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The future UK-EU relationship Contents

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Chapter 4: Energy security and climate change

171.This chapter examines the future of the UK-EU relationship in the areas of energy security and climate change. It focuses on four specific areas: energy security; the implementation of the TCA’s Title VIII (energy), including electricity trading arrangements and cooperation on the development of renewables in the North Seas; the potential for a link between the respective UK and EU Emissions Trading Schemes (ETS); and the implications for the UK of the EU’s proposal for a Carbon Border Adjustment Mechanism (CBAM).261

Energy security

Cooperation following the Russian invasion of Ukraine

172.Before the Russian invasion of Ukraine, the EU received around 40% of its gas supplies and 27% of its crude oil supplies from Russia.262 This figure was higher in some individual EU Member States, notably Germany.263 Since the invasion gas supplies from Russia have been gradually falling (by around 74% in the third quarter of 2022 and beyond).264

173.The UK did not rely directly on Russian gas to the same extent as many EU Member States. In 2021 imports from Russia made up 4% of gas, 9% of oil and 27% of coal.265 Nevertheless, as one expert has written, “[t]he UK is part of the European energy market, which means that UK gas prices are closely linked to those on the continent and that shortages across Europe also affect the UK”.266

174.Analysis by researchers at Bruegel noted that the Russian invasion triggered a “quick and profound reorientation of energy policy in Europe”, as EU Member States sought to move away from dependence on Russian gas supplies.267 An initial plan, titled ‘REPowerEU’, was agreed by Member States in May 2022. This included a package of measures to encourage reduced energy use, diversification of gas supplies and an acceleration of the rollout of renewables.268

175.Our witnesses told us that the energy security challenges in Europe following the Russian invasion of Ukraine have afforded greater prominence to the UK-EU energy relationship. Dr Caroline Kuzemko, Co-Lead of Energy GRP at the University of Warwick, said that “the war in Ukraine has changed the atmosphere, because it is now so clear how connected the UK and the EU are on gas and electricity trade”.269 Dr Simone Tagliapietra, Senior Fellow at Bruegel, shared these sentiments, saying that he was “convinced that the Russian aggression in Ukraine and its energy implications actually bring the European Union and the United Kingdom closer on energy co-operation”.270

176.In terms of practical examples of close energy cooperation since the breakout of war, Ed Birkett, Head of Energy and Climate at Onward, told us that the UK has been purchasing liquified natural gas (LNG) from the US and the Middle East and then transporting it to the EU, thus supporting its response to the energy crisis and loss of supplies of Russian natural gas. As he put it, the UK “managed to step forward as a gas bridge, basically, with LNG coming into Wales and pipeline gas coming in from Norway, and both then going across to the EU”.271 Matt Hinde, Head of EU Affairs at the National Grid, similarly emphasised that the UK’s LNG terminals have “been pretty key to refilling European gas storage”.272

177.The UK managed to establish a strong export market for gas, and became a net exporter of electricity, especially in the summer of 2022,273 with France primarily benefiting, thus “reversing a long-term trend of the UK being a net importer of electricity” from that direction.274 Gas flows from the UK have also gone to Belgium and the Netherlands.275 In addition, Ireland is “100% reliant on the UK for imports of both gas and electricity”.276

178.The UCL Institute for Sustainable Resources told us that the war had accelerated “more serious plans to co-operate on oil and gas security and the reduction of dependence on Russia—including an early warning system”.277 It had also encouraged a greater focus on the role of the UK in the energy map of Europe, including as a “trading hub for natural gas”, and an actor who could help the EU in its pursuit of diversification of gas supplies from Russia.278

179.All of this was possible, as pointed out by our witnesses, as a consequence of the fact that before the breakout of war in Ukraine and earlier, before Brexit, “energy and climate interests and relations were well aligned and the relationship was working”.279 Dr Kuzemko noted that in terms of interconnectors, the UK is connected to Ireland, Norway and other European countries, stressing that there is “no escaping that”.280 (see Figure 1). Post-Brexit, the relationship has changed (see paragraphs 195–208 for a discussion on the implementation of Title VIII of the TCA).281 Nevertheless, this seems to have had a limited impact on cooperation during the crisis caused by Russia’s invasion of Ukraine.

