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New EU tax on carbon imports could complicate things for Republic

Levy due in 2026 aims to address competitive gap opening between EU and countries which don’t price in climate costs associated with carbon emissions

French customs checkpoint on the French side of the Eurotunnel. Photograph: Philippe Huguen/AFP via Getty Images

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John FitzGerald
Fri May 17 2024 - 06:00

The European Union has been ramping up the cost of carbon in order to discourage emissions and help the planet, but that means a gap is opening up in the cost of fossil fuels between the EU and many other countries.

The result is that countries which don’t price in the climate costs associated with carbon emissions will experience a competitive advantage compared with EU businesses. This would mean that products produced elsewhere with ‘dirty’ energy could undercut cleaner EU production. This outcome would be negative for climate change, and negative for EU jobs and incomes.

To prevent such unfair and environmentally damaging competition, the EU is introducing a special tax on a range of products that have a high carbon content. These include electricity, cement, aluminium and fertiliser.

These products have a high emissions content that is easily verified. It would be much more difficult to calculate the carbon emitted in producing products such as cars or clothes.

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The proposed tax, called the carbon border adjustment mechanism (CBAM), will be applied by the EU from 2026. The tax will be calculated based on the difference in the cost each week of emitting carbon dioxide in the EU, and the partner country from which the trade is coming.

The products of particular concern to Ireland are electricity and cement, both of which are produced in Ireland and both of which are traded with the UK (now outside the EU). There are fewer issues with production of alumina in Shannon, as there are no competitive producers in the UK.

In the case of electricity, things get really complicated for Ireland, because Northern Ireland is part of the EU single electricity market, while Great Britain is not.

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This means that all Northern Ireland electricity producers have to buy EU emissions trading permits to cover the electricity they generate using fossil fuels. Because the North is not in the EU, the revenue from the purchase of the permits is returned to the Northern Ireland government for use in its budget.

When the CBAM tax comes into force, potentially it will have to be paid on all imports of electricity from Britain to this island, either via the interconnector with Northern Ireland or the interconnector with the Republic.

While there are different options on how to calculate the new tax, it is important that, for electricity imports, it would be based on the carbon emissions each hour. This is because the emissions vary greatly over time, depending on whether the wind blows or not. If the formula chosen were to be based on average emissions over a week (or a month), that could, perversely, encourage import of electricity from Britain when their emissions are high, while discouraging imports when they are low.

If an incoming Labour government chooses to follow closely the EU’s environmental policies, it may decide to restore the previous status quo, and align its emissions trading scheme price with the EU price

While the revenue in the North from emissions trading permits is remitted to Stormont, it is not clear at this stage who will ultimately receive the revenue from the CBAM tax charged on electricity imports into the North. Logically, it should also accrue to the Northern Ireland government.

The cement market is different – Northern Ireland is not part of any EU market arrangements. That means that imports of cement into the Republic, whether from Britain or Northern Ireland, should face a CBAM levy.

However, policing the cement market could be tricky, as there are lots of small builders buying it. Rather than border controls, an effective administrative system would be needed to deter smuggling and ensure the tax is collected. Otherwise Ireland’s cement industry could be undermined by cheaper UK production and might have to close.

The UK also has a domestic emissions trading scheme. Up to a year ago the UK’s Conservative government ensured that the price under that scheme was close to the EU price. If that near parity had persisted, no CBAM taxes would be needed on trade between the UK and the EU. However, last year the Conservative government brought about a big reduction in the UK price of carbon. So it looks like CBAM taxes between our two islands could be on the cards.

However, if an incoming Labour government chooses to follow closely the EU’s environmental policies, it may decide to restore the previous status quo and align its emissions trading scheme price with the EU price. That approach would be consistent with Labour’s overall policy on tackling climate change and discouraging carbon use. It would also remove another potential source of post-Brexit friction between our neighbouring countries, including rendering the CBAM irrelevant.

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