Welcome to the third panel in today’s hearings on trade strategy and trade principles. This panel is going to zero in on the question of how we can put in place good guardrails to help us collectively hit net zero targets we have signed up to and the role of our trade strategy in that pursuit.

Thank you for joining us. There is a big concern about decarbonisation automatically meaning deindustrialisation. We have heard this week that domestic steel producers are complaining that they may lose as much as £150 million a year now as carbon credits are taken away from them domestically. This might be most relevant for Frank and Sarah rather than you, Rebecca. Looking at imports, which countries and sectors are the biggest contributors to the carbon that is embedded in products imported into the UK?

Thank you for having me here today. If we look overall, the challenge is the right challenge. How do we decarbonise without deindustrialising? We have to be very mindful that the net zero target is a territorial target. It ultimately focuses just on reducing emissions that are within the territory of the UK, rather than our consumption emissions as well. This is ultimately the problem. We import quite a lot of steel from various sources around the world. About 60% of it is from the EU and about 40% is from non-EU sources. Being mindful that this is a problem, if you look at our territorial emission from the steel sector, it has historically been around the 10 to 12 million tonnes of CO2 over the last 10 years. If you start including the imported steel as well, so the steel embedded in products and the steel directly imported, you are looking at something closer to around 30 million tonnes of carbon, so about three times as much. This is ultimately the issue around the territorial versus the consumption emissions and how we work and ensure that, when we decarbonise, we do not just reduce emissions within our borders, but also from the consumption of those products.

The UK has been a world leader in reducing its territorial emissions, but our performance on reducing consumption emissions is much poorer. The helpful thing that we have going for us, though, is that lowering our consumption emissions is going help on a number of fronts. It is going to reduce our exposure to future inflationary price shocks, such as we saw following the Russian invasion of Ukraine, and hopefully help us create new jobs across the country via new industries that enable better resource use. There are lots of things we can do in this space and we absolutely need to be getting on with the whole range of different things.

A lot of carbon-dense industries are energy dense as well. I am not sure quite how we are going to insulate them against price shocks.

There are lots of things we can do to reduce our consumption emissions, such as avoiding unnecessary demand, improving production methods and switching to cleaner processes using renewable electricity.

So electric furnaces rather than blast furnaces for steel?

Yes, exactly, and green hydrogen. Other people are better to speak on that than I am. It is switching to cleaner alternatives, basically. There is a whole range of different things we can do that can help reduce our consumption emissions but also, as I said, improve the resilience of various sectors.

Should the Government introduce legislation to specifically require importers to assess the carbon embedded in their products throughout the supply chain before they place them on the UK market? Frank, do you have a view?

This is coming into the territory of the carbon border adjustment mechanism, where we effectively are saying that in the UK we have an emission trading scheme where domestic producers are required to report and, in large part, pay for their emissions associated with that production. When you import steel from non-EU sources, there are no such requirements today. The Government have now finally agreed to introduce a carbon border adjustment mechanism that would require imports of steel, for example in my case here, to report on the emissions or maybe even use a default value. Our concern is that it is only covering five industrial products. It does not cover any steel embedded in products. If you are importing a vehicle, white goods, construction material or more complex products where steel is just one component, you suddenly avoid and can circumvent the CBAM. This is one fault and why we have to be very careful with reducing free allocation. You alluded to the article in the FT over this weekend about how quickly we reduce free allocations for industries if all the downstream sectors completely avoid it. Ultimately, that means that we end up having supply chain circumvention where all the supply chain, all the companies that use steel, so the vehicle manufacturers et cetera, move outside the CBAM and then import their products to circumvent the CBAM.

If I can sum up, you are suggesting that the Government should legislate and actually widen that legislation. Is that probably what you are saying?

Yes, we believe that the CBAM should be covering a lot more sectors and there should not be the opportunity to use default values. You should actually have to report on your emissions associated with the products, such as domestic consumers and producers are.

Would you agree with that?

Yes. I would just say that we need to have a range of different policies when it comes to tackling carbon leakage. CBAM is absolutely one of those, but there are also mandatory product standards and market creation policies. On mandatory product standards, we would say very clearly that they absolutely should be mandatory. There needs to be a lead-in time, but they should be implemented on downstream end-user products, buildings for example, to exactly try to address the point that Frank was making. That would obviously help incentivise decarbonisation in their respective supply chains, but focusing on those types of downstream end-user products is the way that we would recommend.

