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The biggest shake-up of green trade rules for decades comes into force today, as companies selling steel, cement and other high-carbon goods into the EU will have to prove they comply with low-carbon regulations or face fines.
But a lack of clarity on how the rules will be applied, and the failure of the UK government to strike a deal with Brussels over the issue, could lead to confusion in the early stages, experts warned.
Companies should welcome the carbon border adjustment mechanism (CBAM), which aims to create a level playing field between the EU and overseas competitors, said Stéphane Séjourné, the European Commission’s executive vice-president for prosperity and industrial strategy.
“European industrial producers should be encouraged – and not deterred – in their decarbonisation efforts,” he said. “This CBAM reform brings crucial and long-awaited measures to ensure a level playing field between EU and non-EU industrial producers. By strengthening CBAM, we support our industry’s decarbonisation and secure European players’ competitiveness on the world stage.”
Many countries expected the EU to back down on the “green tariff” rules, in the same way that other environmental regulations have recently been watered down, but the bloc has pressed ahead despite protests from China, the US, Australia and others.
Chinese steel could lose its price advantage over European steel, for instance. However, that could create a glut of steel and other high-carbon products, which some fear could be dumped at low prices into the UK and other markets instead. The UK is expected to bring in its own CBAM next year.
Under the EU rules, exporters to the bloc can buy certificates to cover the carbon emissions generated in the production of their goods. The CBAM is intended to make sure that competitors from countries with poor environmental standards cannot undercut EU businesses and to prevent “carbon leakage”, when producers move to regions with lax regulations because those countries have a cost advantage.
Initially, the rules will cover iron and steel, aluminium, cement, hydrogen, electricity and fertilisers.
CBAMs in Europe and the UK would help to protect domestic producers, said Diana Casey, the executive director of the Mineral Products Association in the UK, which includes cement producers. “The challenge for us is that the rest of the world is not keeping up in terms of decarbonisation. That’s making production of products like cement much cheaper outside Europe as a consequence,” she said.
Imports to the UK of cement had tripled, she said, from about 10% of the market a decade ago to about a third currently. “We need the CBAM to level that carbon cost playing field,” said Casey. “We really do view it as quite fundamental to securing the future of cement production here in the UK.”
Although EU industries had supported the CBAM, which will impose on imports a version of the same carbon regulations they face within the bloc, some have warned of higher prices because they will no longer receive free allowances covering the carbon dioxide they produce, within the EU’s emissions trading system, but will have to buy them instead.
Adrien Assous, the executive director of the Sandbag thinktank, said the effect on prices was likely to be muted, at least at first. “[The CBAM will have] a superbly beneficial impact for EU decarbonisation,” he said. “But the impact of the CBAM [on prices and the economy] in the first few years is going to be quite mild. We’re arguing about a problem that is not very big because the amount of emissions covered is not very big.”
British companies were hoping not to be penalised under the CBAM, as the UK already regulates carbon emissions. The UK and EU have been working on linking their carbon markets, but that has not yet happened, and a proposed deal to exempt the UK from the start has proved elusive, meaning British companies could be drawn into the net.
Wopke Hoekstra, the EU’s climate commissioner, told journalists before Christmas that UK companies had little to be concerned about from the CBAM, despite the lack of a deal, and once the two carbon trading schemes had been linked, the issue of aligning with the CBAM could be straightforward.
“The price it [the UK] will be paying is actually minimum,” he said. “My assessment is that if the full linkage of the [carbon markets] has taken place, then it is likely that there is nothing in the bookkeeping and nothing in terms of the paperwork that still needs to be done.”
Electricity from the UK, which exports renewable energy to EU countries when the wind blows strongly and there is too much wind power for the UK’s grid, should be exempted from the CBAM, said Adam Berman, the director of policy and advocacy at Energy UK. “[It would be] a baffling outcome to effectively disincentivise the imports of clean electricity into the EU,” he said.
The EU has also moved to expand the scope of the CBAM in future, to products that use steel and aluminium, such as machinery and electric appliances, from 2028. This is to ensure that manufacturers do not try to circumvent the carbon rules by relocating their manufacturing to sites outside Europe.
A government spokesperson said: “We are delivering on our commitment to secure a carbon linking agreement with the EU as soon as possible, which will exempt British businesses from over £7bn worth of export charges. We continue to work closely with the European Commission to support our world-class manufacturers and ensure that green investment in the UK results in decarbonisation here and overseas.”