Figure 1: Map of electricity interconnectors for England, Wales and Northern Ireland

Source: The Crown Estate, ‘Electricity interconnectors’, 3 July 2018: https://www.thecrownestate.co.uk/en-gb/media-and-insights/stories/2018-electricity-interconnectors/ [accessed 25 April 2023]

Possible future challenges

180.Our witnesses noted that the dynamics of the energy crisis could change. Dr Tagliapietra indicated that although the UK has so far provided what he identified as a “lifeline” of energy supply to northern and western European countries, “that situation could swiftly change and these countries could provide support to the UK” in the case of energy shortages.282

181. Witnesses also drew attention to engagement between the UK and the EU at political level in relation to energy security. While technical level cooperation has been strong, cooperation at political level has been more limited. Mr Birkett told us that “there is the risk of a potential misunderstanding at the political level about steps that are taken during any energy shortage”, for example cutting energy interconnectors to the UK in the case of “an extreme energy shortage” could be “misinterpreted politically”.283

182.Other witnesses saw potential uncertainties as a consequence of the UK’s exit from the EU energy solidarity mechanism. Silke Goldberg, Global Head of ESG at Herbert Smith Freehills, noted that if there was a critical supply shortage as an EU member, the UK could “then call on its European neighbours to continue to supply it with electricity” but that is “no longer the case” post-Brexit. She argued that “improving this is essential”. 284 Adam Berman, Deputy Director of Policy at Energy UK, suggested there was a “need to ensure that we have really clear dialogue and rules in place”.285 SSE similarly argued that, in light of the current challenges, “the UK and the EU should put in place a comprehensive energy relationship outside of the Trade and Cooperation Agreement (TCA) as a matter of urgency”.286

183.Our witnesses called for closer cooperation between political leaders, especially to plan for energy shortages. Mr Birkett indicated that “[a] lot of that can be done bilaterally between Energy Ministers”.287 He identified the positive impact of the inaugural meeting of the EPC (see Chapter 2), where the then UK Prime Minister was able to reinforce the message about the need to “keep the energy flowing”.288

184.Nevertheless, Mark Copley, CEO of the European Federation of Energy Traders, told us that “it is worrying that the Specialised Committee on Energy has met only a couple of times” in 2022.289 Meanwhile, Jonny Peters, Senior Policy Adviser at E3G said that “while we have seen events driving forward progress at the diplomatic and technical levels, we have not seen that happening yet at the political level”.290

Building future energy security resilience

185.Our witnesses, giving evidence in late autumn 2022, expressed a lot of concern about energy security challenges during the forthcoming winter. Many of those concerns were alleviated by the warmer than usual winter, which contributed to lower than expected demand for energy in Europe.291 Nevertheless, Dr Tagliapietra suggested that the winter of 2023–24 might bring further challenges, which underlines the urgency of the situation. Looking towards the future, the EU is developing a joint-purchasing mechanism of LNG, conscious that in the future liquified gas will play a more prominent role as a substitute to Russian gas. During the autumn and winter of 2022–23 Russian gas was still used to fill storage facilities. That may prove impossible in the future, given that Russia will not resume gas supplies to Europe until sanctions will be lifted.292 Dr Tagliapietra suggested that the “key challenge for the European Union, but also for the UK, will be how to navigate this very tight LNG market”.293

186.Witnesses noted that ongoing energy security challenges may not only be related to the consequences of the war in Ukraine. In 2022 there were also problems with nuclear power stations in France and extremely hot summer weather had an impact on the hydropower production.294 There are also risks from technical outages.295 Sabotage of Nord Stream 1 and 2 have highlighted further challenges to the existing energy infrastructure.296 Finally, there are political risks stemming, for example, from different strategies on how to address these challenges. E3G identified a degree of divergence in the respective UK and EU responses to the energy security challenges in 2022–23, with the Commission’s policy initiatives focused more on demand reduction, whereas the UK Government has prioritised market interventions designed to limit consumer energy bills.297 There is a resulting risk of political misunderstanding in the absence of dialogue.

187.Witnesses suggested there was a need for an increase in the number of electricity interconnectors between the UK and the EU. Mr Birkett told us this was necessary “so that renewable energy resources can be shared across the continent”.298 Ms Goldberg noted that current interconnector capacity is just under 8GW whereas Ofgem would like to see 18GW of interconnector capacity, indicating that “a significant number of interconnectors will need to be built to meet that”.299

188.We were told that the significant differences between the energy mixes of the UK and many EU Member States strengthened the case for additional interconnectors, primarily electricity interconnectors, especially in light of the green transition.300 For instance, a significant proportion of the UK’s renewable energy is from wind power, whereas countries such as Spain have focused more on solar energy (see Figure 2).

