Energy UK response to the HMT and HMRC Consultation on the introduction of a UK CBAM

Executive summary

Energy UK members support the introduction of a UK CBAM as this will reduce the risk of carbon leakage, whilst also creating an incentive for other countries to implement robust carbon pricing schemes to maintain international competitiveness. However, when considering jurisdictions with similar Net Zero ambitions, a CBAM is a barrier to trade – both via non-tariff barriers and, when there is a carbon price differential, a tariff barrier. It is therefore important that the UK CBAM is designed in such a way as to accurately reflect the carbon price differential in the tariff and minimise the administrative burden on industry.

To remove the need for CBAMs between Great Britain and EU or European Economic Area countries, Energy UK strongly supports an agreement between the UK and EU to link their respective emissions trading schemes. As this will take time to negotiate we would urge the Government to pursue bilateral engagement with the EU on a bespoke EU-UK CBAM agreement as soon as possible and ahead of the EU’s CBAM implementation date of 1 January 2026 – this could take the form of an exemption via electricity market coupling or a recognition of the equivalence of the two ETS. This would result in reciprocal exemption from both UK and EU CBAMs of products where carbon leakage risk is low, or where there are particular challenges in applying a CBAM. Such reciprocal exemptions could be conditional on criteria that indicate carbon leakage risk is low, could be time-limited or subject to periodic review. Most members agree with the minded-to position on the scope of the UK CBAM in this consultation. A minority of members believe that the inclusion of electricity in the UK CBAM could be considered as an interim measure to address asymmetric risks for GB electricity generators caused by differences in scope between the UK and EU CBAMs. Including electricity in the scope of the UK CBAM could also be considered to prevent carbon leakage should there be electricity interconnection between GB and non-EU or non-EEA countries without their own carbon pricing regimes in future.

Whilst we support the UK CBAM’s introduction, the Government must also recognise it will lead to higher prices for clean energy projects by raising the cost of procurement for low-carbon generation and infrastructure, which should be reflected in wider policy and regulatory frameworks. The UK must learn lessons from the implementation of the EU CBAM to avoid creating uncertainty for industry. It is also unclear how the UK and EU CBAMs will impact the Single Electricity Market (SEM) between Ireland and Northern Ireland, and how it will apply to the two electricity interconnectors between GB and the SEM – one of which connects with Northern Ireland and one with the Republic of Ireland. The UK Government should work closely with the Irish Government to seek immediate clarity about how the European Commission intends to apply the EU CBAM on electricity trade between GB and the SEM, and whether the market coupling exemption can apply to individual interconnectors that are either coupled between day ahead markets or intraday markets.