EU U-turn. Why the authorities ignore the environmental problems of business
Ukraine risks losing European markets for industrial products without immediate environmental modernization of enterprises. The state has almost distanced itself from this problem, planning to shift all costs onto businesses. But the conditions created by the authorities are unlikely to allow industrialists to cope with this challenge. More details – below in the RBC-Ukraine material.
The European Union, having set a course for combating climate change, is preparing to introduce cross-border carbon regulation (CBAM). By taking such a step, the European Commission (EC), among other things, is trying to protect EU companies that are already forced to comply with a number of requirements of European officials within the framework of the Green Deal (the so-called "green course" or "green agreement"). This program provides for a reduction of carbon dioxide emissions to zero by 2050.
What does this mean and why is it important for Ukraine? In mid-July, the EC presented a plan for carbon regulation. While it is still a draft, it outlines a transitional period for adapting to the new rules. But it is very likely that in a few years, some imported goods into the EU (this refers to metals and products made from them, fertilizers, cement, and electricity) will be subject to a tax. The amount of the levy will be tied to the volume of carbon dioxide emissions during the production of a particular product, taking as a benchmark the norms that enterprises from the European Union are forced to comply with.
This story will certainly not bypass Ukraine. There is no doubt that CBAM will also be extended to Ukrainian industry with a fairly high "carbon footprint". This means that enterprises that plan to continue trading with the European Union will be forced to pay a special tax – the so-called carbon border tax. Ultimately, businesses will either have to squeeze their margins or pass the tax amount into the price of the goods, becoming less competitive in the European market.
According to various estimates, the losses of Ukrainian enterprises in the first year of the new rules could amount to about 600 million euros. "If our government does not engage in negotiations, cannot organize a quality dialogue with EU partners, then we face a drop in foreign exchange earnings and state budget revenues, a reduction in employment and incomes of the population," says the director of GMK Center Stanislav Zinchenko.
And although there is still time to "engage in negotiations" and begin modernizing enterprises, the state, despite business concerns, is not yet in a hurry to help with this. In addition, it seems that some government initiatives on environmental issues are, on the contrary, even more aimed at putting pressure on industry.
Among these is the government's intention to approve the second nationally determined contribution (NDC2), which provides for a 65% reduction in carbon dioxide emissions from the 1991 level. This goal is even more ambitious than in the EU, which aims to reach a 55% target.
Only the European Union has planned investments of 503 billion euros for these goals, while Ukraine has zero. Ukrainian industry also lacks millions in budgets for eco-modernization. This means that enterprises that cannot meet the government's inflated target will simply close, leaving hundreds of thousands of workers on the streets, and the budget without foreign exchange revenues. The absence of industry will certainly reduce CO2 emissions. But isn't the price too high for the government's ambitions and their attempts to stifle business?
Project № 4167: expensive and too fast
In this regard, one of the most controversial is the draft law from the Cabinet of Ministers №4167. The document caused a heated discussion among industrialists. It has already been rejected several times in the Rada, being sent for a repeated first reading. The project, according to its opponents, is unrealistic in terms of the envisaged deadlines for environmental modernization of enterprises – 4 years and 7 years as an exception in certain cases. These conditions are much stricter than those provided for industry in the EU. For example, in Poland, 20 years were allocated for eco-modernization, in Slovakia 17 years.
What is important: the Cabinet's project does not provide for any state support for environmental projects, shifting all costs to enterprises, which, according to various estimates, need about 10 billion hryvnias. Whereas, for example, new members of the European Union, when implementing similar programs, received 450 billion euros from their countries' state budgets and the EU budget for eco-modernization.
For obvious reasons, Ukraine cannot count on a similar level of financial support. But instead, the government could offer businesses and introduce tax incentives and benefits, state guarantees, compensation for loans for eco-modernization, etc. In fact, the government has not yet offered any such tools, shifting the financial burden entirely onto businesses.
In addition, according to critics of the project, it contains several schemes through which regulatory bodies will be able to manually punish enterprises for non-compliance with knowingly unrealistic norms. In the same vein, it is important that another draft law (№3091) makes the State Environmental Inspectorate (SEI) an instrument of pressure on businesses.
This state body, if the law is adopted, will be able to apply unjustified sanctions to enterprises without court decisions. This includes both fines and complete business shutdown. Such powers have repeatedly created a wide field for corruption, giving unscrupulous controllers leverage to "shake down" and "extort" money.