Figure 2: Energy mixes of EU Member States

Source: Al Jazeera, ‘Infographic: How much of Europe’s energy comes from gas?’ (6 September 2022): https://www.aljazeera.com/news/2022/9/6/infographic-how-much-of-europes-energy-gas [accessed 25 April 2023]

189.The Minister for Europe told us that in his assessment “energy co-operation is in a good place”. He also indicated that “there is the prospect of a greater number of electrical interconnectors between us and the European mainland in one form or another”, which he considered would be “very welcome”.301

Conclusions and recommendations

190.We welcome the close technical cooperation between the UK and the EU in response to the energy security challenges in Europe since the Russian invasion of Ukraine, and that to date energy trading between the UK and the EU has continued without disruption.

191.However, we regret that the TCA’s Specialised Committee on Energy met only twice in 2022, despite the unprecedented crisis. Following the agreement on the Windsor Framework, we expect that this forum will now be more active.

192.We recommend that the close technical cooperation on energy security between the UK and the EU should also be extended to the political level, including through regular meetings at the level of the Secretary of State for Energy Security and Net Zero and the European Commissioner for Energy.

193.We call on the Government to approach the EU, without further delay, with the aim of reaching an agreement to guarantee that energy flows between the UK and the EU would be maintained in the event of a critical shortage of energy supply.

194.We recommend that the UK and the EU should cooperate closely on the installation of additional multipurpose interconnectors of substantial capacity, which will be needed to support energy security in the future. We ask the Government to update us on the extent of such cooperation in its response to this report.

Implementation of the TCA’s energy Title (Title VIII)

195.As outlined by Dr Kuzemko, cooperation between the UK and the EU on energy takes place within the context of Title VIII of the Trade and Cooperation Agreement.302 This established the Specialised Committee on Energy to oversee the majority of the provisions agreed between the UK and EU.

196.Dr Kuzemko indicated that one of the main roles of this Specialised Committee is “to implement the relevant titles in the TCA and conclude supplementary agreements on trade rules for electricity”, but despite an existing technical alignment, “it has not been able to do that because of the wider political relationship”. Dr Kuzemko put it that this technical alignment “has been somewhat held hostage”.303 When asked for further explanation, she suggested that this was linked with the lack of trust. Talks on the next stage of trading rules on gas and electricity had been “specifically … held back because the EU does not want to sign a new agreement when it does not feel that it can trust the UK, given the Northern Ireland Protocol Bill.”304 We note, however, that witnesses were speaking before the announcement of the Windsor Framework.

197.On electricity trading arrangements, our witnesses noted that the April 2022 deadline set out in the TCA for an agreement on moving towards a more efficient arrangement has been missed.305 Mr Birkett told us that “we have been kicked out of the most efficient form of trading arrangements” and that “can lead to higher costs for consumers and effectively keep the energy flowing the wrong way compared with what it should be doing, based on prices”.306

North Seas Energy Cooperation

198.Dr Kuzemko noted that North Sea energy cooperation “is another really strong motivation for both sides to improve the relationship”, especially in the context of the Government and the EU’s ambitions to ensure that renewable energy becomes a larger part of their respective energy mixes. 307

