Russian businesses start counting cost of EU carbon border tax

Russian companies stand to be among the biggest losers from the EU’s proposed carbon tax on imports, prompting accusations of protectionism from Moscow.

The levy, known as the carbon border adjustment mechanism (CBAM) and designed to hit countries making insufficient efforts to combat climate change, would result in huge surcharges for Russian groups seeking to access the EU market, according to analysts and officials.

Estimates of the potential costs vary from $3bn a year, according to the Russian natural resources ministry, to a KPMG forecast of about $60bn between 2022 and 2030.

The European Commission is due to detail its proposals in July. Negotiations with the European parliament and member states could then take months, if not years, to conclude.

The tax would initially target a limited number of imports including iron, steel, cement and fertilisers, EU officials told the Financial Times, and would be based on the equivalent carbon price paid in Europe.

Brussels has stressed the CBAM will comply with World Trade Organization rules — whereby imported goods cannot be held to higher standards than those produced domestically — and will only apply to countries that do not match the EU’s internal carbon pricing systems.

But as Europe’s biggest supplier of carbon-intensive goods worth nearly €10bn in 2019, Russia is expected to be hit hardest. Alongside Turkey, it is one of just two G20 countries without a domestic carbon tax and no emissions trading system.

Moscow has accused the EU of using its climate policy to recoup financial losses inflicted by the pandemic.

“It appears that some of our partners cannot resist the temptation to instrumentalise the climate agenda for the benefit of their economies,” said Artyom Bulatov, deputy head of the European co-operation department at Russia’s foreign ministry, at a conference last month.

“We took note of the plans to use the CBAM as an additional source of income for the EU budget . . . And frankly speaking it goes fully in line with protectionism in the trade sphere.”

The recrimination comes as bilateral trade between the EU and Russia has dropped since Moscow’s 2014 annexation of Crimea and the sanctions imposed by Brussels.

Russia, long seen as an outsider in global climate action, stepped up when it joined the Paris agreement in 2019. But while the EU and US have pledged to hit net zero by 2050, Russia’s commitment to reduce its carbon footprint to 70 per cent of the 1990 level by 2030 effectively allows for an increase in emissions.

Speaking at a US-hosted global climate summit in April, Russia’s president Vladimir Putin vowed to “significantly” reduce accumulated net emissions by 2050. But for Europe this still falls short.

“Russia is not ambitious enough,” said Laurent Bardon, head of the trade and economic section at the EU delegation to Russia. “There is indeed a risk that Russia and the EU would diverge, with the risk that it would become an irritant.”

Meanwhile in Europe, the carbon price under the EU emissions trading system has soared to €50 a tonne, leading to business calls for an urgent imposition of the border tax. EU companies argue they risk suffering the brunt of the bloc’s climate-cutting targets, while those outside the EU are spared the costs of doing business in the single market.

Many Russian companies say they are ready to reduce emissions to retain their market share, mostly due to investor pressure.

“It looks like the market or our clients’ requirements to reduce CO2 in our product are much more realistic and, in our opinion, much more sensible [than CBAM],” said Maxim Remchukov, sustainable development director at Sibur, Russia’s largest petrochemicals company.

Russian companies also fear a double tax if Moscow decides to launch its own carbon regulation, but one that fails to align with the EU, said Igor Makarov, head of the world economy department at the Higher School of Economics.

EN+, an energy company that controls Russia’s largest aluminium producer Rusal and mainly uses hydropower, urged the EU to take a softer approach.

“It should be a push but also motivation with a support mechanism. It doesn’t have to be [so] tough that it kills business,” said Alexei Spirin, head of environmental and climate risks department at EN+, one of few companies in Russia that have pledged carbon neutrality.

It should offer businesses a choice to pay tax or invest more to reduce emissions, he said.

Makarov agreed CBAM was not the best way to provide an incentive to Russia to be greener. Moscow is more likely to respond with retaliatory measures than by tightening its regulation.

“Russia and the EU have many opportunities to co-operate in the green area, promote green technology [and] reduce emission,” Makarov said. “But these opportunities are beyond the narrow framework of CBAM, within which Russia is considered the bad guy in the international climate change regime, and the EU is considered the good guy.”

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