EU levy on steel and electricity could create bureaucratic hurdle for UK businesses

• Read the report: Documents considered by the Committee on 14 June 2023
• European Scrutiny Committee

The Carbon Border Adjustment Mechanism (CBAM), approved in May 2023, effectively extends the EU’s Emissions Trading System (ETS) to imports of industrial products like hydrogen, electricity, iron, cement, fertilisers, aluminium and certain categories of steel.

Through the ETS, the EU sets a cap on how much carbon businesses within the bloc can produce within the year. Firms are required to purchase a permit for each unit of carbon they produce, which they can trade with others. The scheme is intended to provide a financial incentive for businesses to cut emissions.

Since January 2021, the UK has run its own ETS, but - in new analysis - the European Scrutiny Committee has raised concerns about how the new CBAM will interact with the UK’s existing scheme.

If the EU ETS price is higher than the UK, it is unclear whether carbon-emitting UK businesses, having already paid a carbon price in the UK, will have to pay the difference when exporting products to the EU. Under all scenarios, they will need to report how much carbon is embedded in products and document the price already paid on that carbon, potentially creating a serious burden on UK businesses exporting to Europe.

The Committee notes that electricity traded between Northern Ireland and the Republic of Ireland will likely be exempt from EU CBAM, meaning that the CBAM levy would almost certainly be applied to electricity traded between Great Britain and Northern Ireland. Indeed, warns the Committee, EU CBAM may be applied to all affected goods moved from Great Britain to Northern Ireland.

Additionally, the Committee highlights the Government’s analysis that application of EU CBAM to imports into the EU could cause third countries to divert carbon-intensive products to the UK. 

The committee’s analysis, published today, urges the Government not to respond to EU CBAM by basing its domestic carbon leakage policy on the approach adopted by the EU. It notes that the issues raised could be resolved by linking the UK ETS to the EU ETS but that any such policy development would require thorough analysis.

Also included in today’s publication:

Windsor Framework: New EU Machinery Regulation

Updates the EU’s safety requirements for machinery products. These apply to Northern Ireland under the Windsor Framework and could affect the UK market as a whole.

Windsor Framework: EU State aid rules for industry

Allows EU countries to subsidise firms more generously, resulting in the UK government responding to protect competition between EU and UK firms.

Windsor Framework: Veterinary medicines

Extends the ‘grace period’ on negotiations to permanently implement the EU veterinary medicines framework in Northern Ireland until 2025, with conditions for the UK.

Windsor Framework: EU Emissions Trading System

Applies partly to Northern Ireland and commitments on carbon pricing under UKEU Trade and Cooperation Agreement.

Windsor Framework: EU electricity market design

Relevant to the UK’s own market design proposals, as it affects electricity trade with both the EU and Northern Ireland.

Euro 7/VII: New EU pollutant emission limits for road vehicles

First regulation to set limits on non-tailpipe emissions from car tyres, with potential consequences for the UK’s automotive industry.

Further information

• About Parliament: Select committees
• Visiting Parliament: Watch committees

Image: UK Parliamentary/Tyler Allicock