Box 5: North Seas Energy Cooperation

European cooperation on energy in the North Seas (including neighbouring waters to the North Sea such as the Irish Sea) started in 2010 when an MoU was signed by the UK, France, Germany, Ireland, Belgium, the Netherlands, Luxembourg, Sweden, Denmark and Norway, together with the European Commission. This was later replaced, in 2016, by a Political Declaration with the same signatories, formally establishing the North Seas Energy Cooperation (NSEC). This identified the purpose of the NSEC as to facilitate “the cost-effective deployment of offshore renewable energy, in particular wind” and promote interconnection between the countries in the region.308 The UK ceased to be a member of the NSEC at the end of the post-Brexit transition period. However, the TCA provides, under Article 321309, for cooperation between the UK and the EU on the development of offshore renewable energy. The TCA also refers to the establishment of a “specific forum for technical discussions” in relation to this commitment. In December 2021 the remaining NSEC members agreed a renewed Political Declaration. This specified that “[a]ll work in the North Seas Energy Cooperation should be in line with relevant EU legislation, the EEA agreement, as well as with existing obligations under international law”.310 It also states that third countries “can be consulted at a technical level” and that “for more structural, regular and ongoing cooperation a MoU could be concluded by the signatories of the Political Declaration and the potential third country”. In September 2022 the NSEC agreed a new target to build a minimum of 260GW of offshore wind in the North Sea region by 2050, with intermediate targets of at least 76 GW by 2023 and 193 GW by 2040. Following the inaugural meeting of the European Political Community in October 2022 it was reported that the then Prime Minister had secured agreement on an MoU for the UK to work with the NSEC.311 On 18 December 2022 this MoU was signed.312 The MoU provides a framework for voluntary cooperation on joint projects, and for the UK to attend meetings at the invitation of NSEC members, but falls short of the UK actually rejoining the cooperation group.313

199.The UK’s relationship with the NSEC (see Box 5) was raised by several witnesses. Most of the evidence sessions that covered this theme took place in November 2022, at which point it had been reported that the UK and the NSEC were to agree an MoU, but this had yet been published. The consensus among our witnesses was that it was important for the UK to re-engage with the NSEC, given the scale of respective plans to develop offshore renewables in the North Seas region.314

200.Dr Kuzemko described the NSEC as a “really vital body” within the context of the respective UK and EU emissions reduction targets.315 She said that the plans for development of offshore wind were on a “grand scale” and argued that “for the UK to regain a seat at that table is incredibly important”, but at the same time she acknowledged that full membership may require signing up to the rules of the EU single market.316

201.Mr Birkett argued that the “world we are moving to now is that of multipurpose interconnectors, where way you might have an offshore wind farm that is connected to two or even three countries”.317 He said that this made multilateral cooperation in formats such as the NSEC more important than in the past.318

202.Mr Hinde emphasised that current UK and EU plans for the North Sea involve “an enormous amount of infrastructure in a relatively small area”. He argued that the NSEC provides a “platform for[ … ] political and regulatory discussions that has not existed post Brexit”. 319 Mr Copley added that he could not “see a way for the EU and UK to reach their net-zero decarbonisation targets at a reasonable cost without developing the North Sea”, and that “[i]f you want to develop the North Sea, you need co-ordinated planning, operation and trading, and you need to work together”.320

203.Lord Hague welcomed the signing of the MoU, stating that “it is significant” and a “wholly positive thing”. He underlined the fact that it is expected to “support the UK’s target to increase offshore wind fivefold”.321

204.The Minister suggested that the MoU with the NSEC will “further deepen our already impressive level of interconnection and collaboration in the North Sea”.322 Mr Henricson-Bell added that the Government has a clear target for the scale of interconnection by 2030, and that:

“There are a series of additional interconnectors that need to be pushed through. That is largely private sector money, but it needs public sector support and regulation. That is the framework that needs to be put in place. The North Seas Energy Cooperation format provides for exactly the kind of regulatory, technical and project co-ordination that he was referring to. We are very much committed to making sure that that happens”.323

Conclusions and recommendations

205.We urge the UK and the EU to conclude an agreement to deliver on the provisions in the TCA relating to energy trading without further delay, now that the agreement on the Windsor Framework has been reached. We ask the Government to provide us with an update on this in response to this report.

206.We welcome the Memorandum of Understanding between the UK and the North Seas Energy Cooperation, so far as it goes. Engagement between the UK and other North Seas countries on the development of renewable energy infrastructure in the North Seas, including Multipurpose Interconnectors, is essential in light of the ambition of respective decarbonisation targets.

207.We recommend that the Government keep under review whether the MoU provides for sufficiently close cooperation with the NSEC or whether there would be benefits to seeking a further agreement, providing for full membership. We also ask the Government to explain the rationale for not seeking full membership in its response to this report.

208.We note that the energy provisions under Title VIII of the TCA expire in June 2026 and recommend that the Government seeks to reach an agreement with the EU to extend these, as part of the TCA review in 2025, to ensure that cooperation can continue and expand.

