Carbon border mechanism will drive up clean energy costs, government warned

The government has been warned that introducing a UK Carbon Border Adjustment Mechanism (CBAM) will inevitably lead to higher costs for clean energy projects.

While overall supportive of the proposed carbon pricing mechanism, Energy UK has called for wider policy and regulatory frameworks to be adjusted to factor in higher prices of clean energy projects if the UK CBAM is implemented.

In particular, Energy UK suggests future allocation rounds of the Contracts for Difference scheme should include allowances for CBAM-associated costs.

The proposed UK CBAM places a carbon price on some of the most emission-intensive industrial goods imported to the UK that are at risk of “carbon leakage”, ensuring that a carbon price is paid regardless of where the goods are produced.

As examples of goods which good be subjected to the CBAM, the government cites imports of aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel.

The trade body’s response to the consultation on the UK CBAM states that the government must “recognise it will lead to higher prices for clean energy projects by raising the cost of procurement for low-carbon generation and infrastructure”.

It continues: “Energy UK’s members are helping to deliver net zero through investment in infrastructure, such as low carbon generation, electricity interconnection, and technologies with complex global supply chains such as electric vehicles and heat pumps.

“Many of these technologies already face higher procurement costs as a result of global competition, and a UK CBAM will inevitably further increase the cost of project delivery. A streamlined administrative process with evidence requirements that are rigorous but not unnecessarily onerous will, however, help to mitigate the cost impact of the CBAM.”

Energy UK also warns that the introduction of a UK CBAM risks creating a barrier to trade and investment if it is not aligned with international emissions schemes.

To tackle this, Energy UK has called on the government to begin conversations with the EU and European Economic Area countries to “link their respective emissions trading schemes”.

“This would result in reciprocal exemption from both UK and EU CBAMs of products where carbon leakage risk is low, or where there are particular challenges in applying a CBAM,” Energy UK adds.

The trade body’s response also calls for clarity on how the UK and EU CBAMs will impact the Single Electricity Market (SEM) between Ireland and Northern Ireland, and how it will apply to the two electricity interconnectors between GB and the SEM – one of which connects with Northern Ireland and one with the Republic of Ireland.

“The UK Government should work closely with the Irish Government to seek immediate clarity about how the European Commission intends to apply the EU CBAM on electricity trade between GB and the SEM, and whether the market coupling exemption can apply to individual interconnectors that are either coupled between day ahead markets or intraday markets,” the response adds.