MPA CBM0014

WRITTEN SUBMISSION FROM THE MINERAL PRODUCTS ASSOCIATION

 

Summary

Introduction To Mpa

  1. The Mineral Products Association (MPA) is the trade association for the aggregates, asphalt, cement, concrete, dimension stone, lime, mortar and silica sand industries. With the affiliation of British Precast, the British Association of Reinforcement (BAR), Eurobitume, MPA Northern Ireland, MPA Scotland and the British Calcium Carbonate Federation, it has a growing membership of 530 companies and is the sectoral voice for mineral products. MPA membership is made up of the vast majority of independent SME quarrying companies throughout the UK, as well as the 9 major international and global companies. It covers 100% of UK cement and lime production, 90% of GB aggregates production, 95% of asphalt and over 70% of ready-mixed concrete and precast concrete production. In 2018, the industry supplied £18 billion worth of materials and services and was the largest supplier to the construction industry, which had annual output valued at £169 billion. Industry production represents the largest materials flow in the UK economy and is also one of the largest manufacturing sectors.

 

 

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

 

  1. Carbon leakage is a significant risk to those industries that are internationally traded and face higher energy and carbon costs compared to their international competitors and substantial costs to decarbonise. In our sector, this includes cement and lime. The risk to the UK is that if these strategic, foundation industries are undermined by carbon leakage and close down, the economy loses high-productivity, high-skill jobs, many of which are in areas of the country that need to be ‘Levelled Up’ but also an increased risk to security and reliability of supply of essential materials.
  2. There is clear evidence of carbon leakage over time in our sector, with the growth in cement imports running at up to one percentage point per year (Figure 1), and the recent closure of South Ferriby cement plant on Humberside, the latest in a slow process of industrial decline that coincides with increasing energy and carbon costs relative to competitors.

 

Figure 1: The share of UK sales from imports has increased by around one percentage point per year for the last two decades.

 

  1. The disruption of the pandemic on global supply chains of a wide variety of goods from Personal Protective Equipment to construction materials highlighted the advantage of having a strong domestic industrial manufacturing base that can supply the UK market with essential products. However, the UK industrial base is eroding in part because the cumulative cost of energy and climate change policies is far higher than those faced by competitors in other countries.
  2. These costs can’t be passed on to consumers in many industries because they will source cheaper imports from elsewhere that do not face these costs. This is unlike non-traded sectors such as power where the costs of decarbonisation have been passed on to consumers.
  3. The current Government approach to tackling carbon leakage is twofold: providing manufacturers vulnerable to carbon leakage with a level of partial free allocation in the UK Emissions Trading Scheme (UK ETS) and supporting the deployment of decarbonisation technologies. The latter includes support through the provision of match funding schemes (such as the Industrial Energy Transformation Fund) and the development of business models to provide long term support for deep decarbonisation technologies such as carbon capture use or storage (CCUS).
  4. Free Allocation has been an important part of the approach to carbon pricing in the EU ETS and now the UK ETS. It works by setting a benchmark based on the most carbon-efficient plant in the market, and pricing the carbon emitted in excess of that, providing an incentive to companies to decarbonise to the benchmark or below in order to mitigate their exposure to the carbon price. Each phase of the EU ETS has seen the benchmark lowered as technology improves.
  5. However, free allocation was undermined during Phase 3 (2013-2020) of the EU Emissions Trading Scheme (EU ETS), with implementation of a cross sectoral correction factor which arbitrarily reduced the level of free allocation below the benchmark level that was defined as necessary to protect carbon leakage vulnerable sectors. The setting of benchmarks for Phase 4 EU ETS/ Phase 1 UK ETS also included an arbitrary ratchet, that for some sectors, such as the UK lime sector, reduced the benchmarked level of free allocation below what is currently technically possible to achieve. This has left carbon leakage vulnerable sectors more exposed to the cost of carbon.
  6. The carbon price has risen sharply in 2021 and at a peak in September 2021 reached £74. This was €24 higher than the EU carbon price paid by EU based companies. The higher UK price is a result of the lack of liquidity in the new and smaller UK market compared to the EU market.
  7. Free allocation in UK ETS is being reduced at a faster rate than decarbonisation technologies such as CCUS are becoming an investable proposition both technically and economically. Without the decarbonisation technology and infrastructure available to industry at a cost that doesn’t put them at a competitive disadvantage in international markets, reductions in free allocation will continue to leave UK industry exposed to the cost of carbon and therefore carbon leakage.
  8. For as long as competitors in other countries do not face the same level of energy and climate change policy costs, it is not possible for UK industry to pass these costs on in their products because consumers will switch to buying cheaper imported products. The result is that UK industry must internalise the cost which erodes profits and prevents UK businesses from attracting investment. Often the precursor to carbon leakage is investment leakage, and there are signs in the UK market that this is happening.
  9. It is clear that for some sectors free allocation is no longer providing the intended carbon leakage mitigation and more must be done in both the short and long term to ensure the UK does not offshore its industry to meet its territorial climate change obligations.

