The EU’s carbon tax may devastate a country it is trying to keep alive: Ukraine

There’s a Ukrainian contradiction brewing in European politics.

As the European Union pledges to fund Ukraine’s war effort, no matter how long it takes, it is also barreling ahead with a new trade law that will drain Kyiv’s war-battered economy if fully enacted.

The measure in question is a pending tax the EU has long had in the works for certain carbon-heavy imports like iron and steel. In a nutshell, the tax will force EU companies to pay a premium if those goods come from countries with lax environmental rules. 

The hope is the tax will keep European manufacturers competitive, given the costs they already incur complying with bloc’s relatively stringent climate rules. The measure presents the EU’s polluting trading partners with a choice: Find new buyers, lower your carbon footprint or accept lost revenue. 

Ukraine doesn’t necessarily have that luxury. 

Since Russia’s full-scale invasion began, Ukraine — already reliant on EU exports — has become even more wedded to European goods, with Russian mines cutting off Black Sea trading routes elsewhere. Ukraine also leans heavily on exports to the EU of iron and steel, both tricky sectors to decarbonize even when there isn’t a war on.

The result is that Ukraine will be dealt a severe economic blow in 2026 when the law takes effect. And producers on the ground are already starting to fret. 

“Ukraine will be caught on its knees,” warned Jozsef Csapo, chief technology and strategy officer of ArcelorMittal Kryvyi Rih, the country’s largest steel company.

Those studying the issue say Ukraine stands to lose billions. Stanislav Zinchenko, who runs an independent consultancy advising iron and steel firms, put the figure at $1.4 billion.

None of this is guaranteed, though. There’s a force majeure — or act of God — clause in the law for exceptional circumstances, and war would intuitively seem to qualify. But Brussels hasn’t given any concrete signals it will offer Kyiv an exemption. And Ukrainian officials argue they can get producers up to EU standards in time.

“Instead of wasting time negotiating a delay,” Ukraine’s Environment Minister Ruslan Strilets told POLITICO, “we need to take effective steps by 2026.”

Trade during wartime 

The EU approved its carbon tax, dubbed the Carbon Border Adjustment Mechanism, two years ago. The bloc argued it would play an essential role in keeping local industry alive as companies grapple with rising climate standards, high energy bills and cheap foreign competition. 

Yet the policy ran into immediate backlash from some of the EU’s largest trading parties. China filed a complaint at the largely moribund World Trade Organization. India threatened to retaliate with a tax on historical pollution that would target European firms. The U.S. initially grumbled but has since quieted down.

Ukraine, however, remained silent, even though its iron and steel industries stood to bear the brunt of the new tax regime.

Those sectors are also increasingly in need of Europe’s business. As the invasion unfolded, Ukrainian plants faced shutdowns, power shortages and plummeting demand. Iron and steel production in turn dropped by a third.

At the same time, Ukrainian factories lost vital trading routes via the Black Sea, as a Russian naval blockade halted shipments. Firms were left with little choice but to redirect whatever goods they could over land to their European neighbors. The EU soon became the primary destination for Ukrainian steel and iron, even if the bloc’s overall imports of Ukrainian steel dropped.

“Right now, our dependence on the European market is twice as big as it was before the war,” Zinchenko said.

Zinchenko estimates that Ukraine currently sends roughly 85 percent of its iron and steel exports to the EU, a dramatic jump from the pre-war level of 45 percent.

“Ukraine cannot avoid selling to the European market,” he said. 

If the EU’s carbon tax went into effect today, Zinchenko added, it would cause an export drop of up to 1.4 million tons of pig iron, equivalent to $600 million in losses. Exports of semi-finished products would also fall by 1.3 million tons, totaling $640 million in lost revenue.

An act of god exemption?

The EU is, of course, not interested in decimating the Ukrainian economy — quite the opposite. It has spent the last two years rolling over funds, approving new cash injections and making sweeping policy changes to help keep Ukraine solvent. 

That’s partly why the carbon tax has a force majeure clause that allows the EU to make exemptions “where an unforeseeable, exceptional and unprovoked event has occurred that is outside the control of one or more third countries.”

Mohammed Chahim, a Dutch Socialist leading the Parliament’s work on the issue, said negotiators considered that language the “Ukraine clause.”

Mohammed Chahim, a Dutch Socialist leading the Parliament’s work on the issue, said negotiators considered that language the “Ukraine clause.” | Andreas Solaro/AFP via Getty Images

“We don’t want to over-punish certain countries,” he said.

Yet Parliament can’t enact the clause on its own — the EU’s executive in Brussels, the European Commission, must take that step. And thus far, it hasn’t, although it has time as the law won’t kick in until 2026. 

In a statement, a Commission spokesperson told POLITICO the EU executive will “assess in due time whether this clause can effectively address the exceptional situation of Ukraine.” The spokesperson also noted that Ukraine’s ongoing efforts to join the EU — the country officially opened accession talks with Brussels in December — will require it to gradually implement EU laws. 

Such steps don’t happen overnight, though. Membership talks typically drag on for years. Transposing EU laws is a byzantine process and the ongoing war will only further complicate things.

Sagatom Saha, a research scholar with the Center on Global Energy Policy at Columbia University, is surprised the carbon tax situation isn’t being treated as an urgent problem. He warned that with the upcoming EU elections, the issue could get pushed off for months as the major EU institutions turn over staff and lawmakers. 

And he cautioned that Ukraine’s silence on the matter may derive from its desire to placate the EU, given its acute military needs and aspiration to speed through the membership process. 

Ukrainian leaders, he said, “have a substantial amount to lose” by countering the carbon tax, as opposed to other opponents like the U.S. or India.

Officially, Ukraine’s government is toeing the EU’s line that it will avoid the economic pain by bringing itself up to EU standards by 2026. Strilets, the Ukrainian environment minister, told POLITICO that an exemption is “not currently on the table.”

Instead, Ukraine is planning to adopt a pilot version of the EU’s carbon pricing system, known as the Emissions Trading System, which forces certain companies to pay for carbon pollution. 

The step would likely raise prices for Ukrainian manufacturers, but lower the carbon taxes on EU exports. 

Ukrainian exporters “will not be immediately exempt from the effects of the CBAM,” Strilets said, using the acronym for the tax. 

But adopting a carbon price will “minimize these implications” if Ukraine has “a competitive carbon price compared to the EU price.”

The problem is that process could take years. 

Cutting carbon in survival mode

Ukraine manufacturers insist they’re not seeking a permanent opt-out from the EU’s carbon tax. But they’re also quick to stress the timeline needed to reach EU standards. 

Zinchenko, the iron and steel consultant, argued that even if Ukraine institutes a carbon price following the EU model, it will take “12 or 15 years to make our carbon price the same as in Europe.”

For businesses, that’s years of higher taxes on EU exports and lower revenue. So instead, industry leaders say they just need time — and perhaps some help. 

EU manufacturers, for instance, have been allowed to spew a set amount of carbon for free each year. While that amount dwindles each year, it has given companies time to shift away from carbon-heavy tactics before their costs skyrocket.

“We don’t consider ourselves as outsiders from these rules,” said Csapo, the executive at Ukraine’s largest steel company, ArcelorMittal Kryvyi Rih. The industry just wants a more “reasonable timeframe,” he added.

If not, Csapo warned, Ukrainian steel will be too expensive for the EU, pushing countries to sources farther away — saving money, but ironically expelling more carbon dioxide during the longer shipping process. 

“Even if you’re looking at it purely from the carbon perspective, this will be the wrong choice,” Csapo argued. “The EU will import it from Brazil or Vietnam, adding tons of CO2.”