RWE                            CBM0001

Written evidence from RWE





RWE is one of the world's leading energy companies. Through its four main subsidiaries, of which three are active in the UK (RWE Generation, RWE Supply & Trading and RWE Renewables), the Group boasts a global portfolio of around 41 gigawatts (GW) of generating capacity and 20,000 employees worldwide.


In the UK, RWE is also one of the largest power generators, employing over 2,600 people with a diverse operational portfolio of over 9.3GW of onshore wind, offshore wind, biomass, hydro and gas - generating enough electricity to power c.10 million homes, equivalent to around 12% of all electricity generated in the UK. For an overview of our UK footprint, see our UK Infographic here.





RWE is sceptical about Carbon Border Adjustment Mechanisms (CBAMs) as instruments to protect against carbon leakage. Ultimately, global decarbonisation requires global cooperation and comparable multi-national regimes for climate protection. While carbon leakage should clearly be avoided, it is best addressed at source by ensuring shared climate ambition, comparable approaches to carbon mitigation – including on carbon pricing - and the deployment and use of comparable low-carbon technologies and products.


The extension of international carbon markets and carbon pricing provides a much more comprehensive and efficient approach to tackling carbon leakage. With the successful launch of the UK Emissions Trading Scheme earlier in 2021, UK Government attention should focus on fulfilling the Trade and Cooperation Agreement’s commitment to explore linking between the UK and EU emissions trading schemes. Linking would reduce the need for CBAMs in the ETS covered sectors and avoid the burdensome alternative of UK and EU governments imposing import tariffs equal to the difference in their respective carbon prices to achieve much the same result.


CBAMs face a raft of practical implementation problems and, ultimately, only have a partial and limited effect on the potential for leakage. The methodologies to calculate the carbon content of imported goods will be complex, indeterminate and subject to significant challenge and dispute. CBAMs would also need to be compatible with WTO rules on non-discrimination which raises questions about the comparability of third-country carbon mitigation and pricing schemes and further amplifies the practical challenges. While CBAMs may provide producers with limited protection from imports, they do nothing to alleviate the challenges faced by industry competing in global export markets and likely reciprocal measures in other jurisdictions have the potential to harm export prospects further. CBAMs are therefore best seen as an imperfect, last resort means to push for comparable ambition and action rather than as a perfect solution to carbon leakage in their own right.



Answers to specific questions in the call for evidence


  1. What are the risks to the UK posed by carbon leakage? How effective is the Government’s current approach to tackling carbon leakage?


Significant investment is required to achieve the UK’s decarbonisation goals. Robust carbon pricing and other support mechanisms will be required to support the energy transition and to decarbonise all sectors of the economy. Decarbonising UK industry that competes in global markets will be particularly challenging if the increased cost of low carbon products and technologies leads to the “offshoring” of UK emissions via imports from countries with less stringent emissions regulation crowd out the adoption of new low-carbon products and technologies in the UK.  Ultimately, UK consumption needs to be zero carbon, but this is best achieved through multi-national frameworks so that imported products have the same implicit carbon cost without the need for complex CBAM frameworks.



  1. What role could a carbon border adjustment mechanism (CBAM) play in addressing carbon leakage and meeting the UK’s environmental objectives?


The best protection against carbon leakage is the adoption of multi-national frameworks for carbon markets and pricing to ensure that our global decarbonisation ambitions can be delivered at least cost to the UK and our international partners. While CBAMs have the potential to prevent the uneconomic leakage of emissions from the UK to producers elsewhere, they will not in themselves secure the investment required in new product standards and technologies to decarbonise all sectors of the economy.



  1. Should the Government pursue a unilateral CBAM? If so, why and what form should this take? If not, are there alternative approaches to addressing carbon leakage which the Government should be considering?


The UK Government’s primary tool to tackle carbon leakage should be the linking and expansion of carbon markets. Most pressing in this regard is the linking of the UK ETS to the EU ETS.  This would level the playing field for UK and EU industry and avoid the need for a CBAM on the covered sectors. This would avoid the unnecessary and burdensome outcome of the EU and UK both pursuing their own CBAMs and imposing tariffs on their respective imports to correct for any difference in carbon prices to achieve much the same result.


Linking UK and EU emissions trading schemes would provide a model for further linking and expansion of carbon markets with international trade partners and, if necessary, allow the UK and EU to coordinate their CBAMs to incentivise trading partners to adopt carbon markets.



  1. If the Government were to introduce a CBAM, which products or sectors should be included and why?


If deemed necessary, CBAMs should be focused on those carbon and energy intensive industrial sectors that are most exposed to international trade. The benefits of any CBAM are likely to dissipate beyond these sectors as the protection against leakage falls and the practical and administrative challenges associated with the calculation and application of any tariffs rises significantly.


Any UK CBAM should also be developed in the context of the CBAM proposed by the EU and the UK-EU Trade and Cooperation Agreement. Given the high degree of alignment between UK and EU climate ambition and carbon pricing – and the possibility of linking the ETSs - the UK should coordinate any CBAM with the EU, This would also suggest similar sectoral scope: iron, steel, cement, fertilisers and aluminium.


