Written evidence submitted by the Chemical Industries Association


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

Risks to the UK posed by carbon leakage

1.1.    Carbon leakage will harm the UK and the climate. When it comes to carbon pricing, the most critical issue for our sector is how we achieve a level playing-field with our international competitors, so that manufacturing emissions are reduced in the UK and not offshored. This would be the best outcome for the UK, securing skilled jobs and advanced manufacturing capability in parts of the country targeted by the “levelling-up” agenda; and it would be the best outcome for the climate, supporting cleaner UK manufacturers with their ambitions to decarbonise.

1.2.    We need a level playing field because we compete on price in a global market. We are also energy intensive, which means energy is our most significant operational cost, and we have already exhausted our economic options for emission abatement. Our industry’s pathway to net zero now depends upon access to competitively priced clean heat and power, as well as carbon capture and storage (CCS) infrastructure to store and make use of unavoidable greenhouse gas emissions resulting from some chemical reactions.

1.3.    Carbon pricing can work for our sector with the right design. That means a long-term, predictable price signal that recognises and accounts for international competitiveness, upstream and downstream impacts, and a sector’s specific pathway to decarbonisation. In the absence of a global carbon price, unilaterally increasing the carbon price for UK operators, without effective carbon leakage provisions, will simply cause our foundation industries to offshore.

1.4.    As participants in the UK ETS, UK manufacturers are already at a disadvantage, owing to the carbon price disparity between the UK ETS and EU ETS, and other manufacturing locations which have a low or no carbon price. Moreover, UK manufacturers are at a further disadvantage, as we face additional direct and indirect carbon pricing over and above our EU competitors. The additional direct cost arises from the UK-only Climate Change Levy charged via our energy bills, whilst the indirect carbon cost comprises the pass-through cost of the UK-only Carbon Price Support (CPS), £18/ tCO2 levied on thermal generators.

1.5.    Success in decarbonising electricity means, paradoxically, we also face higher prices than our competitors in the rest of the world. This price disparity represents the pass-through of cost of: a) Carbon pricing on thermal generation, including the UK ETS and CPS; b) Subsidies for renewable power (Contracts for Difference, Feed-in Tariffs, the Renewables Obligation, Capacity Market); c) The increase in our network’s capacity to balance intermittent and distributed renewables. These pass-through costs have paid for the decarbonisation of the UK’s electricity sector and the UK’s energy-intensive foundation industries have disproportionately footed the bill. Our electricity prices are over 80% above the EU median and far higher than our major competitors.[1] Electricity wholesale costs now represent less than 50% of a UK industrial user’s bill, whilst policy and network costs make up over 50% and rising.[2] UK manufacturers are financing the successful decarbonisation of electricity, at the expense of our own competitiveness.

1.6.    The cumulative burden of rising energy and carbon costs will overwhelm UK industry if the government does not act. Putting aside the current energy crisis, UK gas prices have allowed us to continue to compete internationally despite higher electricity costs. However, the cost of our gas, which we use for heat, will rise if industrial consumers are asked to pay for the decarbonisation of the gas grid as we were with the electricity grid. This process has already started with the government proposals for a Green Gas Levy to support biogas injection to the grid and rumours of a hydrogen levy to follow. Taking the electricity system as a parallel, to date over £50 bn has been spent on policies to support its partial decarbonisation and this figure increases every year. All of this support has only partially decarbonised the electricity grid. To put this in context, the UK’s electricity grid provided 325 TWh of energy in 2018, whereas the UK’s gas demand was 877 TWh. Given the scale of the clean heat transition, and the higher production cost of manufactured green gases (e.g., hydrogen or biomethane), a far more significant amount of long-term financial support is needed to decarbonise the gas grid. The UK’s foundation industries cannot afford to finance the decarbonisation of our whole energy system whilst, at the same time, paying a direct carbon price for emissions that are outside of our ability to abate.



The effectiveness of the current approach to tackling carbon leakage

1.7.    Carbon leakage is already happening in our sector, although the evidence is often not available in the public domain. The reasons behind this are: a) It is very difficult to say any one site closure is because of an energy or carbon price increase. The comparatively high energy and carbon price for large energy users in the UK lowers profit margins. This renders UK manufacturers more vulnerable to whatever one-off shock subsequently results in site closure (e.g., a recession); b) ~70% of our sector is comprised of multinational companies with a global footprint. The comparatively high energy and carbon prices in the UK erode the business case for new investment here so that each year, during budget review, new investment is allocated to sister assets in the EU or elsewhere. The result is that UK assets are being run down rather than renewed. This makes them less efficient and so a more obvious target for closure when a challenge comes along; c) Carbon leakage is not just site relocation, it is new sites opening overseas rather than in the UK. China became the largest producer of chemicals in 2009 and have continued to expand their lead ever since, at the expense of European production. These chemicals are not made using clean energy or with CCS. In Europe, we continue to buy them because they are cheap.

