Ukraine may become one of the beneficiaries of the green transition
Georg Zachmann, Scientific Lead, Green Deal Ukraїna, told Interfax-Ukraine about the assessment of the impact of the CBAM implementation on the structure of the Ukrainian economy.
Text: Oksana Gryshyna
The main vector of Ukraine's development is European integration. This is both an opportunity and a challenge, as our producers have to look for niches and competitive advantages in the EU market in the face of a critical shortage of resources and growing risk factors. Can the CBAM (Carbon Border Adjustment Mechanism) be considered a risk factor for Ukraine's economy?
In the short term, CBAM is a kind of limited challenge in several sectors. I expect that Ukraine will be able to adapt, but we may see some trade deviation from the EU. For example, Ukraine currently exports certain steel products to the EU, and if these become uncompetitive in the EU because of the CBAM, Ukraine may redirect exports these products to Turkey or other markets. In general, we expect only some reshuffling of global trade in these carbon-intensive products, which from the perspective of integration with the EU may not be very useful for Ukraine, as it will mean that Ukraine will export them to other countries rather than to the EU. But the impact will be, as I said, very limited, for a few sectors.
A much bigger challenge may come in the long run, when CBAM becomes more comprehensive and complex. And we already see these trends, the European Commission has already proposed its first ideas to expand the scope of CBAM to additional sectors. In this case, it may become a bigger problem for Ukraine, as more and more sectors will be covered.
When we want Ukraine's integration into the EU, we also want Ukraine to be more integrated into European value chains, and this task will become more difficult the more sectors are in the CBAM. So, if the decision for Ukraine is to be within the EU CBAM system—applying the same rules rather than being treated as an external country—it means Ukraine must consider not only EU membership, but also the adoption of domestic carbon pricing to align with EU standards.
What components should Ukraine fulfill? What are the forecasts for the implementation of the CBAM on time, i.e. by the end of this year?
In my opinion, Ukraine as a state, if it accepts the EU’s CBAM to be applied to Ukrainian products, will not need to act directly, then the companies themselves will have to apply for the relevant certificates to sell on the European market and prepare reports. The Ukrainian state will only have to act if it wants certain derogations from the CBAM or a delay.
In your opinion, is it possible and under what conditions for Ukraine to postpone the implementation of the CBAM?
Yes, there are three options for obtaining a certain derogation from the CBAM. The first two are much discussed. So, the first one is Article 2.8 of the CBAM regulation, which allows countries to continue exporting electricity to the European Union without having to buy CBAM certificates. This is possible if the country has a very clear path, a clear roadmap to carbon pricing and market integration.
This option, which is currently being explored for the United Kingdom, I assume can be used for Ukraine. If Ukraine introduces a carbon price on its electricity generation and concludes a market coupling agreement with the EU, if it can show a clear roadmap, it can get a delay, which will greatly facilitate trade between the EU and Ukraine, because otherwise the electricity sector will be a mess. It is really complicated because in the electricity sector you have hourly trade between Europe and Ukraine, different borders, and if you then introduce some complicated instrument like CBAM, it will lead to many complications.
So it would be really interesting for Ukraine to get some derogations, but it would require very significant systemic steps from Ukraine on domestic carbon pricing for the electricity sector and a roadmap for market integration.
The second derogation is regulated by the so-called Ukraine clause in the CBAM regulations. It was specifically introduced to reflect Ukraine in the CBAM. This is Article 30.7, which allows countries that are in certain difficult, military circumstances to apply for a derogation from the CBAM.
It sounds like Ukraine just needs to apply and everything will be fine, but it's not that simple, because the European Commission will have to prepare a report that Ukraine fulfills all the necessary conditions. And then both the European Parliament and the Council of Europe, that is, the member states, will have to agree with this. Therefore, the report that your government has to prepare should demonstrate that Ukraine is really on the way to carbon pricing and intends to solve the existing problems. And only then can the European side be ready to accept this.
