The European Union plans to introduce a tax on carbon-intensive products later in the decade, but this risks creating more post-Brexit problems on the island of Ireland, by landing importers of British goods. with potentially costly new procedures.
The Carbon Border Adjustment Mechanism (CBAM) was proposed by the European Commission in July 2021 and has been promoted by the EU as a way to protect companies as they decarbonise and prevent carbon leakage, where companies are leaving Europe for places where it is cheaper to pollute.
The CBAM proposal, which is currently being negotiated by the European Parliament and EU governments, would see a trial period start in 2023 and the tax come into force in 2026.
When fully implemented, it would apply a tax on certain carbon-intensive products – for now, electricity, iron and steel, cement, aluminum and some fertilizers – if produced. outside the European Emissions Trading System (EU ETS) with a lower carbon price than the EU.
The UK is one of the countries most exposed to the tax, with iron, steel and aluminum exports particularly vulnerable, according to trade expert Sam Lowe.
And, even if the price of carbon in the UK is high enough to avoid the application of the tax, there will still be potentially costly barriers to overcome in order to import products from Northern Ireland and the United Kingdom into Europe. .
The political situation in Northern Ireland adds an additional level of complexity to the process. This is due to the Northern Ireland Protocol, put in place after Brexit to avoid a hard border on the island of Ireland.
If EU buyers purchase Northern Irish products covered by CBAM through the proposed scheme, it would “create a new regulatory trade barrier between Northern Ireland and Ireland and undermine the rationale for the protocol”, according to Lowe.
Asked about the potential conflict between CBAM and the Northern Ireland protocol, a UK government spokesperson told EURACTIV:
“Cooperation and dialogue on carbon pricing remains of great importance as both sides strive to achieve ambitious climate goals,” they added.
The Irish government is also watching it closely.
“Ireland welcomes the ambition of the CBAM regulation and recognizes the importance of tackling carbon leakage, encouraging third countries to use greener production methods,” an Irish government spokesperson told EURACTIV. .
“We are working with the Commission to examine the potential implications of the proposal for the island of Ireland, including the interaction of the proposal with the Protocol on Ireland/Northern Ireland and the single market of electricity on the island. We will address the details of these issues in the coming weeks,” they added.
In the meantime, in Brussels, the Commission hopes to tackle the problem during the period of setting up the system. During this period, no charges will be applied and the EU executive will have “a clearer view of the implementation of the protocol on Ireland/Northern Ireland”, a spokesperson told EURACTIV.
Solutions for a tricky problem
The EU has made it clear that there will be no exemptions under the CBAM for countries outside the EU ETS. According to an EU official, “the CBAM regulation provides exemptions only for countries participating in the EU ETS or fully bound to the ETS”.
Indeed, any derogation could call into question the compatibility of the system with the rules of the World Trade Organization, rules that the EU has taken great care to respect.
The obvious solution to the precarious situation that Northern Ireland could face is for the UK to join the EU ETS, or at least tie its carbon price to that of Europe.
However, the UK left this system at the end of 2020, establishing its own emissions trading system (UK ETS).
While Northern Ireland remained in the EU single market for goods after Brexit, it also left the EU ETS, with the exception of Northern Ireland electricity generators which remained under the EU ETS.
For this reason, the CBAM tax would not apply to electricity, an EU official told EURACTIV, but other goods will be covered by the tax. “As long as the price of carbon in the UK is as high as in the EU, the CBAM on goods imported from the UK will be zero,” an EU official told EURACTIV.
But that would not exempt Northern Ireland from the bureaucracy involved in enforcing the levy or the regulatory trade barrier it would put in place.
Another way around the problems arising from CBAM and the Northern Ireland Protocol would be for the levy to only apply to goods imported into Northern Ireland if they are destined or likely to enter the EU, suggested Lowe. But he warned that this does not solve the problems of products made in Northern Ireland.
“Now that we have a legislative proposal, we will discuss it with the UK with a view to its practical implementation,” an EU official said.
“The CBAM allows for bilateral agreements with other countries, such as the UK, that have carbon markets like the ETS or other carbon pricing mechanisms in place. We have also included in our proposal the possibility to conclude international agreements to define appropriate deduction modalities for carbon prices,” a Commission spokesperson told EURACTIV.
“We remain fully committed to working with all third countries, including the UK, to ensure that all of our international decarbonisation efforts are as effective as possible,” they added.
[Edited by Benjamin Fox]