Industry analyst fears EU carbon border tax will punish UK green energy

Authors: Susanna Twidale and Kate Abnett

LONDON/BRUSSELS (Reuters) – British wind and solar farms exporting energy to continental Europe could be charged for CO2 emissions from 2026 – even though they produce no emissions – unless Britain and the European Union agree changes to the EU border tax on carbon dioxide emissions.

Charges set out in a little-noticed clause of the Carbon Pricing Bill could hit revenues for renewable energy projects in the UK, increase already high energy prices in the EU and even lead to higher emissions, industry sources and Reuters analysts say.

“It’s a problem on both sides,” said Adam Berman, deputy director of industry group Energy UK.

“(It) discourages clean energy in the UK at a time when we are trying to increase the supply of clean energy, and it will drive up (energy) prices in Northern Europe.”

The Carbon Border Adjustment Mechanism (CBAM) will impose a carbon surcharge on EU imports of steel, cement, aluminum, fertilisers, electricity and hydrogen unless the exporting country has an equal carbon pricing policy.

Under the current proposal, the CO2 energy fee would be calculated using a default value based on average and historical emissions from power generation. The British energy industry says this will unfairly penalize renewable energy sources.

“This is an issue that we are aware of and have raised, and that the UK has raised with the EU,” Catherine Stewart, deputy director of trade policy at the British Treasury, said at an event in Brussels last month.

A spokesman for the European Commission said it would continue discussions with all countries, including the UK, on ​​the draft carbon levy before finalizing its application from 2026.

Analysts say the additional cost of the levy could make it uneconomic to export excess clean energy from the UK to Europe during certain periods when demand is weaker, renewable energy production is high and energy prices are low.

Analysis by Aurora Energy Research, shared with Reuters, found that as much as 3 gigawatt-hours (GWh) of renewable energy generation, enough to power up to 2,000 homes a year, could be cut by 2030 if the levy proves disincentive for exporters.

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“You add tax on exports, which essentially reduces your profit margin every time you want to export,” said Pranav Menon, UK director of energy and renewables at Aurora.

Aurora says that in 2030 a carbon border charge could reduce by 5% the price that UK renewable projects can earn on their energy.

Limited access to cheap British electricity could result in wholesale energy prices rising by up to 4% in markets such as Ireland and the Northern Ireland integrated electricity market, which import large amounts of energy from the UK, Aurora analysis found.

If European countries increase energy production from coal and gas to make up for the shortfall, CO2 emissions could even rise – by as much as 13 million tonnes a year, equivalent to the emissions of 8 million cars, previous analysis by AFRY suggests.

A European Commission spokesman said that exports of renewable energy would be able to avoid the CO2 emissions fee if they could meet certain criteria and prove their origin.

But industry data says this can be difficult.

“Most electricity (between interconnectors) is traded anonymously… so it is almost impossible to show what the carbon content is,” said Pieter-Jan Marsboom, product and services manager at UK-Belgium electricity interconnector Nemo Link.

ELECTIONS in Great Britain

British and EU diplomats have quietly begun discussing the issue, but the highly political nature of any agreement between them after Brexit means no progress is expected before the UK general election on July 4.

Some industry groups are already in talks with the Labor Party, which polls show is on track to win the election comfortably, in the hope that it will persuade the government to reach an agreement with Brussels on a carbon price.

Labor did not respond to requests for comment.

One option would be to link the EU and UK carbon markets, exempting UK energy producers from the tax.

“The best way to deal with the (CBAM) problem and stop UK exporters paying tax to the EU that could otherwise go to the UK budget would be to create (carbon market) linkages,” said the group of SSE, a British electricity producer Head of Policy and Advocacy Alistair McGirr.

So far, neither Brussels nor London has agreed to this idea.

Former British climate change minister Graham Stuart told Reuters in March that the two sides could explore the possibility of establishing links as part of a post-Brexit trade and cooperation agreement.

A European Commission spokesman said the bloc was open to linking its emissions market with others, but “this must result from the mutual will of both parties.”

“This remains to be investigated,” the spokesman said.

(Reporting by Susanna Twidale in London and Kate Abnett in Brussels; Editing by Catherine Evans)