Assessing the impact of the EU carbon border adjustment mechanism on Kazakhstan

Introduction

The Carbon Border Adjustment Mechanism (hereinafter, CBAM) is a policy tool introduced by the European Union in 2023 as part of the Fit for 55 program². CBAM is currently in a preparatory phase, but from 2026, 6 key sectors - cement, fertilisers, iron and steel, aluminium, and electricity - will begin to be taxed at EU borders. Though there exist several proposed coverage levels for CBAM, and a potential expansion into more sectors is in discussion, it is already clear that this tool will have profound impacts on global trade chains and trends. 

A particularly noteworthy impact is projected to be experienced by Kazakhstan, a large raw material exporter in Central Asia with extensive trade links to the EU. The EU is Kazakhstan’s largest trading partner, and accounts for a remarkable 37% of total Kazakh exports in 2024 - equivalent to $36.01 billion⁹. In its turn, Kazakhstan is a close regional ally to the EU, as it was the first Central Asian country the EU concluded an Enhanced Partnership and Cooperation Agreement with in 2015. 

The World Bank (2022) notes that CBAM impact on any particular country will strongly depend on the following: elasticity of demand, level of cost pass–through to consumers, local emissions intensity, emission reduction opportunities relative to that of competitors, opportunities to divert exports, and the ability for exporters to measure and report emissions⁸. Although some of these variables are hard to quantify, Kazakhstan stands out with its comparatively high carbon intensity of production, and underdeveloped domestic ETS¹³. There thus remains a need for a structured impact assessment that focuses on every particular segment of the value chain production in Kazakhstan, including upstream, processing, trade, and downstream segments. 

Impact analysis

Out of the 6 currently covered sectors, Kazakhstan’s trade with the EU only concerns 4: aluminium, iron & steel, cement and fertilisers (hydrogen and electricity trade is not present). This constitutes less than 0.5% of current total exports, and is equivalent to €697 million in 2022⁵. However, under an expanded CBAM, more than 3% of exports from Kazakhstan would be covered, due to the potential expansion to petroleum products and chemicals⁸. This will have a more tangible impact across the whole value chain of production, potentially causing export losses of up to $1.4 billion, a significant increase from the current $66-250 million per year estimation¹³. Thus, the present CBAM impact analysis is conducted with regard to all segments of the value chain in Kazakhstan, and with consideration of both current and expanded CBAM.

i. Upstream segment

In the Kazakh upstream segment, the impact of the current CBAM is not felt significantly at this point in time. The largest effect now is on the aluminium sector, which requires bauxite mining and aluminium smelting⁶. This also applies for the mining of other non-ferrous metals like copper, zinc, silver, lead, and nickel. Though it is unclear how the Kazakh mining sector compares with the EU in terms of CO2 intensity, the high total emissions from the aluminium sector indicate a possibly high carbon intensity at the mining stage as well. Hence, it is estimated that mining of non-ferrous metals can decline by 0.22% by 2035 relative to the baseline⁸. 

However, an opposite impact on the upstream segment is projected under an expanded CBAM in terms of commodity extraction. Since the value of EU imports from some carbon-intensive countries will decrease, and EU producers will gain in competitiveness, Kazakhstan may, in fact, increase production of crude oil in order to meet the higher EU demand⁸.  Crude oil production is therefore set to increase under an expanded CBAM (see figure 1), potentially benefiting the Kazakh oil industry.

Figure 1. Value of exports to EU and EU share of global exports for Kazakhstan, annual average 2018-2020. Source: World Bank, 2022

ii. Processing segment

Concerning the processing and value addition stage, CBAM is expected to be more relevant, both in current and expanded versions. Thus, regardless of what Kazakh producers decide to do to address CBAM impacts, emissions intensity should become an important decision-making factor. Currently, ferrous metals and the aluminium sector within non-ferrous metals are set to be most affected in processing, due to their high CO2 intensity in alumina refining, smelting, ironmaking and iron coke fabrication. For instance, Kazakhstan Aluminium Smelter JSC (hereinafter, KAS JSC) - the country’s major aluminium producer - has aluminium production benchmarks that already exceed the 10% worst EU performers. To be precise, KAS JSC stands at 7.63 tCO2 eq/t of product, compared to EU worst producers’ 2.33 tCO2 eq/t of product⁶. Ferrous metals production in Kazakhstan, in its turn, also exceeds EU values by far in terms of emissions intensity, reaching almost 4000 tCO2/million USD, compared to EU’s 200 tCO2/million USD⁸. Given that the aluminium industry is a hard-to-abate one, this might lead to significant increase in processing costs in aluminium and ferrous metals industries, should Kazakhstan disclose said values¹².

 Under an expanded CBAM, the processing cost increase can become even more pronounced, due to the expansion into petroleum refining and chemicals sectors. These industries, though not vital on the scale of the whole Kazakh economy, will also suffer significant competitiveness losses due to their high carbon intensities. In fact, the World Bank (2022) estimates that a loss of competitiveness will decrease Kazakhstan’s exports to the EU in petroleum and coal products by 29.4% under an expanded CBAM, and chemicals by 27.9% (see figure 2)⁸. In chemical processing, this effect will be due to the use of ammonia in primary processing, as it is a highly carbon intensive process⁸. The processing sector will thus be impacted strongly under both present and expanded CBAM, specifically for non-ferrous metals (aluminium), petroleum products, and chemicals.