 

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

 

  1. A CBAM mitigates against the risk of carbon leakage by imposing the UK’s higher carbon cost on imports and potentially removes the difference from exports, creating a level playing field in the UK market and for UK exporters. This supports domestic decarbonisation, supporting the UK’s environmental objectives, and would also play into the ‘Levelling Up’ agenda by promoting growth in high-productivity jobs in less affluent areas of the UK. It supports the UK’s ambitions to be a global leader on climate change without sacrificing industry.
  2. The CBAM is an important mitigation against one specific impact of the UK having a higher carbon price than its main industrial competitors, and that some countries that export some products do not have an effective carbon price. It is an effective tool for encouraging other economies to price carbon effectively, but the work of decarbonisation is still done by the carbon price.

 

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?

 

  1. Yes. The UK’s desire to be a climate change leader means that the costs of decarbonisation will be impacting UK industries before others. This makes the introduction of a UK CBAM a high priority. MPA believe that the UK needs a CBAM now because UK industries vulnerable to carbon leakage are becoming increasingly exposed to the full cost of carbon, and this cannot be sustained whilst competitors in other countries do not face such costs and are able to make products much more cheaply.
  2. Earlier this year the EU Commission published its “Fit for 55%” package which included proposals for an EU CBAM. MPA is deeply concerned that the introduction of a CBAM in the EU without an equivalent measure in the UK, could result in dumping of goods here. This would result in prices being further lowered, and the market share of domestically produced goods would be reduced. This could cause serious damage to UK industry.
  3. Introduction of a UK CBAM would help prevent the EU CBAM negatively affecting the UK, and level up the carbon costs faced by importers with those faced by domestic producers. If correctly designed, this would enable UK producers to pass on the cost of carbon to consumers, which would help attract investment to the UK for the deployment of deep decarbonisation technologies.
  4. The EU CBAM proposals, in the form of CBAM certificates based on actual emissions, seems like a reasonable, workable option that closely mirrors the ETS requirements faced by domestic producers. For a UK CBAM the proposals should be strengthened to ensure a more robust CBAM by:

19.1   Ensuring there is full CO2 cost equalisation by strictly mirroring the carbon costs faced by UK suppliers, therefore indirect emissions and transport emissions should be part of the system;

19.2   Developing a watertight monitoring and reporting system for measuring embedded emissions and avoiding circumvention;

19.3   Including a solution for UK exports to avoid a situation where CBAM would result in lower access to export markets for UK industry, with a negative impact on global CO2 performance.

 

  1. A UK CBAM should come into operation as soon as possible to mitigate the risk of carbon leakage which is increasing under the pressure of growing imports, changing import business patterns and a sharp increase of the CO2 price.
  2. MPA also believe that any CBAM should be introduced in parallel with continued free allocation, and not as an alternative, until such a time as it has been proven to provide the expected level of carbon leakage mitigation. 

 

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

 

  1. MPA would support the application of CBAM to as wide a product base as possible. Many products compete in the same downstream markets e.g. construction, so it is vital that they are all treated in the same way. Ideally CBAM should be applied to all carbon leakage vulnerable sectors in UK ETS.

 

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

 

  1. If carefully designed to ensure imports genuinely face the same level of climate change costs as UK producers, a CBAM would allow UK industry to pass the cost of decarbonisation onto consumers which would help make the case for investing in deep decarbonisation technologies. This would help accelerate decarbonisation by removing one of the biggest economic barriers to it.
  2. This would protect jobs in energy and carbon-intensive industries and their supply chain, and potentially grow new high-skill, high wage jobs in sectors such as CCUS. The mineral products industry as a whole employs 81,000 people.
  3. Consumers would see the price of some goods rise to reflect the carbon associated with them. This in turn would help push consumers to consider carbon in their purchasing and could lead to greater demand for lower carbon products. This would further make the case for industry to invest in deep decarbonisation technologies. Any revenue income from a CBAM could be used to offset other taxes or costs, so the overall distributional impact is hard to assess with certainty.

