Shell International                            CBM0023

Written evidence from Shell International

 

Shell UK Limited[1] supports the goal of the Paris Climate Agreement and the UK’s 2050 net zero target. In February 2021, Royal Dutch Shell plc announced our target to be a net zero emissions energy business by 2050, in step with society[2].

 

The Government’s setting of clear targets and policies will be crucial to delivering the market confidence, investment, and skills that industry and society need. Shell has long supported government-led carbon pricing mechanisms (CPMs) as an effective tool that gives choices to energy consumers and producers, stimulates the development of low-carbon fuels, technologies, products, and services, and helps drive energy efficiency. We believe that carbon pricing will be a central tool to help the UK achieve net-zero emissions by 2050. It is important to note as well, however, that a carbon price alone will not deliver the necessary emissions reductions. It will also require policy actions that address barriers to the carbon price signal being passed through the economy and that enable responses to that signal, for example building enabling infrastructure and providing information to consumers about necessary behavioural changes. Nevertheless, it should remain the ambition of policymakers to structure CPMs to allow a single carbon price to emerge in the longer run.

 

A standalone UK ETS might be more exposed to the risks of carbon leakage, as outlined in the report to the Committee on Climate Change on The Future of Carbon Pricing in the UK,[3] due to a carbon price differential driven by divergence in cap level or scope, differences in carbon leakage identification and in the level of allocation. Shell supports linking the UK ETS to the EU ETS in the currently traded sectors. In a less liquid UK market, linking the UK and EU ETS is the best way to reduce market instability and volatility. Shell believes that the linking of a UK ETS to the EU ETS should be negotiated as a matter of priority so that linking arrangements are able to be put in place as swiftly as practicable.

 

We recommend that the UK government consider performing an impact assessment of a CBAM to understand what the wider societal implications may be.

 

Summary principles for a CBAM:

The Paris Agreement fundamentally changed the architecture of global climate action, from the more top-down process exemplified by the Kyoto Protocol to a bottom-up approach based on national ambition and circumstances in setting emissions reduction targets. As parties to the Paris Agreement engage in progressively more ambitious climate action, such as the UK, the undesirable effects of asymmetric climate policies will become increasingly difficult. CBAMs can provide additional benefits over mechanisms such as free emissions trading allowances and carbon tax rebates to safeguard competitiveness and minimize leakage. Shell supports jurisdictions implementing a CBAM to address the risk of carbon leakage, in line with relevant agreements such as WTO rules, trade agreements and treaties. CBAMs can be politically controversial and administratively demanding. A CBAM design should be consistent with the Paris climate ambitions and international trade agreements, and the design mechanisms should be carefully considered to avoid assumptions of protectionism. CBAM revenues should be used to support climate policy objectives.

 

Summary of Design considerations

  1. A CBAM design should complement existing domestic carbon pricing measures, such as the UK ETS.
  2. The level of the carbon border adjustment must be determined by the degree of asymmetry.
  3. A CBAM design should take into account domestic carbon price compensation schemes that manage the risk of carbon leakage to avoid duplicative measures.
  4. Shell supports a phased approach to implement a CBAM. Examples of a phased approach are:
    1. Implement a CBAM for the most emissions-intensive and trade-exposed sectors, and over time expand the coverage to other traded-exposed sectors of the economy;
    2. Focus on sectors that are actually and asymmetrically subject to an explicit carbon pricing mechanism (CPM) and expand to other emission regulatory measures if and when possible;
    3. Implement a CBAM for imports to level the playing field within the domestic market to start. In this case Shell recommends expanding the CBAM to cover exports as soon as possible;
    4. Use benchmarks to establish the carbon intensity of the chosen sectors or products, and transition to more accurate methodologies if and when possible;
    5. Establish a proxy to quantify the implied cost of carbon in the import-originating countries where carbon prices are not explicit and modify the proxy to reflect changes over time.
  5. A CBAM must be dynamic to reflect changes in climate policies in the implementing country, as well as the exporting country.

 

A CBAM should focus on addressing the consequences of asymmetric climate policies on carbon leakage. A CBAM should not aim to address industrial competitiveness without addressing the risk of carbon leakage. CBAMs can be implemented unilaterally by jurisdictions with higher carbon ambition, but also through the formation of ‘carbon clubs’8 linked to Free Trade Agreements.

 

As countries take action to reduce their emissions and the world as a whole moves towards achieving the goals of the Paris Agreement, the climate policy landscape will evolve. The CBAM design must cater for changing and evolving policies, e.g. when the exporting country implements equivalent policies. For example, a CBAM calculation methodology should be able to account for changes in embedded emissions due to changing climate regulations. A CBAM design should also include regular reviews17 to assess the efficacy of the CBAM against agreed and transparent economic and environmental goals.


 

If you have any queries regarding this submission, please contact:

 

Madeline Whitaker

Head UK Corporate Relations

Shell International

 

October 2021


[1] The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this document “Shell”, “Shell Group” and “Royal Dutch Shell” are used for convenience, where no useful purpose is served by identifying the particular entity or entities.

[2] Shell’s operating plan, outlook and budgets are forecasted for a ten-year period and do not reflect our net-zero emissions target. In the future, as society moves towards net-zero emissions, we expect Shell’s operating plans, outlooks, budgets and pricing assumptions to reflect this movement.

[3] Committee on Climate Change and Vivid Economics, The Future of UK Carbon Pricing, available here: https://www.theccc.org.uk/publication/the-future-of-carbon-pricing-in-the-uk-vivid-economics.