into an uncontrolled budget.

The prospects for market-based cooperation between Russia and the EU in green financing and sustainable development were presented by Florian Willershausen, Member of the Management Board, CREON Group.

“The European Union blames the producers of carbon-intensive products for emissions, but they only serve the demand that exists in the European market”, mentioned the expert. And although Russia is often cited as the world’s fourth largest pollutant and the second largest CO2 exporter to the EU, in absolute figures, Russian companies generate 1.68 billion tons of CO2 per year, which is almost half of the European Union’s emissions (3.3 billion ton) and only one-third of greenhouse gases emitted by the United States (5.28 billion tons).

“In this context, two things should not be forgotten: firstly, the climate change is a global problem. And secondly, it would be wrong to punish Russia as a supplier of carbon-intensive products, since the continued high demand for these products is the flip side of the same coin. The EU is currently investing in alternative transport and energy infrastructure and will allocate 600 billion Euro for this purpose. It would be reasonable to direct these funds not only into development of the domestic sales market, but also to support the development and to co-finance the entire value chain together with the EU’s neighbors and partners”, the expert said.

“Thirdly, in this regard, it would be reasonable for producer countries to have access to subsidies as well as to gain preferential access to markets or green financial instruments. Lifting of sanctions against development banks and green finance could be a decisive step”, concluded Mr. Willershausen.