1.8.    The situation is made worse by post-Brexit carbon pricing. Brexit caused the UK to fall out of the EU Emissions Trading System (ETS) and UK participants in that scheme were brought into a UK ETS, which launched on 1 January 2021. The UK’s current approach to carbon leakage prevention is the same as that taken in the EU ETS; free allocation is provided to industrial installations which are susceptible to carbon leakage, according to “benchmarks” set by the top performing installations in a given sector. This provides a price incentive for installations to match those operating at the benchmark, whilst setting the emission reduction goal at a challenging but achievable level. Prior to Phase 1 of the UK ETS - i.e., in Phases 1-3 of the EU ETS - this was a relatively effective carbon leakage prevention mechanism, which helped to preserve the competitiveness of EU industry. However, there are a number of emerging challenges that the UK approach must overcome in order to successfully decarbonise without offshoring industry. These challenges are outlined in bullets 1.9 - 1.13.

1.9.     UKA/ EUA price differential: The creation of a UK scheme brings a new dynamic into play, the price-differential between EU Allowances (EUAs) and UK Allowances (UKAs). Going forwards, a relative increase of the UKA price in comparison to the EUA price is equivalent to the removal of free allocation to UK sites. This new dynamic must be recognised and accounted for. This is particularly important as the UK ETS is expected to see higher, more volatile prices than the EU scheme. An example of this was seen on 29th September, when UKAs were trading at £21/ tCO2 higher than EUAs, a 40% premium for UK industry. The UKA price has remained higher, trading at an average 30% premium up to mid-October. The reasons for the differential are: a) The UK ETS has a lower cap and a more rapidly declining trajectory is anticipated; b) the smaller market is less liquid and more at risk from speculators. These factors are exposing UK industry to higher costs than their EU competitors, heightening the risk of carbon leakage from the UK.

1.10. Calculation of free allocation: The calculation of free allocation is currently based on historical improvements, the rate of which are unsustainable. Physics puts a fundamental limit on the efficiency of chemical reactions – e.g., a specific amount of energy is required to break chemical bonds - and the closer you get to that threshold, the smaller and more expensive the improvement gains become. The low-hanging fruit energy efficiency gains have been exhausted in our sector and the Climate Change Committee (CCC) is clear that our pathway to net zero is dependent on fuel-switching to clean electricity and hydrogen, and on retro-fitting carbon capture and storage (CCS). These are step change technologies, the adoption of which does not result in a smooth decline of emissions over time. The continued linear reduction of free allocation, based on historical improvement, is inappropriate for such a pathway.

1.11. Cluster sequencing: In the Industrial Decarbonisation Strategy the government made clear that our sector will need access to hydrogen and CCS infrastructure to reach net zero. Yet in BEIS’ recent cluster sequencing consultation, the government proposes to stagger the roll-out of this infrastructure. This has the potential to lead to a situation in which a site is able to decarbonise its operations owing to its location in a Track 1 cluster, and that results in an unachievable benchmark for a competitor in a Track 2 cluster. Even without an amendment to the benchmark, it is easy to see how cluster sequencing can unfairly penalise UK ETS operators on the basis of their location. Those operators with delayed access to CCS and hydrogen infrastructure will need to pay for their emissions, whilst their competitors in Track 1 clusters will not. To ensure free allocation remains an effective tool against carbon leakage, it must reflect the availability of low-carbon infrastructure.

1.12. Net zero alignment: As well as reconsidering the calculation of free allocation entitlements over time, we need to ensure that the overall emissions trajectory for the UK ETS – the Linear Reduction Factor (LRF) - respects the accepted decarbonisation pathway for energy intensive industry. Our sites all require access to either competitively-priced clean electricity, hydrogen or CCS infrastructure to decarbonise. Hydrogen and CCS infrastructure will only be available in some clusters from the mid-2020s onwards and there is currently no government plan to afford industry competitive electricity prices. The LRF must respect the technology pathway; the emission reduction trajectory should be shallow, declining more steeply as and when support is received for the roll-out of decarbonisation infrastructure in clusters and for electrification of sites.

