The EU’s Carbon Border Adjustment Mechanism (CBAM), which came into force 1 October 2023, will set a price for the carbon emitted during the production of carbon-intensive goods entering the EU.
The policy is designed to support decarbonisation across the European Union, but how will UK businesses be affected?
Cracking down on ‘carbon leakage’
The EU is developing its climate policy to support widespread decarbonisation across the region. With the implementation of the CBAM, the EU hopes to prevent ‘carbon leakage’ by using their policies to counteract the emissions of less climate-positive goods.
The CBAM will make importers of certain goods to the EU purchase certificates for each tonne of carbon emissions embedded in their goods, with the price being based on average weekly prices in the EU’s Emissions Trading Scheme (ETS).
It is hoped that the EU’s CBAM will reduce imports of carbon-intensive goods and encourage products with cleaner supply chains to be imported to the EU. By levying a cost against the amount of carbon produced in a good’s supply chain, the CBAM will ensure carbon prices are equivalent to the carbon price of domestic production, meaning the EU’s climate objectives won’t be undermined.
The products and industries most likely to feel the impact of the CBAM are one’s with significant carbon leakage risks, such as steel, fertiliser, aluminium, electricity, and hydrogen. This has carved a financial cliff-edge into the horizon of key UK industries.
UK faces losses of “over half a billion pounds a year”
In particular, the UK’s steel and energy industries will be hardest hit by the CBAM. Recent plans to go ahead with further North Sea Oil drilling, despite widespread opposition, will mean the UK’s carbon-intensive energy will face higher prices if exported to the EU. However, clean energy sources are still in the firing line.
A key element of the CBAM is that charges will be levied on energy imports based on the carbon emissions of the exporting country’s entire electricity grid. This means that energy generated by wind and solar but connected to a grid considered to be carbon-intensive could still face “a 40 per cent carbon tax to the EU, despite being 100 per cent clean,” according to Adam Berman, deputy director of Energy UK.
Energy UK have estimated that a continuation of the current carbon price enforced by the EU would lead to “over half a billion pounds per year being transferred from the UK to the EU in carbon taxes” from the year 2026. However, UK steel would be the worst hit sector since 75 per cent of the UK’s steel exports go to the EU, leading to potential costs of £372 million annually based on current prices outlined by the CBAM.
For the UK, easing the impact of the EU’s CBAM would require trade talks in a post-Brexit landscape. Alternatively, Energy UK and UK Steel have called upon the UK government to tie the UK’s carbon price to the EU’s, which would link the emissions trading scheme across the two jurisdictions. An EU spokesperson has already explained that linking the two jurisdictions would require “negotiation and separate agreement.”
In order to ease the impact of the EU’s CBAM, the UK will have to face a series of trade talks over the coming months to determine an amicable arrangement that protects the EU’s carbon strategy without compromising a significant chunk of British industry.
