Unlocking the Future of EU-GB Electricity Trade Amid CBAM

A comprehensive presentation based on the ICIS Report Insights

Key Highlights

Understanding CBAM: Overview of the Carbon Border Adjustment Mechanism's role in shaping electricity trade.
Impact Analysis: Detailed scenarios on how CBAM and differing carbon price mechanisms influence power flows, emissions, and market dynamics.
Strategic Recommendations: Policy and regulatory frameworks to secure EU-GB trade with balanced carbon pricing measures.

Presentation Outline

Slide 1: Introduction & Background

Context and Objectives

This presentation is driven by the insights from the ICIS report on “Mitigating CBAM Risks: Recognizing UK Carbon Price is Key to Securing EU-GB Electricity Trade.” It outlines how the EU's Carbon Border Adjustment Mechanism (CBAM) impacts electricity trade between Great Britain (GB) and the European Union (EU), explaining key background, modelling scenarios, projected impacts on power flows, emissions, and market prices, and finally recommending policy measures.

Slide 2: What is CBAM?

Overview of the Mechanism

CBAM is a policy tool introduced by the European Union intended to level the playing field by imposing carbon costs on imports produced in countries without strict carbon pricing mechanisms. In the context of electricity trade, the CBAM mandates that importers surrender certificates matching the carbon emissions inherent in imported electricity. This measure is designed to prevent carbon leakage and ensure a level pricing dynamic between imported electricity and domestically produced energy.

Under CBAM, electricity importers from non-EEA countries, including GB, face the full force of these costs unless the carbon price paid domestically (via mechanisms like the UK ETS and Carbon Price Support) is recognized. This presentation discusses various scenarios such as the “No Rebate”, where full EUA prices apply, and the “Rebate on Price Delta”, where differences between UK and EU carbon prices offer partial relief.

Slide 3: CBAM and Carbon Pricing Architecture

UK vs. EU Carbon Pricing

The effectiveness of CBAM in the context of GB-EU electricity trade significantly depends on whether the UK’s carbon pricing – through instruments like the UK ETS and Carbon Price Support (CPS) – is recognized at the EU border.

The report highlights that failing to allow for a rebate based on the UK's carbon prices may lead to double taxation, curtailing GB's exports by potentially reducing them by up to 76.7% in the most severe scenario. In contrast, aligning the UK and EU carbon pricing models, or applying a rebate based on the price delta, could mitigate these trade disruptions.

Scenarios Explored

Reference (No CBAM): Baseline scenario without the imposition of CBAM charges.
No Rebate: Full imposition of the EU emission allowance (EUA) prices on GB imports, resulting in significant trade and emissions impacts.
Rebate on Price Delta: Recognizes UK carbon pricing, causing reduced but still significant trade disruption primarily when the EUA exceeds the UKA.
Linked System: Hypothetical direct linkage between the UK and EU ETS systems, effectively neutralizing the CBAM impact on trade.

Slide 4: Modelling and Data Analysis

Understanding the Forecasts and Projections

The ICIS report employed a combined European power and carbon model to simulate the outcomes from 2026 to 2030, keeping parameters such as power capacity, demand, and fuel prices constant.

Central to the study were projected carbon prices in the EU and GB markets. Some key figures include:

Year	EUA Price (€/tCO2e)	UKA Price (€/tCO2e)
2026	103.21	96.42
2027	113.65	105.70
2028	132.83	112.14
2029	112.33	120.45
2030	118.99	161.99

This table reflects the UK carbon price (UKA) consistently falling below the EUA price until certain scenarios, emphasizing how the evidence and rebate mechanisms play an integral role in shaping power flows and trade dynamics.

Slide 5: Impacts on Power Flows and Emissions

Effects on Electricity Trade and Energy Generation

In the Reference scenario without CBAM, Great Britain maintains a net import status of approximately 22.5 TWh/year while exporting around 20.5 TWh/year.

The “No Rebate” scenario leads to a drastic reduction in exports, averaging only 4.8 TWh/year – a reduction of nearly 77%. This results in diminished GB gas-fired generation and lower corresponding emissions domestically; however, it forces higher fossil generation in the EU.

In the “Rebate on Price Delta” scenario, while the reduction in exports is less severe (roughly a 21.9% decrease), GB still experiences a significant change in its power market dynamics, especially during the initial transition years (2026 to 2028).

Slide 6: Market Price and Trade Dynamics

Implications for Electricity Prices

The CBAM, due to increased import costs, is expected to lower prices in the domestic GB market, effectively "trapping" renewables. Conversely, EU markets might observe a price increase as the gap left by GB's reduced exports is filled by more expensive fossil-fuel driven generation.

It is important to highlight the interplay between domestic benefits (lower power prices in GB) and larger-scale inefficiencies (increased EU emissions and power prices).

Slide 7: Visualizing the Impact – A Radar Chart

The following visualization is a radar chart representing our analysis of several key dimensions impacted by CBAM under various scenarios. Dimensions include Trade Volume, Emission Changes, Price Impact, Generation Shifts, and Policy Effectiveness.

Slide 8: Strategic Framework & Mindmap

Visual Mindmap of Key Decision Areas

This mindmap captures the interconnected aspects of CBAM, including carbon pricing, trade flows, emission impacts, renewable integration, and policy recommendations needed to secure seamless EU-GB electricity trade.

graph LR A["CBAM Impact"] --> B["Carbon Pricing"] A --> C["Trade Flows"] A --> D["Emissions"] A --> E["Renewable Integration"] A --> F["Policy Recommendations"] B --> G["UK ETS & CPS"] B --> H["EU ETS"] D --> I["Domestic Reduction"] D --> J["EU Fossil Generation"] F --> K["Legislative Clarity"] F --> L["Linked ETS Systems"]

Slide 9: Case Study – UK and EU Electricity Trade

Scenario Analysis and Market Reactions

A detailed examination of the impacts shows that without a CBAM rebate mechanism (the “No Rebate” scenario), GB's electricity exports could fall by nearly 77%, while the “Rebate on Price Delta” scenario indicates a reduction of around 21.9% over critical initial years.

The resulting shifts may also force higher fossil-fuel based generation in the EU, thereby offsetting some domestic emissions reductions in Great Britain.

Slide 10: Multimedia Insight

Understanding CBAM Through Video

To further enhance your understanding, here is a relevant video session that delves into the CBAM mechanism and its broader implications on trade and climate policy.

Slide 11: Recommendations for Stakeholders

Policy and Market Measures

Effective implementation of CBAM requires:

Clear legislative provisions and evidence requirements for recognizing domestic carbon pricing.
A potential dual recognition of both UKA and CPS to avoid double taxation.
Continuous monitoring of carbon price trends to adjust market expectations.
Consideration towards a potential linkage between UK and EU ETS frameworks, which could fully exempt GB-EU trade from CBAM adjustments.