Emissions trading schemes

209.The UK left the EU Emissions Trading Scheme at the end of the post-Brexit transition period. A separate UK Emissions Trading Scheme was established, which is very similar in design to the EU scheme. This first traded in May 2021 and the carbon price has since been similar to that in the EU scheme, although this is potentially subject to variation.324 Dr Kuzemko noted that the size of the EU ETS market is “about 11 times greater” than the UK one.325

210.The opening paragraphs of the TCA, as noted by Dr Kuzemko, include commitments from both sides to maintain climate change mitigation policies.326 Both the UK and the EU are legally committed to net zero carbon emissions by 2050, and have similar policy structures in place, especially in relation to emissions trading.327 Mr Peters noted that shared climate ambition is “locked-in law in a few different areas, both in national systems and under the TCA”.328 Ms Goldberg concurred that climate change “has effectively been elevated to one of the core level playing field elements”, an uncommon feature in previous trade agreements.329

211.Mr Peters observed that after the TCA was signed, and ahead of COP26, both the UK and the EU upgraded their 2030 emissions reduction targets—the UK to at least 68%, the EU to at least 55%. He added that “the UK’s figure of at least 68% would have been roughly the UK’s effort share if it was still an EU member state”, which he felt was an indication that “we have seen this broad equivalence progressing, even in the Brexit context”.330 He noted, however, that while targets seem to be aligned, policies for achieving them may differ. For example, the UK is more favourable to carbon capture and storage than the EU, while EU Member States may increase their investment in hydrogen, outspending the UK in this regard.331 Still, COP26 was the last perfect opportunity for both sides to discuss climate change mitigation targets. Mr Peters was concerned that “now that the COP 26 presidency is over, there is less of a reason for the EU to talk to the UK … The UK is a smaller country when you look at the global mitigation efforts. The UK is not the US, China or the EU, so the reasons to talk to us are fewer”.332

Linking the UK ETS and the EU ETS

212.Dr Kuzemko referred to a consensus among experts that “given the opportunity, the UK should link back to the EU ETS”. She acknowledged that the UK ETS was “up and running faster than expected” and had set a higher price for carbon than the EU scheme, but said that “it is of course far less liquid than the EU ETS and there is a higher UK ETS price, so there are knock-on costs for the industries involved”.333

213.Mr Berman argued that linking the UK and EU ETS would allow the UK to reach net zero “faster and more effectively”, that it would have benefits in terms of liquidity and that it would also have advantages in terms of “price stability and in making sure we do not have any volatility”.334 Mr Peters made a similar argument in favour of establishing a link, saying that he could “name only upsides”.335 Mr Copley and Mr Hinde also offered their support for linkage.336

214.Witnesses stressed that the case for a linked Emissions Trading Scheme was strengthened further in the context of the EU’s proposals for a Carbon Border Adjustment Mechanism (CBAM). This is discussed in more detail later in the chapter.

215.Mr Berman expressed optimism about a possible link. In his opinion, the EU and the UK could follow the framework developed during similar negotiations between the EU and Switzerland. He indicated that, given the similarities of the UK and the EU schemes, he was “confident that we could have this done in relatively short order”.337 Written evidence provided by E3G also referred to the existing precedent of the link between the Swiss and EU Emissions Trading Schemes and emphasised that if any link followed the Swiss model the UK “would not lose sovereignty” over the design of its ETS, as the link allows for the exchange of credits under a shared carbon price but not for full market integration”.338

216.Mr Berman told us that the agreement “would work for both parties”. From the perspective of the Commission, it “would represent the definition of a level playing field, which the EU loves”. From the UK’s perspective that would be “an international trade mechanism” which “retains a full set of revenues and the vast majority of the rules of the system”.339 Mr Copley outlined “reasons for optimism”: both schemes are very similar; there is a precedent to follow (the agreement with Switzerland) and a lot of “preparation for linking” was done “in the run-up to Brexit”.340

217.Mr Berman suggested how potential negotiations might play out:

“The EU would probably ask, in some hypothetical negotiation, for the UK to include more sectors under its ETS as they are moving towards that. The UK would probably ask the EU to include negative emissions under their ETS because it would be at a strategic advantage, with a huge nascent CCS industry and a lot of North Sea to be able to incentivise that. So I do not see it as a sovereignty issue”.341

