NGV CBM0013

Written evidence submitted by National Grid Ventures

About National Grid Ventures (NGV)

NGV is the competitive division of National Grid plc, one of the largest investor-owned energy companies in the world. It operates outside of National Grid’s core regulated businesses in the UK and US where it develops, operates and invests in energy projects, technologies and partnerships to accelerate the development of our clean energy future.

NGV’s diverse portfolio of flexible, low-carbon and renewable energy businesses across the UK, Europe and US includes sub-sea electricity interconnectors, liquefied natural gas, battery storage, wind and solar power. NGV has 50% ownership shares in assets representing nearly 8,000MW[1] of cross-border electricity interconnectors between the UK and Europe. These assets facilitate delivery of many billions of pounds of benefits to UK consumers through lower energy costs, GHG emissions, security of supply and the integration of renewable forms of electricity generation. By 2030, we estimate our interconnectors will help Britain to prevent 100mt of carbon emissions.

Executive summary

• A robust carbon pricing framework is needed to support decarbonisation of the economy on the pathway to net-zero GHG emissions by 2050.
• We note the increasing focus on the issue of Carbon Border Adjustment Mechanisms (CBAM) as a policy response to carbon leakage. This response focuses on the issue of the inclusion of electricity under a CBAM and the potential impacts of such a policy.
• The European Commission published its CBAM proposal in July 2021 and, if adopted, it will be operational for the electricity sector as of 2026.
• Despite similar EU-UK energy and climate targets, and equally ambitious carbon markets with competitive emission allowances, the UK is not among countries currently being exempted from this proposal.
• To avoid any distortion on cross-border electricity trade and additional administrative burdens, a possible policy option would be to link the ETS between the two parties which is enabled by the UK-EU Trade & Co-operation Agreement.
• If a CBAM is implemented covering electricity, an agreement with the EU on a carbon taxation could be considered to remove each party’s obligation to purchase allowances in the others CBAM for the cross-border trade in electricity and to avoid double counting of carbon content.
• Otherwise, a CBAM comprising the electricity sector could result in potential reduction of renewables exports over electricity interconnectors from Europe, diminished socio-economic welfare benefits to UK consumers, and less maximisation of further GHG emissions reductions opportunities.

Summary of Views

We are committed to support the UK to reach its ambitious climate and energy targets. Over the last 10 years National Grid has invested more than £2.4bn in new interconnector capacity to connect the UK with its neighbours. We are developing a number of new projects with our partners around the North Sea including projects such as multi-purpose interconnectors which will play a vital role in optimising the deployment of renewable energy resources into and around the UK helping to minimise emissions from electricity generation across the continent. 

The application of a unilateral CBAM, especially to electricity, could harm progress in this sector.   

We would argue that:

1. Where exchanges of electricity take place between the UK and countries with similar or higher decarbonisation objectives, then the application of a CBAM is unnecessary. In the case of a UK CBAM application, serious consideration should be given to increasing inefficiency in electricity trading and market distortion, as well as additional administrative burdens and procedures on cross-border electricity interconnector trading that a CBAM would introduce against the extremely low risk of carbon leakage in the electricity sector.

2. Given that the EU and UK have very similar climate targets and carbon markets[2], there is little benefit to applying a CBAM to imports to the UK from countries with similarly low carbon emissions targets. This is particularly the case for the electricity sector where the UK can only import electricity from the European countries it is physically connected to, and where the electricity imported is overwhelmingly produced from low carbon resources and there is a similar competitive price for the ETS allowance.

Table 1: Comparison of climate & energy targets that UK and EU aim to achieve

• The GB electricity market has seen a drop in fossil fuel generation (driven by coal plant closures, phase-out of coal by 2024 and the deployment of renewable energy), while at the same time the share of zero carbon electricity that has been imported via NGV interconnectors has risen (see graph below). The electricity imports coming from the EU, which has an effective carbon market, have a lower carbon intensity than GB overall. Overall that carbon leakage risk for the GB electricity sector is very limited, if at all.

• More than 50% of GB’s power imports have been “zero-carbon” electrons and rising in recent years; zero-carbon electricity imports via NGV interconnectors reached 72% in Q3 2021.

• To establish a CBAM for imports will introduce a significant administrative burden on all imported electricity, and it is ultimately redundant when that importing country has similar climate ambitions as the UK. This will translate into extra costs and will diminish the wider socio-economic welfare benefits. As the graph below shows, electricity interconnectors are continuing to play a pivotal role in maximising the use of Zero-Carbon energy[3] across Europe and move more Zero-Carbon energy than fossil fuels. If CBAM is applied to cross-border electricity flows, this will translate into extra costs and will diminish the wider socio-economic welfare benefits.

Designing and implementing a carbon border adjustment mechanism

If a CBAM is taken forward, there are a number of principles that could be taken into account:

• To build international agreements on low carbon trade with jurisdictions with similar climate ambitions to the UK. This could be for example by linking national emissions trading schemes (ETS). This would reinforce that a CBAM is not required to cover such trade of mutually recognised low carbon goods. Such an option is also supported by wider businesses covered by the UK and EU ETS’ who have previously urged both sides to start the process of linking the Systems as soon as practicable.[4]

• A CBAM should only be applied to goods imports from countries that have materially higher carbon intensity than the UK.

• A CBAM should not present an undue administrative burden on imports and especially low carbon imports such that any perceived benefits in carbon reduction are outweighed.

• A CBAM should not act to “skew” domestic markets against cross-border trade.

• The efficacy of a CBAM in reducing carbon emissions in the producing nation should be assessed accurately prior to implementation.

October 2021