And I think that the political challenge for Brussels is that they are a little bit afraid to start this game of derogation (in general, not in relation to the energy market), because if Ukraine manages to get it, then there will be negotiations with the UK, African countries, other transition countries and the US. There is a kind of a big political game on CBAM, because CBAM is a European instrument that was supposed to protect the decarbonization architecture, the political architecture in Europe. So officials may be a little bit cautious about giving Ukraine full freedom of action. I think it will work out in the end, but it is not taken for granted from the beginning.
The third option would be for Ukraine to introduce carbon pricing that is equivalent to the EU’s – like Switzerland. So if Ukraine would link its emission pricing to the EU emission trading system the the EU might not apply CBAM to exports from Ukraine.
Which sectors will be most affected by the CBAM mechanism? How much investment is needed to decarbonize industries, and which industries are currently working more actively on the green transition in Ukraine?
This is a very good and complex question. The first part is the easiest. Metallurgy and chemicals are the sectors that Ukraine exports to the European Union and are already subject to the CBAM. So they will feel the impact the most. The investment needs are difficult to establish, because it can be argued that some of the industries will need investment in general, regardless of the CBAM. And then, for these investments to be “green”, the additional costs will be limited, but will give the opportunity to earn more money by selling to the European market.
But ultimately, this largely depends on Ukraine's economic strategy. Will Ukraine become an exporter of green products to the European Union? Does Ukraine want to become a bigger energy exporter? Or does Ukraine want to remain an exporter of agricultural products? So there are strategic questions in Ukraine about what the best economic future will be. My personal opinion is that the transition countries that are now part of the EU are trying to become a real part of the value chains in the EU. For example, not only agricultural exporters, but also exporters of food and processed products, as well as contributions to the automotive industry, have been a powerful driver of the economic miracle of Slovakia and the Czech Republic, and partly of Poland. Such a shift in focus would mean a very profound shift in the economic structure of Ukraine, which is still centered on heavy industry and agriculture. So, depending on your economic strategy, the answers to the questions of which industries to invest in and whether CBAM is a problem or an incentive for their development will depend on your strategy.
In your study, the baseline scenario envisages a gradual increase in the price of carbon in Ukraine, quadrupling by 2035 to USD 4 per ton. What is the basis for these figures and what impact is expected on the economy and population?
The figure was taken from the Low Carbon Development Strategy of Ukraine, which is an unpublished government document that contains some future projections and assumes this price of $4 per ton. The impact of $4 per ton would still be quite low, because the EU currently has 70 euros per ton, which is 20 times more. And if we look at the impact on electricity prices for households, we are talking about an increase in electricity prices for households by about 1 or 2%.
My personal opinion is that in order for this to have an impact, the first step towards raising the carbon price for Ukraine should be bolder. Because if Ukraine starts with $4 and then gradually increases the price, it will never reach the EU level, and as a result, it will always have to deal with CBAM. So it would make more sense to start with something like $20, which would still be very competitive with the EU, and then gradually increase it to be able to get closer to the prices of other countries in the club that Ukraine wants to be a member of.
Yes, this is not a popular solution. But the money that Ukraine collects stays in Ukraine (instead of being sent through CBAM to the EU), and Ukraine can to use itto help those industries and people who need it most.
The sectors of Ukraine covered by the CBAM have traditionally played a significant role in the national economy and have been leaders in exports (metallurgy, agriculture, energy, etc.). How will the CBAM postponement or implementation (in any shortened format) affect the economic structure?
Agriculture is not covered by the CBAM at this stage. As for other sectors, if you get a full deferral for a certain period of time, Ukraine will be extremely competitive on the European market because everyone else who exports to the EU has to pay CBAM. So it will be kind of an unfair comparative advantage for the steel industry in Ukraine, because they then save maybe 10% on the cost of a ton of steel to ship to the EU. The result of this could be that Ukraine would import a lot of steel from Turkey for all the uses of steel in Ukraine, while it would export all the steel that is produced in Ukraine to the EU. So, in essence, Ukraine will become one of the vectors for trade diversion to the European Union.