218.Mr Peters also suggested that a potential agreement would not have consequences for the UK’s sovereignty. He argued that “the UK is not losing any sovereignty here, because this is a market. Ultimately, the carbon price is dictated by the market, so the UK is not losing any sovereignty in terms of its policy decisions … linked systems remain independent of each other”.342

219.On the contrary, Mr Birkett considered that trying to link the UK and EU ETS would have sovereignty implications. In his view this would, for example, mean that the UK would have to align itself with the EU rules on emissions and be subject to the CJEU’s jurisdiction in that area. He indicated, however, that there would also be downsides to not linking, in particular “more volatile carbon prices, which increases uncertainty for investors”. He suggested that the decision on whether to seek a link ultimately “comes down to a political judgment for the Government”.343

220.Mr Birkett also put forward some proposals to mitigate the risks of volatility from a smaller and stand-alone scheme if a link is not pursued, including “having a long-term rising floor price in the UK ETS [ … ] as well as a price cap in the UK ETS”.344

221.Dr Tagliapietra told us that it is highly unlikely that the EU would be keen to do anything that would weaken its ETS, “but, if it is properly managed, a linkage of the two systems might be technically achievable, and politically acceptable”.345

Conclusions and recommendations

222.We recommend that the UK approach the EU to explore the feasibility of linking their respective Emissions Trading Schemes. We note that the evidence we received on the implications of a shared scheme for UK sovereignty in this area was mixed, but we believe that following the Swiss precedent, such a policy could be implemented without negatively effecting the UK’s autonomy to design its own trading scheme. The evidence we received indicated that there would be significant mutual benefits to be gained from such an arrangement.

223.We understand that aspects of these negotiations may prove to be complex but the Government should enter discussions in a “can-do” spirit. Since the UK and EU Emissions Trading Schemes are currently similar in design and scope, it is likely that a link would be easier to achieve sooner rather than later, given the possibility of greater divergence over time.

The implications for the UK of the EU’s proposal for a Carbon Border Adjustment Mechanism (CBAM)

Box 6: Carbon Border Adjustment Mechanisms

In December 2022, the Council of the EU agreed its general approach to the Commission’s proposed Carbon Border Adjustment Mechanism (CBAM). Under the EU’s legislative process, the draft Regulation is now the subject of negotiations with the European Parliament. A CBAM is, in basic terms, a charge levied at the border proportionate to the amount of carbon emitted during production of imported goods. The EU sees this as necessary to ensure the effectiveness of its wider efforts to combat climate change. Without a CBAM in place the EU foresees a risk that energy-intensive industries might relocate outside the EU and then sell their goods back into the EU, effectively undercutting EU-based industry that would be subject to other carbon-reduction policies such as the EU ETS. This problem is referred to as “carbon leakage”. Under the EU’s current CBAM proposal, countries with an ETS linked to the EU’s would be excluded from charges. As the UK and EU schemes are not currently linked it is possible that border carbon adjustments could apply between the UK (or potentially Great Britain)346 and the EU.

224.Dr Tagliapietra told us that CBAM, by design, is aimed at mirroring the EU Emissions Trade System (ETS):

“If a third country has its own emissions trading system that will be taken into consideration—so if the UK and the EU emissions trading systems are delivering a very similar carbon price—basically no CBAM will be applied to the goods being exported from the UK into the European Union, because that will be taken into due consideration”.347

225.However, Mr Berman listed three ways in which CBAM could potentially affect the UK. First, it would introduce a regulatory barrier. UK companies exporting to the EU would have to provide assessments of the carbon footprint of their products and prove that carbon price was paid in the UK. Secondly, if the carbon price in the UK was lower than in the EU, then companies would be obliged to pay the difference to the EU countries. If the price of carbon in the UK was higher, British companies would lose out in terms of competitiveness. Thirdly, as discussed further below, the Commission has previously indicated that a CBAM would fall within the scope of the Protocol on Ireland/Northern Ireland, although the Government did not express a view on this (see footnote 346). It is not yet clear what impact the Windsor Framework agreement might have on this.348

226.An additional challenge, identified by Mr Birkett, is a possible carbon tariff on UK-produced electricity.349 Mr Hinde provided further information about the potential complexity of such a charge on electricity, saying that “it is very difficult to prove the carbon intensity of the generation in the UK or anywhere, because you tend to trade electricity anonymously on exchanges”.350

