All three countries are major producers of fossil fuels, and their economies are heavily reliant on said inputs. Oil and gas constitute the majority of exports from the Greater Caspian region to the EU. Although these hydrocarbons are currently not included in CBAM, the Greater Caspian countries rely heavily on them for domestic production processes, which are thus carbon intensive. However, there are important differences between the degrees of CBAM exposure between the three countries, affecting different sectors.
CBAM aims to reduce carbon leakage, which the European Commission defines as ‘the situation that may occur if, for reasons of costs related to climate policies, businesses were to transfer production to other countries with laxer emission constraints.’ It is designed to complement the EU Emissions Trading System (EU ETS), which has been the cornerstone of the EU’s internal carbon pricing policy since 2005. Under the EU ETS, companies operating within the EU must purchase allowances for each tonne of greenhouse gases they emit. The EU’s internal carbon pricing has led to the risk of carbon leakage, with companies shifting production to countries with weaker climate policies to avoid carbon costs. To protect EU industry from international competition, certain industrial sectors have long received a portion of their required allowances for free. As these free allowances will be faced out from 2026 onwards, this carbon leakage will instead be addressed through CBAM. Under this mechanism, importers will be required to purchase and surrender CBAM certificates reflecting the embedded emissions in their goods, with certificate prices linked to the price of EU ETS allowances. How will CBAM have an impact on the Greater Caspian Region and its (trading) relations with the EU?
Author: Douwe van der Meer, Associated Researcher
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