The EU’s proposed CBAM would also extend to the electricity sector. As noted in the following answer, however, we have serious reservations, about the practicality and merits of applying a CBAM to electricity and would urge that for electricity the most practical and economically correct way to achieve the same would be to link the Emission Trading Schemes



  1. What practical and administrative challenges might arise when designing and implementing a CBAM? How might these be addressed?


Any CBAM faces the practical challenge of defining a fair, objective and efficient basis for calculating the associated carbon content of the product concerned and the relevant price of carbon to be applied. The mechanism must also be capable of providing “credit” for any carbon pricing already applied to the product and/or the adoption of low-carbon techniques. The methodology envisaged for the EU CBAM – involving the calculation and surrender of shadow emissions credits – would appear to address many of these aims.


In the case of electricity, the methodology for charging and applying a tariff is likely to be highly complex and border on the intractable. Specifically, any methodology for electricity border tariffs on imports of electricity from the EU to the UK would need to address the following:


                     Distortion to interconnector flows from the gap between marginal and average carbon intensity. Electricity is produced from a combination of low-carbon and carbon intensive sources. UK and EU prices for electricity – and hence cross-border flows on the interconnections - are driven by marginal costs – including the prevailing cost of carbon for the marginal generation resource. At the same time, the average emissions intensity – and average carbon cost - will vary continuously in response to changes in the proportion of wind, solar, biomass and nuclear resources compared to fossil generation. The “correct” signal for interconnector imports and exports would rely on the actual marginal difference in the real-time UK and EU carbon prices for each half-hour. However, in practice any tariff methodology is likely to rely on an average calculation of carbon intensity and/or historic carbon prices. This raises the possibility of interconnector flows “in the wrong direction” which is not only inefficient and costly, but which threatens to increase overall emissions (e.g., if the tariff results in an inefficient switch to either side of the interconnector generating more from fossil fuels to export).  A “border tariff” also threatens to create a pricing “dead zone” between EU and UK markets where no power flows at all until the price differential between the markets is sufficient to overcome the (average) carbon border tariff.

                     Point of compliance: identification and reallocation of title to interconnector flows. The capacity and usage of the electrical interconnections are subject to complex multinational agreements. Market participants can purchase the capacity on the interconnections in advance and can nominate flows day ahead for the following day. The UK and EU have also agreed a day-ahead system of “loose volume coupling” to optimise the proposed day-ahead flows in the light of power auction outcomes in the UK and interconnected countries( Netherland, France, Belgium, Norway and Ireland). In some cases, day-ahead coupling will reverse the flows nominated in advance. Market participants can then adjust flows further in intraday markets and system operators may also change the flows to manage their respective transmission systems in real time. This complicates the question of who pays for the carbon tariff and the question of title to the electricity that flows. A further complication is that the physical title to the electricity is separated from the title to the revenues from the price difference between the UK and EU markets as part of the coupling process (i.e., market participants don’t actually own the power that flows). This will complicate the administration of the tariff considerably and further exacerbates the potential for increased cost and emissions resulting from flows in the “wrong direction”.

                     Provision for renewable power to be excluded. The CBAM may need to reflect the possibility that imports could be hypothecated to renewable generation sources using renewable guarantees of origin. This complicates the optimisation and allocation of interconnector flows still further.


Coupled with the prospect of a reciprocal EU CBAM, potentially with a different design, these factors suggest that a CBAM should not be applied to electricity. As noted previously, by far the better approach would be closer alignment and linking of the UK ETS and EU ETS to ensure consistent carbon pricing and optimal cross-border flows.



  1. What impact might a CBAM have on UK (i) industry, (ii) employment and (iii) consumers?


We have not made any assessment of the wider potential impacts of a CBAM.



  1. What risks would need to be managed when designing and implementing a CBAM?


As noted above, any CBAM applied to electricity should seek to avoid any impediment to the efficient flow of electricity and any associated unintended increases in emissions.



  1. What wider opportunities and benefits might arise from introducing a CBAM?


As highlighted above, we see the introduction of a CBAM as being an inefficient and complex tool for addressing the cost of carbon.  However, ultimately, we could see some rationale for its introduction to support/push other nations to implement carbon pricing schemes equivalent to those adopted in the UK (and Europe).



  1. How might a CBAM interact with the UK’s international obligations, including on trade and the environment?


The interaction of CBAMs with the EU-UK Trade and Cooperation Agreement would appear to present significant (additional) areas for difficulty and negotiation. Further complication arises again here in the electricity sector as Northern Ireland remains within the EU Single Electricity Market under the Northern Ireland protocol.



  1. Should the CBAM design include any special regard, e.g. for developing countries or small and medium-sized enterprises? If so, which circumstances should be given special regard, and what impact might this have? If not, why not?


No. CBAMs are designed to avoid emissions leakage and it would be self-defeating to provide for exclusions. Any exclusion invites the bypass of the obligation by routing products through the excluded country or company.



October 2021