Thus, if Ukraine is the only country that can sell products to the EU without paying a carbon tax, then everyone would want to use Ukraine as a tax-free port for shipments to the EU.
We are now seeing capital exports, investments in metallurgical and energy capacities in Italy, Poland, and Romania. Do you see any influence of the CBAM in this?
There is a risk that capital is not reinvested in Ukraine, but this is potentially independent of the CBAM. But the very postponement of the CBAM could turn Ukraine into a kind of entry point for tax-free steel, which will probably benefit only a few tycoons who will then be able to sell their products without a carbon tax to the EU. And in the long run, I'm not sure if this deferral will be extended then. It will probably be changed at some point, and Ukraine will have to pay, and then the whole structure will have to be changed again. I think that will create a lot of uncertainty.
What options for CBAM application regimes did you analyze in your study? And what is the difference between the impact of the options on individual industries, exports, and domestic welfare?
Essentially, we had two main scenarios: one with CBAM and one without CBAM. If you introduce CBAM, the overall impact on the Ukrainian economy will be quite limited, but the steel sector will reorient to other regions and reduce exports to the EU. Therefore, this scenario predicts a sectoral impact on exports in the steel sector that is visible, but the overall economic impact will be rather limited as resources within the economy are potentially shifted away from the steel sector.
In the sensitivity analysis, we look at what would happen if we exclude electricity from CBAM. We see a relatively limited impact there, but I'm not very satisfied with the analysis because the CBAM is very complex as in contrast to classic products, electricity is exported in some and imported in other hours - and sometimes in the same hour imported from Poland and exported to Romania. We are currently preparing a more detailed representation of the electricity sector .
We are also looking at what happens when Ukrainian exporters of aluminum and other products not only need to pay CBAM for the emissions when producing the product itself, but also for the emissions caused when the electricity was produced that went into the exported product.
The impact of CBAM, if we take into account the second category of emissions, for Ukraine increases, as expected.
The EU incentivizes the implementation of innovations in member states as part of the green transition with grants, subsidies, etc. For example, the volume of government grants for decarbonization projects in the steel industry in Europe has already exceeded €15.1 billion. Doesn't it look like Ukrainian business is in a non-competitive environment? Is there a possibility for the EU and its affiliated banks to introduce targeted programs and preferential lending conditions for Ukrainian producers?
The general picture you described, that the European Union uses the revenues from carbon pricing and returns this money to industry for investment, is true. And if Ukraine decides to develop a carbon pricing mechanism, it should also consider how to do that. As I said at the beginning, if you have a high carbon price, the Ukrainian state gets a lot of revenue, and then the question is what to do with that revenue - return it to the citizens, use it for investment, or keep it for the state budget. These will be very political discussions that are already underway.
Let me remind you that there is already a Ukrainian decarbonization fund, which has a very small volume and uses this money, conditionally, for several small solar panel projects, so it is not yet influential. But in principle, the tool already exists. Again, the problem is that it is very small, and the management is probably not designed to handle tens of billions of hryvnias. I mean, a high carbon price is going to raise so much money that you want to be sure that the parliament, anti-corruption agencies, and everyone else has a clear idea of how that money is going to be used.
Why is there such a strong opposition to CBAM in Ukraine?
One concern in Ukraine is that CBAM could create an economic wedge between Ukraine and the EU. To avoid this, it is important to accelerate Ukraine’s integration into the European energy and carbon markets.
Additionally, some domestic actors — particularly large industrial players — have a strong interest in avoiding CBAM.
However, our analysis shows that for Ukraine’s economy overall, the impact of CBAM is limited.
It’s also important to note that CBAM is not uniquely disadvantageous to Ukraine. European producers will also face stricter rules, as their free emission allowances are being phased out starting January 1, 2026. This levels the playing field between EU and non-EU producers. Without CBAM Ukraine would have gained an advantage, not only against EU companies but also all other countries that export to the EU that have to pay CBAM.
