Preparing for the European Carbon Border Adjustment Mechanism: Insights for Turkish Exporters

In October 2023, the Carbon Border Adjustment Mechanism (‘CBAM’) will mark a significant milestone in the journey towards the European Union’s goal of becoming carbon neutral by 2050, which was initiated by the Paris Agreement and the European Green Deal.

As European companies continue to lower their greenhouse gas emissions, the CBAM is designed to prevent ‘carbon leakage’ by halting the transfer of energy-intensive production outside EU borders. Essentially, it is a mechanism intended to safeguard the competitiveness of European firms. Beginning in October 2023, authorized European importers will be required to report imports of iron and steel, cement, electricity, aluminum, fertilizers, and hydrogen, which are recognized for their high carbon emission intensity. By 2026, other industries, including petrochemicals and plastics, are anticipated to be included in the reporting process.

What does CBAM mean for Turkish companies in practice?

This practice can be seen as a form of taxation. By 2026, authorized European importers will need to purchase certificates that match the difference in “embedded carbon” of the goods purchased from Turkish companies. This will add an extra cost to the imported goods, which goes beyond the scope of the Customs Union agreement between Europe and Turkey. The method for calculating the carbon difference is likely to be determined during the transition period leading up to 2026.

Apart from this ambiguity, the CBAM creates further uncertainty by imposing periodic and intensive declaration obligations, and requiring the calculation and “hedging” of carbon certificates for sales. Without appropriate measures, Turkish companies’ competitiveness is likely to suffer, especially in comparison to countries with lower energy costs like Russia, or those with more significant renewable energy resources like China. This disadvantage may result in the Turkish industry losing market share that it previously benefited from under the EU Customs Union exemption.

How can Turkish exporters protect their market share?

Turkey’s Ministry of Trade has published the Green Deal Action Plan in 2021, acknowledging the EU’s significance as Turkey’s main export partner. Turkish exporters should prioritize gaining comprehensive knowledge of the process by closely monitoring academic articles related to the CBAM regulation, as well as conducting measurements and risk scenario analyses to determine its potential impact on their exports. It is imperative that they promptly review their supply chains, including both upstream and downstream aspects. Taking measures such as transitioning to renewable energy sources, conducting carbon assessments, and analyzing potential new expenses will enable them to prepare for the 2026 implementation date during this transitional period.

Will reporting standards change?

To summarize, there will be significant changes in reporting standards, including the need for more comprehensive and transparent reporting that includes environmental, social, and governance (ESG) factors. This trend towards Integrated Reporting, which provides a more holistic view of a company’s performance, is gaining importance both in Turkey and globally. For Turkish companies that work with European counterparts, adhering to these reporting standards will become increasingly important. The International Accounting Standards Board (IASB) and the International Sustainability Standards Board (ISSB) are taking steps to establish an Integrated Reporting Framework, which will serve as a roadmap for Turkish companies to comply with the CBAM.