The EU’s race to net zero and why it matters to everyone else

Published 27/03/2024   |   Reading Time minutes

As part of its net zero plans, the EU is changing how it handles imports from carbon-intensive industries. The changes will initially apply to some industries but will eventually apply to all EU imports.

The EU’s Carbon Border Adjustment Mechanism (CBAM) is the “world’s first” carbon border tax. This is designed to stop “carbon leakage”, where companies move production to places with laxer climate rules to avoid domestic emissions-reducing measures, or when domestic goods are replaced by more carbon-intensive imports. Domestic attempts to reduce emissions can be undermined, and jobs may be lost, while the country’s carbon footprint stays the same, or even grows.

CBAM could mean big changes for Welsh exports to the EU. EU importers must report the amount of emissions incurred in producing their imports and, from 2026, pay extra charges based on these emission levels.

With 59.5% of Welsh exports by value EU-bound, the Welsh Government frequently describes the bloc as our “most important trading partner”.

This article introduces the EU’s CBAM, and explains why it matters.

EU CBAM basics

The EU wants to be carbon neutral by 2050 as part of its European Green Deal. One target along the way is to achieve a 55% net reduction in emissions by 2030. Last month, the EU also published a roadmap for its 2040 targets.

The European Commission says that the EU is at greater risk of carbon leakage as it becomes “a global climate leader”. It keeps a list of sectors and subsectors at risk of carbon leakage which includes steel, petrol and coal.

The EU believes CBAM will bring the carbon price of its imports in line with the carbon price of EU goods, making it less attractive to move production abroad.

CBAM charges will be based on the EU’s Emissions Trading Scheme (ETS). The EU’s ETS gives some sectors an amount of free emissions before they have to buy extra allowances to continue emitting. Some carbon-intensive EU industries receive a higher share of free ETS emissions allowances to protect their competitiveness, but these will be phased out between 2026-2034.

CBAM industries

CBAM will initially apply to six industries:

  1. Iron and steel;
  2. Cement;
  3. Fertilisers;
  4. Aluminium;
  5. Electricity generation; and
  6. Hydrogen.

Since 1 October 2023, EU importers have had to report emissions attributed to their imports.

From 1 January 2026, extra charges will apply based on the import’s emissions. The added cost will be calculated using the weekly average auction price of EU ETS emissions. This will increase as free allowances are phased out.

How will this affect Wales?

The EU is Wales’s largest trading partner and is more reliant on EU trade than the other UK nations. The latest trade statistics show that export values to the EU account for around 59.5% of Welsh exports compared with 50.4% for the UK.

CBAM means changes for Welsh exporters to the EU. They may need to provide extra information to EU customers to help them meet new emissions reporting duties. This could be trade information, like country codes, or environmental information, like emissions amounts.

The UK steel industry is concerned that steel which would’ve been sold to the EU from other countries could be diverted and dumped in the UK instead, forcing Wales’ steel industry to compete with cheap imports.

Perhaps most significantly, decarbonising to avoid/reduce CBAM charges and remain competitive could become an urgent consideration.

In addition to the goods themselves, a report by the Centre for Inclusive Trade Policy (CITP) found that Wales has a greater share of employment in CBAM industries than any other UK region. So, it “seems very likely to impact employment in Wales more seriously than elsewhere”. It also found that, as all but one of the most employment-vulnerable regions had the lowest labour productivity in 2021, CBAM could also “further exacerbate geographical inequality and weaken the effectiveness of the UK’s levelling-up programme”.

Exports of CBAM goods

Calculating Welsh exports of CBAM goods is complicated because UK export statistics don’t fully align to the CBAM goods list in the EU’s Regulation.

‘Iron and steel’ most closely align. The 2023 trade statistics show Wales exported £913.7 million worth of iron and steel to the EU. Tata Steel plans to close its blast furnaces in Port Talbot by the end of 2024 as the site moves to electric arc furnace production. Tata has said it will temporarily import steel from the Netherlands and India rather than using primary steel from Port Talbot, so that it can continue to make products at its downstream sites while the new electric arc furnace is being constructed.

Other categories are more complicated. For ‘electricity generation’, Wales exported £932.7m in power generating machinery and £447.5m in electrical machinery, appliances and parts to the EU which could incur CBAM charges. But Wales was a net exporter of renewable electricity to Europe in 2022 which would likely avoid CBAM. Wales also exported electric current to the EU, valued at £160.5m.

Aluminium is another complex category. Wales exported £455.8m in non-ferrous metals, £249.0m in manufactured metals and £61.1m in metalliferous ores and metal scrap in 2023, all of which could include aluminium.

Next steps for the UK

In December, the UK Government announced plans to introduce a UK CBAM by 2027, applying to all bar one of the EU CBAM industries (the UK’s will apply to glass and ceramics instead of electricity generation). Polling data from November showed 73% of UK manufacturers support a UK CBAM and 70% supported aligning it to the EU CBAM. No mention is made of linking the two in the latest UK proposals, published on 21 March.

Details will be finalised this year but CBAMs have formed part of discussions on the future of Welsh steel at the Senedd’s Economy, Trade and Rural Affairs Committee, including with the Secretary of State for Wales, David TC Davies.

UK Steel, which strongly supports a UK CBAM, has already warned it’s “hugely concerning” that there’ll be a one-year gap between the EU and UK CBAMs start dates. It estimates that 23Mt of steel could be dumped in the UK in this window.

At the last meeting of the UK-EU joint parliament, the Parliamentary Partnership Assembly (PPA), Huw Irranca-Davies MS and Sam Kurtz MS, echoed these concerns.

Many of the EU and UK CBAM’s implications are unknown. For example, we don’t know whether EU importers could switch from Welsh exporters to EU suppliers before the UK CBAM might level the playing field.

What we do know is that CBAMs are designed to clamp down on carbon leakage, forcing the issue of whether to decarbonise to stay competitive.

One thing’s for certain: the EU’s race to net zero is not just the EU’s race.

Article by Sara Moran and Helen Jones, Senedd Research, Welsh Parliament