1.13. UK ETS late-stage: The Committee on Climate Change (CCC)’s net zero pathway accepts that industry will have residual emissions in 2050, and therefore sites which have reached their maximum abatement potential cannot be exposed to a continually rising cost of carbon ad infinitum. The importance of this issue can already be seen in the ongoing discussions regarding the government’s industrial CCS business models; it has become clear that although a site could decarbonise a significant proportion of their emissions using CCS, they may be left with residual emissions that they are unable to abate for which they would still be exposed to an increasing carbon price. Such a business would have an increasing liability which they would be unable to mitigate.


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

2.1.     Benefits of a UK CBAM: a) it could effectively apply an equivalent carbon price to manufacturers outside of our jurisdiction, thereby levelling the playing-field for manufacturers competing for UK market share; b) it could allow cleaner UK manufacturers to compete on a level-playing field overseas, if the carbon price is refunded on products exported to countries with no carbon price.

2.2.     Design of a UK CBAM: Any UK CBAM should ensure reliable and predictable conditions, and encourage decarbonisation of industry at the lowest cost. It should recognise the issue of international competitiveness and the reality that the decarbonisation infrastructure we depend on (i.e., affordable and reliable clean energy and CCS) are largely out of a manufacturer’s control. To prevent additional carbon leakage pressure, any UK CBAM, and/or our interface with an EU CBAM, must not add additional cost/ administrative burden to business. The legislative environment for carbon pricing and carbon leakage protection is already complex and additional layers of overlapping regulation would complicate matters for authorities and businesses alike. Finally, revenues resulting from any UK CBAM should be channelled exclusively into innovation and low-carbon investment in industry, to assist with the clean transition of hard-to-decarbonise sectors.

2.3.     Industry needs to be involved in the design of a CBAM. The Industrial Decarbonisation Strategy and CCC’s 6th Carbon Budget both advocate consideration of a UK CBAM. Yet, aside from this inquiry there has been no open engagement with stakeholders on this topic, from BEIS or the Treasury. Industry is keen to work with the government to ensure the design of any CBAM allows UK manufacturing sites to remain globally competitive whilst decarbonising their operations.


  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?

Why pursue a unilateral CBAM?

3.1.     The EU are already looking at implementing a CBAM for steel, electricity, cement and chemicals, because they are aware of the risk of carbon leakage and want to reach net zero whilst maintaining a strong manufacturing base. In light of this activity from the EU, it is critical that the UK government acts to improve protection for UK-based industry. We must ensure that we do not end up negatively impacted by an EU CBAM, and we should also investigate whether a UK CBAM could assist in the protection of UK industry. We therefore welcome this inquiry.

3.2.     Consumption vs territorial emission reduction: Territorial emission reduction targets for domestic industry penalise UK manufacturers in favour of more carbon intensive manufacturers overseas, leading to the offshoring of our consumption emissions. The ONS has shown that the UK’s consumption emissions have decreased only modestly (~3% since 1990), whilst our territorial emissions have decreased significantly due to industrial offshoring.[3] The UK government must therefore focus on monitoring and reducing consumption emissions. Measures to encourage the consumption of low-carbon goods, such as a UK CBAM, would help level the playing field for UK manufacturers during the transition to net zero, mitigating the offshoring of emissions. It would also create an incentive for manufacturers overseas to lower their carbon footprint.


Alternative approaches

3.3.     Carbon pricing can work for industry. It has worked well for power because the power sector has a captive market, viable alternatives and significant policy support (£50bn to date, rising to £100bn by 2030). These allow it to pass through the cost to its customers. Industry competes globally for market share so, in the absence of a global carbon price, cannot pass through the cost of decarbonisation to its customers. To reach net zero, industry needs access to a competitively priced and reliable supply of clean energy. The scale of the investment is vast and direct carbon pricing, on top of paying for the energy transition, further erodes the business case for investing in UK assets. For our sector, an effective carbon price would provide a long-term, predictable price signal. It would recognise international competitiveness, upstream and downstream impacts, and a sector’s specific pathway to decarbonisation.

3.4.     The threat of carbon leakage can be removed. Ultimately, we will need to shift the cost of decarbonised production to the end consumer, by creating a market for zero carbon industrial products. Our preferred solution would be that the government press for a global carbon price, using the leverage of its position as host of COP26. This would render CBAMs irrelevant. Alternatively, UK government should push to link the UK and EU ETS schemes such that UK businesses are included under the EU’s CBAM umbrella However, until either of these occur, UK specific measures will be needed. We agree with the CCC’s advise that this could be done through product labelling/ standards or a carbon border adjustment measure (CBAM).[4] We would add that the design of a CBAM would be critical to its success. UK businesses must not be affected by the EU CBAM such that they bear double carbon costs when exporting and are not exposed to competitors with unfair carbon support on the UK market.