 

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

 

  1. The greatest risk is that importers find a way to circumvent the proposals so that they are not impacted by the cost of carbon and they can continue to offer cheaper products in the UK compared to those produced domestically.
  2. Reactions to the EU CBAM proposals have indicated the possibility of retaliation or circumvention by several methods. For example, suggestions to slightly modify products to avoid CBAM obligations or shuffle resources around so the cleanest industrial plants export to the EU, and more polluting plants serve domestic markets. Another proposal for circumvention is transhipment whereby goods would be shipped to an intermediary country which has an equivalent carbon price before being exported to the EU.
  3. It is important that the scope of any UK CBAM is comprehensive enough to avoid any risk of such circumvention and consideration would need to be given to how to reduce these risks including a strict application of the Rules of Origin.
  4. UK producers in the UK ETS are required to monitor and report their emissions to internationally recognised standards, and have these emissions verified to ensure the correct number of UK allowances are surrendered to fully cover their emissions. It is vital that imported goods are subject to the same level of scrutiny for monitoring, reporting and verification and importers should be incentivised to use verified emissions to determine their CBAM compliance. This will help ensure imports face an equivalent level of cost as UK producers.
  5. The risks identified above are significant and it is important that the current carbon leakage mitigation measure of free allocation is not removed immediately, but that the CBAM operates in parallel until it has been tried, tested and proven to be watertight. Only when it is clear that imports are subject to the same carbon cost as domestic producers and that this cost is being passed onto consumers, can the UK consider gradually removing free allowance allocation. The price or extent of the CBAM would take into account the value of the free allocations to ensure a level playing field.
  6. The existence of free allocation alongside a CBAM will not only provide time to make sure the CBAM is operating effectively but it will reduce the costs faced by importers as well, since these would be equivalent to the costs over and above the level of free allocation. This gives countries exporting goods to the UK a chance to implement equivalent carbon prices before they are faced with the full cost of carbon in their products sold on the UK market.
  7. Many of the risks of circumvention interact with WTO rules, so any CBAM could see significant litigation both from those countries imposing CBAMs and those outside them.

 

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

 

  1. A CBAM could enable further and faster decarbonisation with lower risk of carbon leakage deterring the necessary investment. It would make the UK an attractive investment proposition for global companies in carbon and energy-intensive industries.
  2. A CBAM would support the market for low carbon goods and materials. To date consumers have generally been protected from the rising cost of carbon due to the provision of free allowances and the fact that if UK EIIs pass on the cost of carbon, consumers can switch to cheaper imports. Being able to include the cost of carbon in goods and materials will encourage consumers to consider the purchasing choices they make, and this in turn has the potential to increase demand for low carbon products. Creating demand for low carbon products will help to justify industrial investments in decarbonisation technologies and low carbon products.
  3. Introduction of a CBAM provides an opportunity for the UK to encourage other countries, that have not yet implemented any carbon pricing, to consider doing so. Introducing an equivalent carbon pricing system would enable industry in other countries to export to the UK without facing any CBAM cost.

 

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

 

  1. CBAM would need to be consistent with WTO rules, which would mean the costs faced by importers must be equivalent, and not more, than the costs faced by UK producers. Initially the CBAM should be introduced in parallel to free allocation. This would ensure that the system can be tested to be watertight before free allocation is gradually removed. It would also be a softer introduction to importers as the costs they would face would be lower as they would be equivalent to the costs faced by UK producers over and above the level of free allocation.
  2. A CBAM provides the UK with the opportunity to encourage other countries that have not yet done so to introduce carbon pricing and consider their decarbonisation ambitions. As part of the UK’s global leadership ambitions on climate change as the holder of the COP Presidency it would be an extra tool on top of climate diplomacy.

 

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?

 

  1. It is important that all imports are treated equally and that they all face an equivalent cost to domestically produced products. Having special regard to certain countries would still leave UK producers exposed to carbon leakage and encourage circumvention activities where intermediate products are routed through exempted countries.
  2. The only situation where special regard should be given is where countries can demonstrate they have implemented an equivalent carbon price and that they have an equivalent and robust system for monitoring, reporting and verifying the emissions in the products and materials they produce. Such products should then carry the same cost of carbon as those produced in the UK and wouldn’t then be significantly cheaper when imported here. For developing countries it may be suitable for the UK to support them in developing such a system.
  3. The other special regard is for UK exports of products to countries that don’t have an equivalent carbon price. The CBAM could work in reverse, removing the carbon costs from the UK to allow domestically produced goods under a high carbon price to compete in markets that do not have one, further encouraging all countries to introduce robust carbon pricing.

 

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

 

  1. Many of the challenges have been highlighted through this response and include:

40.1.       Ensuring a robust system is in place to monitor and report accurately the level of emissions in imported goods.

40.2.       Ensuring a watertight system that prevents circumnavigation via the potential routes set out in paragraph 26 above. This will include ensuring a strict application of Rules of Origin.

40.3.       Designing a system for the generation, buying and surrendering of CBAM certificates.

40.4.       Having an effective regulator.

  1. A specialist authority is required that can consider all the potential issues and design a system that prevents circumnavigation, meets WTO rules and fully mitigates carbon leakage for UK industry.

October 2021