Failing to avoid the application of the EU's carbon border adjustment mechanism (CBAM) to the UK would constitute a dereliction of UK climate policy, delegates at a conference this week heard.
The application of the EU's CBAM would be "politically toxic" in the UK, Alistair McGirr, group head of policy and advocacy at utility SSE, told the Carbon Forward conference in London. It would risk trade friction, political issues concerning Ireland and lead to UK exporters effectively paying into the EU budget.
"If the EU CBAM applies to the UK we have failed in climate politics," he said.
CBAM can therefore be a "useful stick" to encourage the UK to link its emissions trading scheme (ETS) back to the EU's system, McGirr said, which would exempt the country from the mechanism.
McGirr is "hopeful" a linking agreement could take place ahead of the EU CBAM's implementation in 2026, with the linkage itself operational by 2028.
While the recently-elected Labour government has not yet confirmed it intends to link the systems, they already appear more comfortable working with the EU than the preceding Conservative leadership, McGirr said. They may not have acted yet because they do not want to appear too close to the bloc too quickly, he said, and trust between the jurisdictions will also need to be rebuilt.
The obligatory review of the EU-UK trade and co-operation agreement could present an opportunity to restart the conversation, said Beth Barker, senior policy officer at UK sustainable business alliance the Aldersgate Group.
But while the risk of trade complications is the "one thing that might really drive linkage" it remains politically very difficult, warned Trevor Sikorski, head of natural gas and emissions at consultancy Energy Aspects. He pointed to the lack of trust between the two sides, the potential for differing levels of climate ambition, and the risk the move could be perceived as giving control back to Brussels.
The limited size and liquidity in the UK ETS offers a "vision of the future" for the EU's system, McGirr said, and a link to the UK ETS offers one way of expanding the EU carbon market.
Under current rules, the EU ETS supply cap is expected to fall to zero by 2039, effectively allowing no emissions from covered sectors. But this legislation "cannot stand" unless the EU wishes to decarbonise through deindustrialisation, head of climate research at fund manager Andurand Capital Mark Lewis told delegates.
Lewis "takes it for granted" the UK ETS will be linked back to the EU ETS "way before 2030", he said, agreeing that the application of the EU CBAM to the UK would constitute a "terrible failure of UK climate policy".
The EU carbon market should also expand to include credits issued under Article 6 of the Paris climate agreement, he said. The article sets out the framework for two global carbon trading mechanisms, the rules for which are yet to be finalised.
But the EU ETS supply cap will not necessarily actually fall to zero as quickly as feared, European Commission advisor Damien Meadows pointed out, because as other sectors are added to the system the cap will be revised upwards accordingly. "We don't need to panic," he said.
