Category: Policy and Regulation News

AFRY has today published an impact study report on the EU Carbon Border Adjustment Mechanism (CBAM), focused on electricity imports from Great Britain. The study was commissioned by Nemo Link and a group of interconnectors and transmission companies.

The report found that, although the principles and intentions of the EU CBAM are positive in the pursuit of decarbonisation, there are issues with the method of application which, unless addressed, unduly increase the cost of electricity imports into the EU from GB, presenting adverse outcomes for policy objectives, in particular: 

Two issues identified in the report:

1. Risk of significant over-statement of emissions assumed for electricity imports from GB, as values based on carbon intensity of historic fossil fuel generation are likely to be applied.
2. Excessive carbon price exposure for imports from GB, linked to practical obstacles to demonstration of a carbon price having been paid in GB by emitting generation and exposure of GB zero-carbon generation to carbon costs.

Resulting in the following adverse outcomes:

•    Putting at risk development of offshore grid/cross-border infrastructure needed for the energy transition;
•    Harming delivery of decarbonisation policies by presenting barriers to low carbon projects; and
•    Frustrating efficient market operation by unduly blocking flows that would otherwise be economic.

Action is needed to ensure efficient use of cross-border capacity. The report highlighted mitigation options as follows:

• Short-term actions:
  • Implicitly recognise UK carbon price having been paid in GB for any electricity imports from GB into the EU via implementing acts.
  • Allow use of recent GB system carbon intensity measure as basis for GB export emissions.
• Long-term actions:
  • Advance political agreement to create full ETS linkage
  • Ensure developing GB-EU implicit coupling model fulfils market integration requirements and political alignment on condition fulfilment.

“EU CBAM in its current form could create a very significant trade barrier for electricity imports into the EU even if the carbon prices in the third country are identical. This would negatively impact all dimensions of the energy trilemma. Political will is urgently called upon to get the identified issues addressed and an EU CBAM exemption for the UK e.g. via relinking the ETS schemes should be examined,” said Bart Goethals, Chief Commercial Officer, Nemo Link Ltd.

Full report can be downloaded here.

If you’d like to learn more about this study on the EU CBAM, AFRY will be hosting a webinar presenting the insights from its assessment, outlining the issues identified and their implications, on Monday 25th March 14.00 CET. Register HERE.

The aim of the EU Carbon-Border Adjustment Mechanism (CBAM) to prevent carbon leakage is admirable.

However, the detailed legislative proposals currently don’t consider well how electricity is traded in practice. Nemo Link expects that this will most likely lead to a double and/or unnecessary carbon taxation on electricity imported into the EU. Currently carbon-free imports would be even penalized more than electricity originating from thermal power plants.

In particular the CBAM drafting assumes by default that all imports of electricity from Third Countries are originating from fossil power plants. The current legislative drafting also makes it also very hard to consider the actual carbon content for imported electricity. This fails to consider renewable sources of electricity as export drivers and could discourage green electricity imports from outside the EU in the future.

In addition, in order to be eligible for a rebate against CBAM costs, an importer to the EU must provide proof that the goods they are importing have had a specific carbon price paid in the third country. However, this might not work well for one of the key sectors covered by CBAM, electricity, as it is virtually impossible to track the carbon price paid by electricity as most electricity, like an interchangeable commodity, is commonly traded nationally/internationally via anonymous exchange based transactions which makes a direct administrative trail between the producer and importer almost impossible to establish.

Once the EU CBAM is financially introduced, imports of electricity into the EU from third countries are expected to materially decrease, not because they are more carbon intensive than their EU equivalents, but simply due to the increased compliance costs and double and/or unnecessary carbon taxation. This is expected to lead to increased power prices in the EU.

The decreased imports are expected to lead to an increased activation of less efficient power plants in the EU and an increased curtailment of renewable plant output in the Third Countries. Both would lead to an increase in CO2 emissions overall and this will mean that the main aim of the EU’s CBAM is not met.

This type of trade barrier could also negatively impact the further buildout of additional interconnections with Third Countries and negatively impact some of the GB-EU Multi-Purpose Interconnector projects that are currently being considered.

The EU-GB electricity trade is particularly exposed to the unintended consequences of the EU’s CBAM given the level of interconnectivity, the UK’s very ambitious renewable buildout and net zero targets. Currently it was even expected that GB would have become over time a net exporter of electricity towards the EU. Especially in times of high RES output the EU was expected to be importing electricity from GB.

Given the expected impacts we urge EU policy makers to incorporate some changes to the latest CBAM legislative drafting.

Some minor wording changes on Article 9 that deals with the determination of the Carbon price paid in the country of origin would already be very beneficial.

Given the advanced stages of the CBAM negotiations, and to keep open the possibility for further (needed) changes/clarifications, it is important that the proposed review clause (Art.30) is sufficiently broad so as to allow such/clarifications changes to EU CBAM Regulation well-before its targeted financial implementation.

In the presentation prepared by Nemo Link (here) more information can be found on the topic (from a EU-GB perspective) and also some suggested wording changes to the latest legislative CBAM drafting are included.