Figure 2. Modelled real exports by destination and sector, 2035, deviation from ‘Baseline’. Source: World Bank, 2022.

iii. Trade segment and export exposure

Naturally, the largest noticeable impact is then expected to occur in the trade segment over a variety of sectors, resulting from a loss of competitiveness. Industries are likely to be affected unevenly, with the strongest decline threatening the ferrous metals sector and aluminium within the non-ferrous metals sector. Under the current CBAM, ferrous metals exports are projected to decrease by almost 40%, while the smallest percentage changes are expected in chemicals and petroleum products (see figure 3). Given Kazakhstan’s moderate-to-high export exposure to the EU in ferrous metals, this presents a notable risk for producers in spite of overall negligible values of export coverage under current CBAM.

Figure 3. Modelled exports to the EU in 2035, CBAM sectors, deviation from ‘Baseline’. Source: World Bank, 2022.

In fact, under an expanded CBAM, ferrous metals exports are almost twice as affected by CBAM, particularly due to the inclusion of Scope 2 emissions. Additionally, reflecting the inclusion of carbon intensive processing in chemicals and petroleum products, these industries are more exposed. Overall, this totals to up to $1.8 billion export losses by 2035, including around 58% of the total value of Kazakh aluminium exports to the EU⁸. Kazakhstan should thus not underestimate the scale of CBAM coverage, even in its present form, as ferrous metals, non-ferrous metals, chemicals, and petroleum products industry export, on top of upstream and processing stages, will significantly be undermined without additional action by the State.

iv. Downstream segment

Finally, Kazakhstan’s downstream segment is the only one to be projected to benefit from the introduction of CBAM in both of its coverages, as several Kazakh producers will gain a competitive advantage over EU producers. This can occur mainly in motor vehicles & parts, machinery & equipment, and metal products, which currently do not make up a significant portion of Kazakh exports to the EU⁸. The underlying mechanism is that Kazakh manufacturers will not face CBAM costs on their inputs (Kazakhstan’s ETS only has a carbon tax of $1/tCO2eq) and will also not be covered by CBAM directly. This creates an opportunity for increased output and exports, as these products will become more competitive in other international markets compared to EU products, and will also be exported more often to the EU itself⁸. Specifically, exports of motor vehicles, machinery, and metal products to the EU are projected to increase by 1-2% under the current CBAM proposal, and 3-5% under an expanded CBAM (see figure 4). It must be noted, however, that currently Kazakhstan imports machinery and motor vehicles from the EU, and does not have an export-oriented industry ready for such an expansion. Realising this new advantage will thus require sustained policy support for the growth of machinery, motor vehicles, and metal products sectors.

Figure 4. Modelled exports to the EU in 2035, downstream sectors, deviation from ‘Baseline’. Source: World Bank, 2022.

In consequence, CBAM is expected to have a moderately negative impact on Kazakh production in its current proposal, majorly exposing processing and trade stages of the value chain, specifically in the non-ferrous metals and chemicals sectors. In the expanded proposal, more pronounced positive and negative impacts can be expected across all stages of the value chain, specifically upstream and downstream, exemplified by crude oil production and the machinery sector. The potential gains in upstream or downstream production will, however, be coupled with stronger losses in processing and trade, due to a stronger impact. It must also be noted that although general assessments can be made about a certain sector, under both of its proposals, CBAM will not have the same implications for every company or facility within the same industry. This will inevitably depend on the carbon intensity of the specific technology they use, and other business decisions taken by the company/facility in regards to CO2 emissions. 

Timeframe of impacts

To visualise the above mentioned impacts, an expanded Impact Timeframe was constructed, referenced as figure 5 in the annex. The illustration demonstrates that non-ferrous metals (aluminium) will, indeed, be having the most immediate and severe consequences, beginning now. Petroleum, chemicals, and ferrous metals will also experience disruptions, but in a less pronounced and less imminent variation. As time passes, the timeline assumes the implementation of an expanded CBAM, and many more Kazakh sectors are projected to be impacted, despite the fact that the expanded coverage has not been finalised yet. As mentioned above, these sectors are petroleum products, chemicals, and non-ferrous metals.

It can be concluded from the infographic that Kazakhstan faces low-to-moderate CBAM risks in the immediate term, but they are projected to increase substantially, especially in the case that an expansion follows.

Policy recommendations

i. Current policies

Mitigating the impacts of CBAM has become a key priority for Kazakhstan, yet no drastic measures have been implemented so far. Current policy action is characterised by an underperforming KAZ ETS (Kazakhstan Emissions Trading System) and limited efforts to address the concerns of exporting industries.

