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Turkey could face over $900 million in CBAM-related export costs: Report

12 August 2021 William Fleeson

The costs of an upcoming carbon-related export rule in the European Union (EU) could amount to more than $900 million annually for trading partners in Turkey, a new study suggests.

The proposed rule, called the Carbon Border Adjustment Mechanism (CBAM), aims to prevent carbon-intensive industrial activity from taking place in non-EU countries, for import to EU-area customers. It is one of the elements of the Fit for 55 package of proposals released by the EC in July to enable the EU to reach its goal of 55% GHG reductions by 2030 from 2005 levels.

The study, released on 29 July by the Climate Change and Sustainable Transition consultancy, was commissioned by the European Bank for Reconstruction and Development (EBRD).

As proposed, CBAM will put Turkey's aluminum, cement, and steel sectors under special pressure. Turkey neighbors the EU and serves as a close trading partner with the European bloc. The fee would reflect that manufacturers in Turkey pay a carbon price below that of competitors in the EU.

In terms of financial impact, much depends on how extensive the new CBAM measures will be trading partners outside the EU, the EBRD said. That variation will move according to type, or "scope," of emissions, as well as differences among sectors.

For example, for emissions from Scopes 1 and 2—which include direct as well as indirect emissions—costs could total about $912 million (€777 million), the report found.

But for Scope 1 alone, or the direct emissions from a carbon-intensive industrial process, the total cost would fall to $468 million (€399 million).

The EBRD acknowledged the possibility of "steep additional costs" for Turkey under CBAM.

"The EBRD is working on a set of strategic policy choices for the [Turkish] government to mitigate trade risks and foster domestic low-carbon economic development in line with the EU climate policy objectives," said Sule Kilic, the EBRD's deputy head of mission for Turkey.

The report lays out six scenarios for calculating CBAM's possible effects on Turkish exporters. Three of the scenarios involved a practice of "foreign carbon price crediting," or factoring in exporting-country climate policy. The other three scenarios consider CBAM calculations for countries with no foreign carbon price crediting, or for countries that do not have a domestic carbon pricing scheme.

Cost calculations in the EBRD report center on three components: carbon intensity, or how much carbon per unit is released in the production of a given product; the volume of exported products; and the carbon price under the EU's Emissions Trading System (ETS). The study assumed a carbon price of €70/ton in 2026.

A reporting system for CBAM will launch in 2023. Importers subject to the policy's carbon levies will begin payments from 2026.

More broadly, CBAM is a part of the sweeping European Green Deal environmental package, which is designed to decarbonize EU industries by imposing carbon-related taxes on target certain industries inside and outside the EU's borders.

Given the new extra costs on imports to the EU, Turkey's industrial leaders may try to take their business elsewhere, says Deni Koenhemsi, a manager in the Pricing and Purchasing group at IHS Markit.

"The extra costs associated with CBAM will mean that Turkey will be increasingly looking at non-European markets for its exports," Koenhemsi said.

CBAM's effect in Turkey will vary substantially by sector. For cement, the levy could add as much as 50% additional cost to imports bound for the EU. Aluminum imports could face a surcharge of 19%, while imports of steel could see a more modest rate of 9%, the EBRD says.

In GDP terms, CBAM could impose a cost of 0.07% on the Turkish economy in 2023, the report found.

The EBRD called on Turkey to align itself with several of the flagship climate pacts that increasingly govern global environmental and emissions policies. The bank encouraged Turkey to join the Paris climate agreement. The country is the only one from among the G20 group of large global economies that has not which has not yet signed the Paris accord.

Turkey should also set sectoral and nationwide net-zero targets for carbon dioxide emissions, and create a national carbon trading system like the EU's ETS, the EBRD said. Fit for 55 proposes to expand the role of the ETS to include the EU's buildings and transport sectors, and the materials—like aluminum, cement, and steel—that those sectors require.

The relationship between climate policy and access to capital will grow more important, the EBRD said—whether with the EU, or as a general matter of international trade. The bank noted plans by the EU and the G7 countries to make mandatory the requirements from the Task Force on Climate-Related Financial Disclosures, specifically on carbon pricing, which will impact export economies like Turkey on an increasingly global scale.

The EBRD will offer direct financing to countries affected by environmental policies like CBAM. The bank's High Impact Programme for the Corporate Sector, which is co-funded by the multilateral Climate Investment Funds, will support "process-related efficiency gains" for carbon-intensive industries in Turkey and other countries where the EBRD operates, the bank said.

Turkey in 2020 was the 24th-largest emitter of greenhouse gas emissions globally, releasing 410 million tons of carbon dioxide equivalent last year, according to IHS Markit data. The country, which participated in the US-organized Leaders Summit on Climate in April, said then that it expects to reduce national emissions by as much as 21% by 2030.

Posted 12 August 2021 by William Fleeson, Senior research analyst for Executive Briefings, IHS Markit

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