The introduction of the European Union's Carbon Border Adjustment Mechanism (CBAM) in 2026 could potentially impose big new financial strains on Ukrainian producers, costing them millions in lost trade, unless the EU offers exemptions due to the war with Russia.

As the EU continues to pledge support for Ukraine's military endeavours for “as long as it takes,” it is concurrently advancing the CBAM legislation that could severely impact the already embattled Ukrainian economy. The proposed tax targets carbon-intensive imports such as iron and steel, which are pivotal to Ukraine's export sector.

As relations with Russia soured in the years following the annexation of the Crimea in 2014, trade with its former biggest partner has come to a virtual standstill since the start of the war two years ago, while that with the EU has soared. Moreover, the EU’s decision to temporarily suspend all quotas and duties on Ukrainian imports has only made the EU an even more important trade partner.

But if the EU insist on including Ukraine in the CBAM regime, analysts predict a severe economic downturn for Ukraine by 2026, with potential losses amounting to $1.4bn upon CBAM's activation.

However, Ukraine has a potential get out of jail free card; the legislation includes a 'force majeure' clause that covers natural disasters and war. Despite this, the EU has yet to explicitly assure Kyiv it will grant 'force majeure' and suspend the new duties. The absence of clear guidance from Brussels leaves Ukraine in a precarious position and has made business nervous.

The EU remains unpredictable on trade questions as it comes under pressure from its various member states that are pursuing their own national interests and protective of their markets. The most recent example is the blockage of Ukraine’s border with Poland by Polish farmers, angry about imports of cheap Ukrainian grain, despite the fact that the government in Warsaw has been amongst the Ukraine’s most ardent supporters in its struggle with Russia.

Experts voice concerns that should the EU carbon tax be implemented imminently, Ukraine could face a significant reduction in exports, including a downturn of up to 1.4mn tonnes in pig iron exports, worth $600mn in revenue loss. Similarly, the export of semi-finished products could diminish by 1.3mn tons, resulting in a $640mn loss.

Jozsef Ksapo, ArcelorMittal Krivoy Rog's Director of Technology and Strategy, told RBC that such measures could "bring Ukraine to its knees."