FEU raises alarm over CBAM's economic impact

During a high-level meeting chaired by Prime Minister Denys Shmyhal focused on deregulation and removing administrative barriers to business, the Federation of Employers of Ukraine identified the EU's Carbon Border Adjustment Mechanism as a critical threat to Ukraine's export economy. The FEU presented compelling evidence that the European carbon tax would devastate certain sectors of Ukraine's export industry if implemented as currently scheduled. According to the federation's January study, CBAM would immediately trigger a 50.6% reduction in Ukrainian exports of affected products to the European Union. This dramatic contraction represents a significant blow to an economy already struggling under wartime conditions. The federation emphasized that CBAM stands among the most urgent factors impeding normal business operations in Ukraine, requiring immediate intervention at both national and international levels to mitigate potentially catastrophic economic consequences.

Projected long-term damage to Ukrainian exports

The FEU's comprehensive analysis paints an increasingly concerning picture of CBAM's impact over time as carbon pricing in the EU escalates. While the initial shock would reduce exports of affected products by $1.8 billion in 2026, the federation projects that losses would expand to $2.3 billion by 2030 and reach $2.4 billion by 2034. This progressive deterioration reflects the mechanism's design, which links border carbon fees to the rising price of emissions allowances within the EU's Emissions Trading System. For Ukraine's steel, cement, aluminum, fertilizer, and electricity sectors, these projections represent an existential threat to their European export markets. The federation's analysis suggests that without intervention or accommodation, Ukrainian producers in these sectors face a stark choice between absorbing unsustainable carbon costs or abandoning EU markets altogether, with profound implications for industrial employment and economic stability in Ukraine.

Force majeure argument gains traction

The federation's advocacy centers on invoking force majeure provisions within the CBAM regulatory framework, arguing that Ukraine's wartime circumstances justify exceptional treatment. This approach acknowledges the legitimacy of the EU's climate objectives while seeking temporary accommodation for Ukraine's unique situation. The FEU's position has gained support from economic experts who note that Ukraine's industrial base is operating under extraordinary constraints, including power shortages, logistical disruptions, and production facilities damaged by Russian attacks. These conditions severely limit Ukrainian producers' ability to invest in emissions reduction technologies that might otherwise mitigate CBAM's impact. The force majeure argument represents a pragmatic diplomatic approach that avoids directly challenging the EU's climate policy while creating space for a more gradual transition that reflects Ukraine's wartime reality and post-war reconstruction needs.

Tariff liberalization extension sought

Beyond CBAM postponement, the FEU emphasized the critical importance of extending the EU's Autonomous Trade Preferences for Ukrainian goods beyond their current expiration date. This tariff liberalization has provided vital economic support to Ukraine during the war, helping maintain export flows despite massive logistical and production challenges. The federation views continued preferential market access as essential to Ukraine's economic resilience and eventual recovery. The potential simultaneous expiration of trade preferences and implementation of CBAM would create a "double shock" for Ukrainian exporters, potentially overwhelming their adaptive capacity during wartime. The FEU's advocacy for continued tariff liberalization reflects a broader concern about maintaining Ukraine's economic integration with European markets as a foundation for post-war reconstruction and development, particularly as the country pursues its EU membership aspirations.

Domestic business environment challenges

The federation's representations to Prime Minister Shmyhal extended beyond international trade concerns to highlight several domestic factors constraining business activity. Particularly troubling is what the FEU characterized as excessive pressure from law enforcement agencies on business operations. The federation called for reinstating a moratorium on certain investigative actions, conducting a comprehensive audit of ongoing proceedings, and adopting amendments to Ukraine's Criminal Procedure Code developed with business community input. These governance issues compound the challenges posed by international factors like CBAM, creating a multilayered crisis for Ukrainian businesses. The FEU also highlighted insufficient business lending and difficult access to credit resources as significant constraints on business activity and economic recovery, alongside restrictions on foreign exchange payment timing that complicate both exports and imports of technically complex equipment.

Government response and next steps

Following the meeting, the FEU submitted a formal letter to Prime Minister Shmyhal detailing its analysis and recommendations. The government's response will be closely watched by business leaders and economic analysts as an indicator of Ukraine's diplomatic strategy regarding CBAM and broader economic resilience measures. The Prime Minister's office has acknowledged receipt of the federation's proposals but has not yet announced specific negotiating positions or diplomatic initiatives regarding CBAM postponement. Economic observers note that the government faces a delicate balancing act between advocating for Ukraine's immediate economic interests and maintaining alignment with EU climate policy as part of its broader European integration agenda. The coming weeks are expected to reveal whether Ukraine will pursue a formal diplomatic initiative seeking CBAM exemptions or postponement, potentially in coordination with other affected non-EU countries.

Broader implications for EU-Ukraine relations

The CBAM controversy emerges at a sensitive juncture in EU-Ukraine relations, as Ukraine pursues its EU membership candidacy while simultaneously managing wartime economic challenges. The carbon border tax issue illustrates the complex interplay between the EU's climate leadership ambitions and its geopolitical commitment to supporting Ukraine. Some European policy experts have suggested that the EU's application of CBAM to Ukraine without accommodation would contradict its broader support for Ukraine's economic resilience. Others note that CBAM exemptions could create precedents affecting the mechanism's application to other trading partners. The debate highlights fundamental tensions in reconciling climate policy with geopolitical and humanitarian considerations. How the EU responds to Ukraine's concerns about CBAM will likely influence not only bilateral economic relations but also perceptions of the EU's capacity to balance climate objectives with other strategic priorities.

International context and comparative approaches

Ukraine's concerns about CBAM mirror those raised by other developing and emerging economies, though with the additional dimension of wartime circumstances. Countries including Brazil, India, and South Africa have criticized the EU's carbon border adjustment as potentially protectionist and disproportionately burdensome for economies at different development stages. Some jurisdictions have secured partial accommodations or transitional arrangements based on their specific circumstances or existing climate policies. For Ukraine, these international precedents may provide useful templates for potential compromise solutions. The FEU's advocacy occurs within this broader international context of ongoing dialogue about equitable approaches to climate transition. Ukraine's unique wartime situation potentially strengthens its case for exceptional treatment, while the broader debate about CBAM's application to developing economies creates a framework for considering differentiated implementation timelines or support mechanisms.

Key Takeaways:

• The Federation of Employers of Ukraine warns that the EU's Carbon Border Adjustment Mechanism could reduce Ukrainian exports of affected products by 50.6%, representing a $1.8 billion loss in 2026, escalating to $2.4 billion by 2034.

• The FEU is urging the government to negotiate with the EU for a CBAM postponement based on force majeure provisions, citing Ukraine's wartime circumstances as justification for exceptional treatment.

• Beyond CBAM concerns, the federation highlighted several domestic challenges including law enforcement pressure on businesses, insufficient access to credit, and restrictions on foreign exchange payments that collectively impede economic recovery.