227.Witnesses stressed that the implementation of the EU CBAM could place a significant administrative burden for energy-intensive industries exporting to the EU. Mr Peters explained that “there are really serious non-tariff barriers when it comes to CBAM”, including “monitoring, reporting, verifying emissions, communicating with the new CBAM authority”.351 Dustin Benton, Policy Director at Green Alliance, made a similar point. He said that the UK is “very unlikely to pay CBAM fees” because the carbon price is higher, but exporters would be “filling out lots of declaration forms and red tape, basically”.352

228.We were told, in line with the Commission’s view, that any EU CBAM could potentially apply to Northern Ireland under the terms of the Protocol.353 UK in a Changing Europe indicated that a CBAM therefore had the potential to “thicken the sea border” by introducing additional friction to trade between Northern Ireland and Great Britain, while Mr Berman suggested that a CBAM “could also constitute a significant barrier for companies in Northern Ireland wishing to trade with the Republic of Ireland”.354 It is not yet clear how this will be affected by the changes to arrangements introduced under the Windsor Framework.

229.Our witnesses provided us with suggestions on possible steps that might be taken to mitigate the potential implications of the EU CBAM policy for the UK. The starting point, in the opinion of several of those we heard from, would be for the UK and the EU to at least discuss the implications of the EU CBAM, rather than wait until the EU establishes the system.355 Mr Birkett suggested that the UK Government should “get out ahead on carbon border adjustments”. The UK, in his opinion, should be looking “to stick relatively closely to the EU’s plans, or to offer improvements if we can see them”.356

230.The consensus among witnesses was that the most realistic way of securing an exemption from the policy for the UK would be to link the respective UK and EU Emissions Trading Systems. For instance, Mr Berman said that “[t]he EU has made clear that there is only one way for the UK to ensure that the CBAM does not apply to it and that is linking emissions trading systems”.357 Similarly, Jonny Peters of E3G said that the “only way to address this is by having a linked ETS, in the same way that Switzerland has an exemption from the EU CBAM because of its linking arrangement with the EU”.358 Dr Tagliapietra added that the UK can replicate EU CBAM in the same way that it has replicated the EU’s ETS.359

231.Mr Hinde noted that there is a list of countries that will not be covered by the EU CBAM, including Norway, Switzerland, Iceland and the Energy Community Treaty countries. He said that “[f]inding a way for the UK to join that list would be the other way of doing this, if we are not going to link”.360

232.Mr Henricson-Bell told us that the Government was in fact “tightly plugged in” with the European Commission when the CBAM proposal was designed. He indicated that given “the very close similarities of our ETS systems at the moment, we would expect—and the EU knows—that, in any operation of the CBAM, the equivalence of our carbon pricing would be taken into account.” He also acknowledged the requirements imposed by CBAM on British companies and confirmed that the Government is working on that, with the European Commission. The UK has observer status at the EU informal expert group on CBAM, allowing it to feed into the process. 361

233.In response to a report from the House of Commons Environmental Audit Committee in 2022, the Government committed to consulting on options for combatting carbon leakage and to building a “full understanding” of the EU proposal and its implications for the UK.362 A consultation on options to address ‘carbon leakage’, including the possibility of a CBAM, was subsequently launched by the Government in March 2023.363

234.When asked about the possible impact of the EU CBAM on UK businesses, the Minister for Europe told us that “the central proposition is that we will have our own similar system whereby we will achieve a similar, if not better, standard. As long as we co-ordinate, we are all basically trying to move in the same direction. We do not see a circumstance where there is significant disadvantage to our own side”.364 It was not entirely clear whether this amounted to an indication that the UK will introduce its own CBAM.

Conclusions and recommendations

235.The EU’s proposed Carbon Border Adjustment Mechanism (CBAM) is a clear example of how EU policy developments can have important implications for the UK, and of the need for the Government to engage early with the EU policy process to promote and protect the UK’s interests. There could be serious risks in terms of trade diversion and damage to mutual UK-EU trade if their respective CBAMs on third country trade were to diverge substantially.

236.We consider that the potential implications of the EU CBAM for the UK, including for trade between Great Britain and Northern Ireland, further strengthens the argument for linking the UK and EU Emissions Trading Schemes.

237.In response to this report we ask the Government to update us on what discussions have taken place with the EU about CBAMs so far, including where in the existing TCA structure the subject of CBAMs has been discussed.

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