Carbon trading, the next Brexit disaster

The chemicals industry says 60% of firms face declining orders and now the sector is pinning its hopes on a new industrial strategy from the Labour government. Meanwhile, manufacturing employment continues to fall, as does its share of GDP. 

But if that were all not enough, another problem is fast approaching for all the industries in the UK that use large amounts of energy, including steel, aluminium, ceramics, potteries, heavy engineering and the chemicals sector. Brexit has another very nasty surprise in store for them all.

Because, as part of the deal to leave the EU, the UK also left the EU’s Emissions Trading Scheme (ETS). This is the scheme whereby heavy energy users buy and sell carbon credits to offset their huge greenhouse gas emissions. We could have stayed in the EU scheme, but we chose to leave and set up our own, which means there is a looming crisis that British industry is dreading. 

The EU and the UK will soon start to demand that importers of products into its market pay a “carbon tax” at the border, to ensure a level playing field and so that foreign products made without having to pay for those carbon credits do not undercut its domestic manufacturers, who are saddled with the extra costs of going green. Otherwise, companies would just produce their steel or chemicals in cheaper countries with lower standards. In that scenario, you wouldn’t be de-carbonising your economy, just de-industrialising it. 

The EU’s so-called Carbon Border Adjustment Mechanism is going to start next year and the UK’s own version in 2027, which means heavy industry in this country faces yet another crisis, and soon. 

As Frank Aaskov, director of energy and climate change policy at UK Steel, told me Britain and the EU “now have two different schemes with two different prices that do not recognise each other”. He says that since “30% of all our steel goes to the EU”, that means 30% of all our steel “would most likely have to pay to cross the border into the EU”. In short, we would face in effect tariffs on sales into Europe. 

Exactly the same issue will hit the UK’s chemicals industry, which imports around 75% of its raw materials from the EU and sends 60% of its exports to the continent. Nishma Patel, policy director at the Chemical Industries Association, explains that means the sector is very vulnerable to what is happening in continental Europe. “When we left the EU, we took across the EU Emissions Trading Scheme and just called it the British ETS, so it started as a very similar scheme. But over time the EU scheme has changed.”

Now, she says, “A factory in the EU will pay the EU carbon price, a UK one will pay the UK carbon price. If the two systems diverge then… it will essentially mean a carbon tax at the border” to make up for the different carbon prices. 

That means almost all manufactured goods, not just steel and chemicals, will face the likelihood of red tape, form-filling and extra taxes when they are either imported or exported to the EU. For components and raw materials that cross the border numerous times, the situation is even worse. 

That is why much of British industry says we should never have left the EU’s scheme and we should rejoin it at the earliest opportunity. Alternatively we could do what the Swiss have done and agree a deal with the EU.  

As Aaskov explains: “The Swiss have their own carbon emissions trading scheme, but it is linked to the EU, so that if you buy an allowance in the Swiss scheme you can spend it in the EU and vice versa. That means their prices are basically the same and they don’t have any border tax.” 

There is within our current trade deal with the EU a provision to negotiate a deal on carbon trading. All it needs is for the British government to start talks and ask to do it. 

But this would mean giving up some control of our industrial policy – we would have to agree to cooperate with the EU. The Tories failed to agree such a deal because they did not want to be seen to be talking to Brussels; but now things are supposed to have changed. 

As part of the UK’s “reset” of its relationship with the EU, a deal on carbon pricing and cross-border cooperation would be an easy win and a no-brainer. The government is “considering” such a deal.

Cabinet Office minister Nick Thomas-Symonds, who is overseeing the reset discussions, says that “linking our respective systems is absolutely what the ambition is.” Which is some sort of progress, because industry has been begging the government for an agreement for the last six years and has got nowhere. 

But time is now running out. Without a deal by 2026 we will have to pay to export to the EU. By 2027, when the UK’s scheme is up and running, we will face the farcical situation of the UK placing an import tax on EU goods, components and raw materials. 

These may then be included in a product that is re-exported back to the EU – and if so, the EU would put another tax on them. Working out the level of tax alone will be a bureaucratic nightmare. 

If you thought Brexit was bad for trade with the EU, just wait until carbon emissions trading gets up and running. It is yet another Brexit disaster that is coming down the track. 

The Tories had years to sort this problem out, but sat on their hands for fear of being seen to deal with “the enemy”.  The Labour government probably has just enough time to dodge this bullet, but it only has a matter of months to start talks and come to an agreement. 

The “reset” is going to have to start soon, or it will come too late for British industry.