Since its introduction in 2011, the KAZ ETS has achieved little in terms of emissions reductions. The system currently covers only 43% of national emissions, notably excluding the crucial transport sector ¹³. All allowances are allocated for free, and companies can acquire unlimited additional allowances at no cost⁴. This has resulted in low transaction volumes and an extremely low carbon price - slightly more than $1/tCO2. The system is therefore not ambitious enough to prevent negative CBAM effects at the moment^{7, 14}. To address this, the Government has announced plans to expand ETS coverage by types of economic activity and greenhouse gases covered by 2026, and is considering introducing carbon pricing for the unregulated sectors^{3, 12}. However, it remains unclear which sectors will be included and whether the carbon price will be raised to an effective level.

The Government has also created an interdepartmental working group within the Government, dedicated to investigating CBAM impact¹⁵. However, these measures remain insufficient, as the lack of a robust enabling environment continues to hinder the effective operation of the ETS market. 

ii. Proposed policy solutions

To effectively protect Kazakh exporters from CBAM-related losses, the following range of specific and cross-sectoral actions are recommended.

On a macro level, the main strategy must be emphasising stable political support for sustainability goals and the green transition. This implies strengthening institutional support for low carbon technologies and sustainability measures. For instance, one such policy is the introduction of a legislative framework for environmental regulation, or the creation of a target environmental fund to finance social-purpose investments¹¹. In finance, emphasising sustainability could include the implementation of monitoring and verification of emissions within the power system, to facilitate the decarbonisation of energy supply. Maintaining a strong political momentum will be useful for the increase of the Carbon Tax. In consequence, a raised carbon tax can then become multi-purpose, as carbon revenues can be used for social purposes like investing in schools or renewing the country’s outdated power grid ^{1, 7}. Ideally, this Tax must then aim to reach EU ETS levels, since for example, the incentivisation of CCUS use in aluminium smelting already requires the price to be $210/tCO2¹². These macro measures on the side of the Government should aim to support producer-state relations and emphasise sustainability goals across the whole economy.

Concerning more specific policy strategies, targeted sectoral support to aluminium producers and a fundamental transformation of the KAZ ETS are identified as the most important and urgent actions to be taken by Kazakhstan. Since aluminium producers (specifically KAS JSC) were identified as the first and the most affected actors, this industry can be utilised as an example of sector decarbonisation. This requires several steps. First, improve and harmonise data to assess climate-related risks and emissions sources. Next, digitise and optimise reporting mechanisms for greater efficiency ^{10, 13}. Then, connect aluminium producers to low-carbon electricity grids to reduce Scope 2 emissions. Finally, integrate best available low-carbon technologies, such as CCUS, with government support to minimise costs. As for KAZ ETS, the most important steps are introducing paid allocation of carbon allowances, expanding the possibilities of trading carbon units on different trading platforms, and expanding the coverage of ETS market participation⁴. This will address the most significant challenges of the current ETS identified by researchers, but will also require sustained efforts. Combined with the above macro policies, these measures can potentially alleviate the economic threats posed by CBAM to Kazakhstan’s exporting industries and strengthen domestic carbon taxation.

These steps are further expanded upon in Figure 6 of the annex, assessing their feasibility and potential impacts on the broader Kazakh economy. An additional policy option of export diversification/resource reshuffling is also included, however, it would have significant limitations given the worldwide adoption of measures similar to the EU ETS/CBAM. It can thus only be a temporary policy solution, requiring a different long-term strategy aligned with global decarbonisation trends.

Conclusion

Overall, it has been identified that at present, the EU CBAM presents a low-to-moderate risk for Kazakh industries, but the risk is expected to rise substantially with time, especially in case that an expansion of CBAM follows. Namely, the most urgent impact, spread across the entire value chain, is felt by the aluminium segment within non-ferrous metals and the broader ferrous metals sector. While some downstream industries may see eventual benefits, the immediate and medium-term risks to upstream extraction, processing, and trade competitiveness are significant and growing. Realising the above mentioned downstream potential for benefits will also require industrial expansions and reorientation towards export, which is not present at the moment.

To mitigate these impacts and guarantee a competitive future in an increasingly decarbonising world, Kazakhstan must urgently strengthen its current policy framework and render specific sectoral support. On a macroeconomic level, recommendations include introducing environmental legislation, implementing a comprehensive MRV system for emissions, progressively raising the carbon tax with mechanisms for social beneficial reinvestment, and subsequently creating a carbon fund for transparency purposes. Regarding sector-specific support, the Government should prioritise the aluminium segment and the ferrous metals industry, by introducing enhanced emissions tracking, integrating factories with low-carbon energy infrastructure, and adopting best available technologies to reduce emissions. A firm expansion of KAZ ETS is also indispensable, in order to cover more sectors and phase out free allocation of allowances. 

As Tosun (2022) argues, the cost of adapting to the European Green Deal is less than the cost of being regulated by it without preparation¹⁴. Embracing the global energy transition will thus not only safeguard Kazakhstan’s industrial competitiveness at the moment, but also retain carbon-related revenues within the national economy rather than ceding them to external EU regulators. 

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Annex

Figures 5 and 6. CBAM Impact Timeframe between 2025-2035.

*Infographic created with the use of Canva AI

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