Head of Trade & Customs
Clarity needed to prevent EU row on NI environmental taxes
Northern Ireland could provoke a row between the UK and EU over environmental taxes, a business organisation has warned.
Energy UK said there needs to be clarity about how the tax known as a Carbon Border Adjustment Mechanism (CBAM) will apply in Northern Ireland.
The UK government says Northern Ireland will be part of the UK CBAM, which will apply from 2027. However, Energy UK said the EU is likely to insist that its version of the CBAM applies in Northern Ireland.
Understanding CBAM
A CBAM is effectively a carbon or fossil fuel tax on energy-intensive imported goods like steel and fertiliser. The EU's CBAM also applies to imported electricity.
UK and EU manufacturers have to pay to emit carbon. A CBAM is intended to create a level playing field by making sure imported goods are also paying for the carbon emitted in their manufacture.
The Windsor Framework Challenge
Energy UK said the EU is likely to want its CBAM to apply in Northern Ireland due to the Windsor Framework, Northern Ireland's post-Brexit trading arrangement.
The framework essentially leaves Northern Ireland inside the EU's single market for goods while the rest of the UK is outside. That means goods moving from Great Britain to Northern Ireland face a range of checks and controls to ensure they meet EU standards.
Serious Consequences
Energy UK said that only by applying the CBAM on goods coming from Great Britain to Northern Ireland will the EU be able to confirm "that any goods entering the single market have paid a carbon price".
It added: "If the UK were to insist that the EU CBAM should not apply in Northern Ireland, this would have serious consequences for the government's 'reset' with the EU and risk reopening the Windsor Framework.
"A likely consequence of this action would be the imposition of barriers to trade in the form of retaliatory tariffs from the EU."
The Cost Problem
Energy UK also believes that even if the government agreed to the EU CBAM applying in Northern Ireland, it would still create problems by imposing significant new costs on goods and electricity being sold from Great Britain to Northern Ireland.
It said that ultimately the problems could be solved by the UK and EU relinking their system for pricing carbon emissions, a link that was broken by Brexit.
The Solution: Linked Carbon Markets
It added: "Linking the EU and UK carbon markets would remove carbon borders between both jurisdictions.
"Most importantly, by creating a combined carbon market, the carbon price in the UK and EU will end up becoming the same.
"This removes the need for CBAM payments from the UK to EU. With a linked carbon market, the administrative burden of filling in CBAM paperwork will also disappear."
Government Response
A UK government spokesperson said: "Under the terms of the Trade and Cooperation Agreement, the UK government and EU agreed to consider linking our respective carbon pricing schemes and to cooperate on carbon pricing."
Analysis
This is a complicated and messy policy area which a few years ago could have blown up into a major EU-UK dispute. But there is currently no appetite for that sort of row, and the government seems to be edging towards a solution.
That solution is basically alignment with the EU's system for pricing carbon emissions. "Linking our respective systems is absolutely what the ambition is," the government's EU point man Nick Thomas-Symonds said last week.
If that happens, government critics will say that government policy is a slow drift back into the EU's orbit.