In a column in the January issue of Energy in Buildings & Industry, Andrew Warren, Chair of the British Energy Efficiency Federation, considers the introduction of new ‘green tariff’ rules set to impact on any high-carbon goods entering into the EU and the need for the UK government to deliver on its commitment to secure a bridging deal that would avoid potentially costly repercussions for UK businesses.
Implications of the Carbon Border Adjustment Mechanism
This year marks 35 years since the publication of “Our Common Inheritance”, arguably the most influential UK government policy paper on energy and the environment. It was the first to spell out how prices paid for energy use must reflect the ecological damage production causes.
This January the European Union is taking the most important step yet to ensure this vital principal has worldwide implications. It is now implementing the Carbon Border Adjustment Mechanism (CBAM).
For the past two decades, many European manufactured goods have included materials, the production of which has included the cost of involvement within the EU Emissions Trading Scheme (EU:ETS).
Products manufactured entirely outside the EU:ETS frequently have avoided such overheads, thereby undercutting European-made goods. What CBAM is designed to do is simply to level the playing field, removing that distortion. It will charge importers for the carbon price of their goods End of case.
Levies will be imposed on iron, steel, cement, fertilisers, aluminium, electricity, and hydrogen imported from jurisdictions without a carbon price comparable to that set through the EU:ETS. The levy will apply to around $120bn of upstream products imported to the EU from around the world.
This level playing field is precisely the key policy objective set out back in 1991 when the then Environment Secretary, Chris (now Lord) Patten, published “This Common Inheritance”. It emphasised the environmental damage caused by the production of every type of energy. From mining that produces coal or uranium for nuclear power; from gas and oil fields; from land take; noise and visual pollution; and disruption to fisheries and agriculture.
The most immediate response came from the European Commission , which proposed a new tax upon energy consumption, at $10 per barrel of oil equivalent. This was fought off by energy suppliers, emphasising the inflationary implications upon fuel prices. Instead, it was agreed that a new trading system between companies should be created. But not trading energy consumption allowances. Instead, emissions from one of the six key identified greenhouse gases causing the climate to change, carbon dioxide.
Cap and trade system
After an initial voluntary trial in the UK only during the 1990s , came a European-wide mandatory system, the EU:ETS. Launched back in 2005, it has helped achieve very significant reductions in emissions from power and heavy industry, cutting them by around half. It functions as a “cap and trade” system, incentivising innovation in cleaner technologies, driving fuel systems, raising billions for green investments, and crucially establishing a global precedent for carbon pricing.
(Full personal disclosure: I was a member of the official working party that created the experimental UK scheme, I was also heavily involved with creating the EU:ETS).
Just before Christmas, the European Commission set out proposals to further strengthen the policy in response to industry fears that some appliances, machinery, and other products made using carbon intensive imported materials could avoid paying any CBAM levies. It is proposing to “close loopholes to prevent circumvention” by expanding the scope of the CBAM to include 180 specific steel and aluminium-intensive downstream products, the vast majority of which are used in industrial supply chains.
All of this is very material to many UK exporters. Because post the Brexit vote a decade ago, the. UK perversely opted out of the EU scheme, and operated its own semi-clone UK:ETS. This very largely mirrors the original scheme, but in some subtle ways diverges- sufficiently to mean that the trading price per unit has regularly been 20% or more lower than the European scheme.
The new Government has consistently made noises about linking the two schemes again. Rather like the also non-EU Swiss have done. Several other non-EU countries have opted to participate fully in the original scheme. Officially, the UK is gearing up to introduce its own CBAM in 2027, although there is little evidence of progress as yet.
British exporters across carbon-intensive industries, including steel along with heavy manufacturing like concrete and chemicals, were hoping for a “bridging” deal that would shield U.K. businesses from CBAM levies while ETS linkage was being negotiated. None has materialised.
Steel industry concerns
“The EU CBAM creates barriers to U.K. steel exports to Europe and piles additional costs and admin onto our steelmakers at a time when global trade is increasingly turbulent,” warns Frank Aaskov, UK Steel’s director for energy and climate change policy.
The ripple effects of the EU’s new policy are also expected to lead to steel from abroad being diverted to the less protectionist U.K., providing further competition on the domestic market for beleaguered producers. “Our U.K. steel industry is largely unprotected as the EU CBAM risks redirecting steel flows away from Europe and into open markets like ours,” Aaskov adds. He argues this was arguably “worse” than the CBAM charges themselves.
The EU’s CBAM began its transitional phase two years ago. Importers of products covered by the rules required to report every quarter on their embedded direct and indirect greenhouse gas emissions. In an assessment of this transitional, the Commission said it had been a “key driver in the promotion of decarbonisation in countries outside of the EU, partly due to the outreach and technical assistance provided to facilitate implementation”.
After the initial phase ,it is expected to gradually expand CBAM to cover a wider variety of imported products and materials in the coming years, with chemicals and polymers expected to be among those included next year.
Full inclusion in the CBAM for all products covered by the EU’s Emissions Trading Scheme (ETS) – itself set to expand to include a wider range of emissions like surface transport and buildings- is scheduled to be completed from 2030. A brave new world is emerging. With the UK much on the sidelines.
Energy in Demand - Sustainable Energy - Rod Janssen 