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The carbon border adjustment mechanism

Commodity watch by Chris Osborne, UFU senior policy officer.

As many governments drive forward with their policies to decarbonise their economies, imbalances occur when other nations fail to align in terms of implementation.

What is the carbon border adjustment mechanism?

Aimed at preventing ‘carbon leakage’, the carbon border adjustment mechanism (or CBAM) aims to ensure equal treatment of domestic and imported goods by applying a charge to carbon emitted during the production of imported carbon-intensive goods, such as aluminium, cement, iron and steel and crucially for agriculture, fertiliser.

What is carbon leakage?

Emissions trading schemes (known as ETS) on their own, risk moving the production of carbon intensive goods to new locations or “pollution havens”, where producers may be subject to less stringent regulations. Although production may have moved, the same volume of emissions is still produced, and this is referred to as ‘carbon leakage’.

EU CBAM

The first CBAM in the world was the EU CBAM. It is currently in a transition period and will be fully operational from 1 January 2026, when certificate trading will commence.

UK CBAM

In December 2023, the UK government announced the UK would implement a CBAM.   HM Treasury last week concluded its consultation on its design and the Ulster Farmers’ Union responded, voicing concerns summarised in this commodity watch. Based on the government’s announcements, UK CBAM will be similar to EU CBAM, but there are differences in terms of timescale and scope.

NI Protocol/Windsor Framework

An overarching complicating factor is that Northern Ireland will follow the EU CBAM.  However, the UFU are no clearer as to what this means for us, as decision makers have not been able to provide clear direction.

Impact on NI

A CBAM will have cost and profitability implications for all agriculture sectors in NI, both directly in terms of reliance on imported fertiliser, but also indirectly on account of proposals to apply CBAM to downstream sectors to which we rely.

  • Direct impact

Where fertiliser is one of the primary inputs for production, CBAM will increase the cost of imported and domestically produced product.

  • Fertiliser use in NI

0.25m tonnes of fertiliser comes into NI port every year, and in terms of usage, 340,000 tonnes is applied to land in NI. Fertiliser use is the most significant variable cost for cereal producers, representing around a quarter of variable costs. However, it is also used extensively across other sectors in NI agriculture, grassland management and potato sectors being two examples.

NFU have modelled the cost implications of CBAD upon GB fertiliser prices, however, when applied to NI, costs could be greater. Here in NI, rules around importing fertiliser are slightly different. Pure ammonium nitrate fertilisers are not permitted and it is illegal to import and/or take possession of fertilisers which have more than 79% ammonium nitrate, unless licensed by the NIO. Most fertilisers in NI are based on a form of ammonium nitrate called calcium ammonium nitrate and these restrictions create historical anomalies when analysing price.

The UFU also have concerns at downstream impacts of the increase in fertiliser prices. NI farming will be required to compete with imports of grain or other agricultural commodities produced with cheaper fertiliser (that is not subject to a carbon pricing regime), both in domestic and international markets.

Electricity

Electricity is included in the EU CBAM model. Hence, the UFU have concerns, both in terms of generation, with implications on the wholesale trade/movement of generated energy and in relation to the day-to-day use by our members and any subsequent rise in cost.

Indirect/downstream impact

CBAM will apply to the cement, glass, iron and steel sectors. These are all sectors which the NI agriculture sector rely for maintaining their businesses, i.e., for infrastructure repair/improvements.

Should upward cost implications be mirrored for these sectors, and considering their role as an input in farming, it will mean more increased costs for NI agriculture, into the processing sector, to retail and there is a real danger of it being passed down to consumers in the form of increased food prices.

Next steps

The general election has put on hold any discussions on Brexit issues/questions/concerns until September 2024. We have raised our concerns with the Department for the Economy and have been assured of further engagement, which means that we will continue to seek clarity at the earliest opportunity.