The Complexity of the EU CBAM in Northern Ireland

The European Union (EU) is poised to start the transitional period of its Carbon Border Adjustment Mechanism (CBAM) on 1 October 2023.1 Assuming the EU wants to implement the CBAM in Northern Ireland to prevent carbon leakage and the Joint Committee of the Withdraw Agreement agrees to do so, it’s going to have a significant economic impact on Northern Ireland.

This may divert trade away from Northern Ireland for those not wanting to pay for the extra cost of customs procedures involved in going through to the red lane. To mitigate these negative impacts, the UK and the EU should link their Emissions Trading Systems (ETS) and the UK should implement an EU-style CBAM too.

Our research identifies Northern Ireland’s exports and jobs associated with the EU CBAM-regulated industries.2 We find that Northern Ireland’s total exports of regulated products to the EU are estimated at £348m (of which £333m is to the Republic) accounting for approximately 5.8% of Northern Ireland’s total goods exports to the EU (and 10.1% of exports to the Republic).

In addition, we find that around one-quarter of employees in the industries that produce regulated products in Northern Ireland are linked to exports to the EU (and 23% to the Republic) in 2021. This implies that around 1,100 employee jobs are vulnerable to disruption by the EU CBAM and almost all these jobs (1,001 out of 1,091) are related to exports to the Republic of Ireland. 3

Goods destined for Northern Ireland, but which risk subsequently entering the EU customs union, will suffer unnecessary CBAM measures at Northern Ireland ports. The Windsor Framework, which reduces customs procedures and removes EU customs tariffs, will not solve this issue as these goods have to go through the red lane (i.e., are subject to EU customs tariffs). The impact will be relatively greater on those third-country goods4 for which the UK duty is less than the EU’s by three percentage points because they are at risk of subsequently going to the EU and, thus, must all go through the red lane.

The UK Government has yet to establish an EU-style CBAM to exempt imported goods into Northern Ireland from the EU CBAM and thus avoid the spill-over effect of the EU CBAM on the Northern Ireland market.

We have meticulously analysed the impact of EU CBAM on the imports of Northern Ireland in four scenarios in terms of whether the UK and the EU link their Emissions Trading Systems (ETS) and whether the UK has an EU-style CBAM.

According to our analysis, the implementation of EU CBAM in Northern Ireland will adversely affect Northern Ireland’s imports in all but one scenario: where the UK and the EU link their ETS and the UK has an EU-style CBAM. The EU-style UK CBAM means that it will measure the carbon content of imports in a manner consistent with the methodology of EU CBAM, thereby, with a linked EU-UK ETS, imposing customs tariffs on the imports at the same level of EU CBAM costs. Due to the same customs tariff (i.e., the same carbon border adjustment tax), Northern Ireland importers will be exempted from the EU CBAM tariffs at Northern Ireland ports.

Because Northern Ireland is part of the EU single wholesale electricity market, its electricity producers must purchase EU (not UK) ETS allowances for the carbon emissions they generate. Nevertheless, Northern Ireland electricity producers will still bear administrative fees related to identifying and reporting emissions.

As for EU CBAM-related goods produced in Northern Ireland, which consume electricity bought from the Northern Ireland’s retail electricity market that is subject to UK ETS price, they will bear the EU CBAM’s indirect emission costs. It would make the most sense if importers in the Republic should purchase CBAM credits at a quantity that deducts the indirect emissions costs already paid in the UK, which, were paid at the EU ETS price. However, it remains unclear how the Commission will deal with this issue.

To implement EU CBAM in Northern Ireland, the EU has to add its CBAM Regulation to Annex II of the Windsor Framework (the previous Northern Ireland Protocol). If the UK Government fails to link with the EU’s ETS and have an EU-style CBAM, the UK Government could (theoretically) use the Stormont Brake to prevent the EU from implementing EU CBAM in Northern Ireland.

However, under the Windsor Framework, launching the Stormont Brake requires that 30 Members of the Legislative Assembly from two or more political parties of Northern Ireland sign a petition. What is more, it also requests a pre-veto scrutiny process to prove the severe impact of a new EU Regulation on Northern Ireland citizens’ daily life. This could be more than difficult as the Northern Ireland Assembly is still separated, and the UK Government has yet to establish a pre-veto scrutiny process.

The UK Government faces conflicting interests between securing the well-being of Northern Ireland citizens and contributing to reducing global carbon emissions. Politically, using the Stormont Brake would harm EU-UK relations and stall progress in reducing carbon emissions.

1. The EU CBAM will cover six emission-intensive industries – cement, iron and steel, aluminium, fertilisers, electricity and hydrogen – and internalise carbon emission fees into imported goods in these industries, thus discouraging EU manufacturers from relocating their factories abroad to avoid the EU’s carbon emission cost.
2. See: Zhao, X and Zhang, D (2023) Where Technical Meets Political: The Complexity of the EU CBAM in Northern Ireland, CITP Working Paper 4
3. During the transitional period between 1 October 2023 and 1 January 2026, the EU importers falling within the six industries have to declare annually the volume of imported goods and the amount of emissions they embody (embedded emissions). Foreign exporters need to inform the EU importers of the relevant data and have it verified independently. After the transitional period, the EU importers must purchase and surrender the corresponding number of CBAM certificates at the EU ETS price in addition to their reporting obligations.
4. Third-country goods here meant those coming from outside the EU and the UK.