Emissions trading systems (ETSs) have been at the core of climate policy in the EU and the UK for more than 15 years. Operating under a ‘cap-and-trade’ principle, they are designed to enable decarbonisation to take place in industries where it is most cost-effective. However, there is a risk that these systems push carbon-intensive industrial processes to other territories with less stringent carbon pricing, regulations or emissions standards. This can result in a subsequent overall increase in greenhouse gas emissions or ‘carbon leakage’.
To lower the carbon leakage risk, the Fit for 55 Package, published by the European Commission in July 2021, included a proposal for the introduction of the Carbon Border Adjustment Mechanism (CBAM).
This research project has developed an approach to assess the impacts of ETS and CBAM on Scottish business.
- Scottish ETS installations face considerable uncertainty in relation to their future exposure to carbon liabilities due to the changeable policy landscape.
- The main product groups within ETS sectors include primary energy and electricity, petrochemicals, metallic and non-metallic products as well as outputs of the pharmaceuticals, food and drink, wood-based and paper product industries.
- As well as the Scottish domestic market, the main ETS sectors primarily compete with producers in the rest of the UK. The key ETS exporting sectors mainly compete with producers in the EU and the wider European Economic Area, followed by the US.
- Our mapping suggests that sectors such as paper, metal forging, glass fibres, and non-metallic minerals may be particularly vulnerable to international competitiveness impacts. However, many of these sectors trade primarily with the EU, where carbon pricing is comparable. Many other sectors display “medium” risks; including glass, oil refining and chemicals.
- If the EU draft CBAM was implemented, the aluminium and iron and steel ETS sectors in Scotland would be affected. In addition, non-ETS sectors such as fertiliser production, may also see an impact, but further data collection is needed to fully quantify the impact.
- Our calculations suggest that the ETS installations considered in our study incurred an ETS cost of around £230 million in 2019.