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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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The EU’s Carbon Border Tax Could Deal A Devastating Blow To Russia’s Economy

The European Union's carbon border tax, to enter into effect in five years, was conceived with the idea of leveling the playing field for European industrial producers and importers who manufacture their goods in much laxer emissions-related regulatory frameworks. But the border tax could have a welcomed side effect for Brussels: it could have a more devastating effect on Russia's economy than sanctions.

This is the warning Rosneft's head, Igor Sechin, recently gave President Vladimir Putin in a letter detailing the steps that could be taken to address the emissions problem, per a report in business daily Kommersant. According to the letter, initially, the carbon border tax would affect Russia's exports of metals, fertilizers, electricity, and cement, but could later expand to oil products, of which Rosneft is the largest Russian exporter, Kommersant wrote.

The carbon border tax idea has been problematic from the beginning, even though it is already a fact in the EU. It came after a pushback from European industrial associations when Brussels slapped even stricter emissions-reduction targets on them, hiking carbon prices to a level where, industrial producers argued, their products became uncompetitive with imports from countries such as China—and by extension Russia—where emissions-cutting standards for the industry were much laxer.

China, standing to lose the most from a carbon border tax, sounded the alarm as soon as Brussels set a date for the tax to enter into effect. "CBAM is essentially a unilateral measure to extend the climate change issue to the trade sector. It violates WTO principles ... and (will) seriously undermine mutual trust in the global community and the prospects for economic growth," a spokesman for China's Ministry of Ecology and Environment told media last month.

Related: Oil Glut In Asia Worsens

Also last month, the Russian Institute for Natural Monopolies Research, an industrial research think tank, said that it had calculated that Russian exporters could lose some $2.3 billion annually from the EU carbon border tax, which would be equal to an export tariff of some 24 percent, as the carbon tax mechanism in its current form would affect some $9 billion worth of Russian exports.

The calculations were made based on a carbon price of $60 per ton, which is what carbon emissions are currently trading at. Still, there are those who say that for the decarbonization of heavy polluters to really take off, carbon prices need to be much higher. And this means Russia could suffer a lot more in export losses.

However, the EU carbon border tax mechanism is not the only emissions-related problem looming on Russia's industrial horizon. The United States is considering its own version of a carbon border tax, and none other than the International Monetary Fund recently proposed what it calls an international carbon price floor.

The floor would be tiered to reflect the degree of development of emitters and their share in total emissions. Based on this, the IMF proposed a minimum carbon price of $75 per ton for the biggest emitters—the U.S., Canada, the UK, China, India, and the EU—a floor of $50 for developing countries that don't emit so much, and another of $25 per ton for low-income countries.

Carbon taxes, therefore, are increasingly looking like they will be a fixture of the global economic future. Russia is among the top five emitters of carbon dioxide, so the losses it could suffer from such taxes would only rise in the future. But Sechin, in that same letter that spelled out the warning against EU carbon border taxes, has an idea.

Russia is home to the world's biggest carbon sink: a fifth of the world's forests. And this carbon sink is absorbing even more carbon dioxide than previously thought, according to a recent study published in Nature. According to data collected by the researchers, Siberian forests have grown substantially over the past three decades, and so has their carbon absorption rate.

And there is Sechin's idea: have Russia's carbon sinking capabilities recognized by the EU and have the country exempted from the Carbon Border Adjustment Mechanism for its carbon emission absorption potential. For this, Russia would need international certification for this emissions absorption potential. It would also need regulatory support for carbon offset projects.

It is doubtful that the EU would exempt a polluter as large as Russia from its carbon border tax, despite its enormous carbon sink. After all, the idea of the mechanism, officially, is to increasingly discourage polluters from polluting and encourage them to invest in lower-carbon production instead. The fact that Rosneft's head is sounding the alarm on the consequences of this idea means that it has the potential to become really damaging for Russia and, by extension, to other exporters of high-carbon goods.

"Carbon border tax is essentially a kind of unilateral measure," said China's Environment Ministry spokesman in July. "The unprincipled extension of climate issues to trade is not only a violation of WTO rules, a blow to the free and open multilateral trading system, and may cause serious damage to international trust and economic growth, it is also inconsistent with the principles and requirements of the United Nations Framework Convention on Climate Change and its Paris Agreement." 

China and Russia are using two very different approaches to tackling the carbon border tax problem. It would be interesting to see which one will have more success.

By Irina Slav for Oilprice.com 

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