Experts have repeatedly voiced the idea of creating a Ukrainian Decarbonization and Transformation Fund, similar to the Energy Efficiency Fund. Could such a tool stimulate systemic decarbonization programs?
I am a big fan of this idea. There are two elements that I like about the Energy Efficiency Fund that could be implemented for the Decarbonization and Transformation Fund. First, it is co-financed from external sources, so on the one hand, Ukraine will receive its own carbon revenues from its citizens and industry, but then this money will be supplemented by funds coming from international partners, and this will help Ukraine to receive more revenues. It will incentivize Ukraine to adjust the level of carbon prices faster and it will also allow Ukraine to pay for the special impacts that carbon prices can have faster.
And the second element that I like about the current energy efficiency fund is that there is a kind of joint governance structure between the Ukrainian and international side. And this joint governance, in my opinion, is still quite useful because it allows us to really identify the most effective ways to use the significant budgets to fulfill the mission of the fund. Otherwise, there is a fear that such funds are then used for domestic political purposes rather than for the long-term transition needs of the country. So I think it's a very good idea to create something like an energy efficiency fund, where international partners contribute funds equal to Ukrainian contributions and then are part of the governance structure to help spend the resources in the most efficient way.
Should this decarbonization fund focus on large businesses, or perhaps medium or small businesses?
In Germany, we have a very large climate and transition fund that essentially deals with businesses of different sizes with very different project areas, but also helps consumers. So it works not only for businesses but also for households. In particular, it has tools such as lower electricity prices for households financed through this transition fund, as well as helping steel mills to invest and supporting small and medium-sized enterprises to install solar panels. After all, there are very different areas of projects that need to be politically decided and developed. I can imagine something similar for Ukraine. The most important thing is good governance, because if the governance is not good, there is a risk that too much money will go to those who have political connections and not to those who need it most.
What should be the key initial steps on the Ukrainian side to make the idea of this fund realistic?
I believe that Ukraine needs a leader who wants to create something like this and who has enough political power to implement it within the framework of the fund. And who can say: 'Ukraine wants to make this part of the CBAM negotiations with the EU, is ready to agree to somewhat higher carbon prices and some joint management of the fund with partners, but on the condition that the partners raise significant additional funds. I think the European side will be interested in such proposals, but of course, this is also European taxpayers' money, so it will not be easy on both sides, so strong political commitment is needed on both sides.
Under what conditions can decarbonization become a revolutionary tool for changing the structure of the Ukrainian economy, improving the quality of life and addressing climate issues?
I think Ukraine has very good opportunities for a greener economy. It has a lot of low-carbon resources, it has critical raw materials, it has good wind and solar energy potential, it has a lot of agricultural land. So, in principle, Ukraine can be one of the winners. If you look at the economic geography of the past, where there were coal mines, there was industry, and in the future, industry and economic development will be where there is access to land and low-carbon energy resources. Ukraine, in my opinion, can also be one of the beneficiaries of the green transition.
Geographically, it is very close to the centers of Western Europe, where there is already an established infrastructure, and this will also help Ukraine to move forward a little bit in terms of development. In the short term, this has additional costs and we cannot turn a blind eye to it. Building a low-carbon power plant is more expensive than using an existing coal-fired power plant. Building a clean steel plant is more expensive than building a dirty one. But this will be a prerequisite for joining the European Union, which, in my opinion, is the most important anchor of development for Ukraine. This is the only thing that will really help Ukraine to revive economically. And it will make Ukraine's economy resilient to future challenges. And the purpose of our research is to find areas where there are solutions that are feasible under the current economic structure to decarbonize the country and bring it closer to the European Union.
I think the long-term picture is quite clear: Ukraine is a member of the European Union, contributes its share to stabilize the climate, and benefits from its economic potential in this area. But the transition path will be quite difficult, especially in the current political situation.