When making such plans, as in the case of eco-modernization of industry, the authorities clearly do not take into account the real state of enterprises. And instead of state support and dialogue with industrialists, "advanced" European norms (and even stricter than in the EU) are once again copied without taking into account Ukrainian specifics.
Something similar happened in the case of Ukraine's commitments under the Paris Climate Agreement - the first global treaty to prevent the climate crisis. As is known, it was signed in 2015 by 196 countries, approving a single comprehensive action plan to reduce carbon emissions by 45% by 2030. The United States, during Donald Trump's presidency, withdrew from the agreement, and after Joe Biden's victory in the elections, rejoined it.
Having rebooted the climate agreement, the signatories held a so-called "climate summit" in April 2021, where a new version of the Paris Agreement was discussed - with a set of commitments, strict control tools, and responsibility for compliance. One of these commitments was the condition for each country to reduce CO2 emissions, the so-called "national contribution."
Ukraine decided to distinguish itself here as well. While the EU committed to reducing emissions by 55% by 2030, the Ukrainian authorities "ran ahead of the locomotive," declaring their readiness to conquer the figure of 65%. Meanwhile, the industry perceived such promises as absurd and unfeasible, not taking into account the state and capabilities of enterprises.
Eco-tax: without purpose and meaning
Against this background, it looks quite strange how the authorities year after year use the available resource, allegedly to support ecology. In Ukraine, businesses have long been paying an environmental tax, and its size is regularly increasing. And another increase is provided for in the high-profile draft law No. 5600 with amendments to the Tax Code.
The name of the tax often does not correspond to how officials dispose of the funds collected from industry. To date, 45% of the eco-tax goes to the general fund of the state budget, 55% - to local budgets. In fact, the funds "dissolve," are spent on any needs, but are definitely not used to improve the environment.
Businesses have long been saying that the tax should be targeted in reality, and not just on paper. For example, 70% should be left to enterprises with the condition that they will spend the money on eco-modernization, and 30% should be directed to targeted environmental funds. And only in such a format will the eco-tax fulfill its key function of implementing environmental protection measures.
The population will also benefit from the targeted use of all environmental tax funds. State budget expenditures for financing environmental protection measures will decrease. But the authorities refuse to take all these obvious measures, because the non-targeted use of the environmental tax provides a source of money for more visible and understandable projects for the electorate.
Given the EU's carbon regulation plans, leaving the situation unchanged is very short-sighted. If the targeted use of environmental tax funds is not introduced, they will continue to be dispersed, and the environmental situation will remain the same: due to the high "carbon footprint" in Ukrainian products, businesses will lose solvent markets, and industry will shrink.
Tax pressure: rates will triple
Another problem for the industry may be the already mentioned draft law No. 5600, approved by the Verkhovna Rada in the first reading. The document contains norms that significantly increase the fiscal burden on legal businesses, including industrial ones.
This refers to the strengthening of environmental taxes and fees, which can only lead to one result - a drop in industrial production and GDP, the loss of not only external but also internal markets by Ukrainian industry, from which foreign competitors will benefit. And the increase in the tax itself will not improve the environment, as has already been said above.
In addition, the environmental tax rate will increase unevenly, which also raises questions for businesses. The tax on the placement of safe mining waste dumps is proposed to be increased threefold - by 200%. While the environmental tax rates on hazardous waste, including toxic substances, are proposed to be increased by only 5%.
Such an approach can lead to a deterioration of the environmental situation in Ukraine. Not to mention that this is clear discrimination against mining and metallurgical, ferroalloy enterprises and refractory manufacturers. Their costs will significantly increase, and business investments in production, modernization and ecology, on the contrary, will fall.
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The initiatives of officials regarding ecology are unlikely to find understanding among businesses, not to mention zero support for these ideas. Much of the above is perceived by industrialists as an unsystematic and fragmented policy. A policy that ignores real problems and needs. Therefore, there is no need to talk about any impulses and incentives for the economy.
Here, it is more about deindustrialization, which the government, either consciously or due to incompetence, reinforces with its decisions. If the situation continues to develop in the same direction, there is a real threat of further primitivization of industrial production. And then – a complete loss of production potential, which will be clearly more expensive to restore than the costs that can now prevent such a scenario.