3.5.     The UK government must consider all options for maintaining a level-playing field for UK industry, with the EU and the rest of the world, whilst we roll-out the energy and emission infrastructure required for net zero manufacturing. This could be achieved by: a) Levelling the playing field on carbon price e.g., through effective free allocation or linking with the EU ETS; b) Ensuring competitively priced energy supplies by exempting industry from the pass-through cost of policies to decarbonise the power sector, as recommended by Dieter Helm’s Cost of Energy Review; c) Grant support for investments in energy efficiency and industrial decarbonisation; d) Subsidy support for the roll-out of industrial CCS as well as fuel-switching to hydrogen and electricity.

3.6.     The UK must design and implement a comprehensive net zero strategy that enables industry to decarbonise economically, and ultimately become the foundation of the UK’s net zero economy. All net zero pathways for our sector require the use of new production routes that cost 20-80% more than ‘business as usual’, and up to 115% for some of the last emissions to be cut.[5] These differences cannot be borne by companies facing international competition, so supporting policy will be essential. 2050 is only one investment cycle away, and any further delays will hugely complicate the transition.


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

4.1.     Criteria for CBAM eligibility: The eligibility for protection via CBAM must be determined on the basis of a sector’s exposure to carbon leakage risk. We would therefore urge the UK government to engage with the EIIs that would be affected by an EU CBAM as a first step.


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

5.1.     See responses to questions 2 and 3.


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

6.1.     CBAMs are a new, innovative and contentious measure. They raise challenges of fair carbon accounting and reporting, WTO compliance and potential third country retaliation, which will need to be resolved during any test period. See also our response to question 8.

6.2.     The UK government must also consider the risks posed by the EU implementing their CBAM. For those sectors that are directly mentioned in the European Commission’s proposals, steel, cement and fertilisers, there are new risks to trade distortions, particularly of high carbon products from non-EU countries being barred from the EU and dumped on UK markets. There needs to be a symmetrical measure in place to support the position of UK industry.


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

7.1.     No comment.


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

8.1.     UK chemical plants provide high value jobs and revenue in regions of the UK targeted for growth in the Government’s 2019 manifesto. But we face comparatively high energy and climate-related costs which are rendering us increasingly uncompetitive in global trade. Furthermore, the economic and political uncertainty associated with Brexit has squeezed inward investment.

8.2.     Our industry adds £19.2 billion of value to the UK economy every year from a total annual turnover of £55.5 billion. In addition to gross value added, the sector contributes to the UK economy in its position at the head of many supply chains within manufacturing and its employment of a well remunerated, highly-skilled workforce. We support 500,000 jobs both directly and indirectly. The sector’s level of business investment is £4.6 billion, while the expenditure on research and development is £5.4 billion. The products and technologies of the chemical industry are essential parts of medicines, food and drink, telecommunications, energy-saving, IT, clothing and much more. Critically, our sector is the foundation of a net zero economy. We create the advanced materials that go into renewables technologies for energy generation, new zero-carbon fuels for transport and insulation to keep our homes warm.

8.3.     We are the largest exporter of manufactured goods (manufacturing plus distribution) with annual exports of over £55.8 billion. 63% of companies in the sector export what they make to the world, the highest proportion of any goods manufacturing sector in the UK economy. 54% of our exports go to the EU and 73% of our imports and raw materials come from the EU.

8.4.     The UK must seek to avoid any dealignment of UK-EU climate policy, owing to our close trading relationship, that could result in a CBAM negatively impacting upon UK businesses. Our export competitiveness must be ensured. Any UK CBAM must be World Trade Organisation (WTO) compatible, taking into account the non-discriminatory, differentiation and “likeness” principles of the WTO, as well as possible exceptions allowed under Article XX. In considering a UK CBAM, the UK must support and promote international free and fair trade and engage in dialogue with its trading partners, to avoid trade conflicts. This dialogue should respect the Paris Agreement and promote the establishment of a global carbon pricing mechanism (including the provisions under Article 6 of the Agreement), which ultimately could level the playing field and achieve global emission reduction.


  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?

9.1.     No comment.


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

10.1. No comment.

October 2021

[1] BEIS (2021) International industrial energy prices

[2] Correspondence with BEIS energy statistics team

[3] ONS - The decoupling of economic growth from carbon emissions: UK evidence

[4] CCC (2020) 6th Carbon Budget

[5] Material Economics - Industrial Transformation 2050 - Pathways to Net-Zero Emissions from EU Heavy Industry