Rebecca, I do not know if you have a particular view on this. Is this an area that National Grid is particularly involved in?

Thank you for having me here today. We were just describing the coverage of the UK CBAM. I am representing National Grid’s interconnectors business. This is six subsea cables connecting the UK to five North Sea European countries. The trading of electricity—exporting and importing to and from the UK—will be impacted by the implementation of the European CBAM from January next year. The UK CBAM as per design does not cover electricity, but the European CBAM does. What that means is that electricity that is exported from the UK via interconnectors to these European countries will be subject to a tariff. We forecast that tariff to cost exporters and UK Treasury significant sums by 2030. We are incredibly keen for the UK Government, as part of the reset that I have heard discussed at this Committee today, to ensure that energy, specifically CBAM, is one of the topics covered, so we can work towards closer collaboration and ensure that this is sensibly implemented.

No. I can elaborate on that answer.

Effectively, what we are trying to do here is mitigate global climate change. It is all very good if the UK just deindustrialises and reduces its emission territorially, but then imports all the industrial products that have loads of emissions associated with their production. It is avoiding the responsibility of decarbonising the cost associated with it and washing its hands of its responsibility to deliver true net zero. That is why we have been somewhat concerned sometimes that Government often like to reach out for the stick rather than the carrot when it comes to industrial decarbonisation and penalise industry for its emissions, rather than encourage and support it to decarbonise and provide the right supportive business environment for it to do so. CBAM is part of the solution, but I very much agree with Sarah that there is no silver bullet in this process. We need a number of different policies. Even the CBAM itself in the best of cases may also have issues with providing that protection, because there would be a way to circumvent it, for example, or avoid those costs at the border.

Absolutely, we need to do as much as we can on everything. This is something to be mindful of when talking about the trade strategy. We have this opportunity. The previous Government were quite random with their approach when it came to agreeing deals. The trade strategy used to do a lot of things. We would obviously like it to set out how it expects trade policy to align with and contribute with our net zero goals, both in the UK and overseas. We have suggested it should include some principles and frameworks to guide the development of both trade negotiations and policies in the trade space.

There are sectors more responsible for the UK’s consumption footprint than others. We did not mention it earlier, but there is transport, fuel and heating. There are lots of different spaces, but I would say the trade strategy must be based on robust information in terms of consumption emissions. Yes, that is the basic level that we are looking for in this space.

We have obviously heard about how the UK CBAM is going to be important in preventing carbon leakage, but I would be interested in your views about how it needs to be designed to avoid harming UK producers. I will start with Frank, who I know has many views from UK Steel on this.

Thank you so much, Antonia, for this question. I really appreciate it. We have been very keen to the Government that we believe there needs to be a level playing field on emission reporting and on cost of carbon overall. Since 90% of the world’s steel production does not face any carbon cost whatsoever, it is very welcome that we finally have a CBAM. However, that being said, we do have some concerns around the design choices that the Treasury and HMRC have taken in setting out what the UK CBAM would look like. This would be in particular about the use of default values: i.e. if you cannot be bothered to report on your emissions, to put it politely, you can use the default value that is just the average emission intensity. We are quite concerned that that basically means that, if you have double the emissions, or the highest emissions globally, you can simply just claim the default value, massively underpay for your carbon value and therefore circumvent most of the CBAM cost. We also have concerns, for example, around how robust the CBAM is going to be, and whether the Treasury and HMRC are going to regularly test this. Just in comparison, in the EU the Commission is required every two years to report on the effectiveness of the CBAM and propose options if it does not work. The UK does not have a similar requirement; we are particularly concerned, again, that DESNZ and other Departments are looking to reduce free allocation but do not have a plan B in case the CBAM does not work. What if it does not work? What if we see loads of circumvention? What if we see high-emission steel imports? What if we see a shift in exports and imports? Do we still keep reducing free allocation and therefore increasing the cost of domestic industry, while we allow imports to simply circumvent all this cost? We have some concerns over the design and how robust the policy is at the moment. It seems that they prioritised the importers of steel over domestic producers.

Of course, some might say that there are also some worries about the timescale. I had a response to a letter from the Treasury yesterday about the CBAM, which said that the EU CBAM cost will be minimal in 2026. I would appreciate your thoughts on that.

We dispute that. With all respect to the Treasury, it underestimates the actual cost faced at the border in 2026 in the EU. Effectively, there are two ways of looking at it. You can look at how much you are going to reduce the free allocations that steelmakers in the EU, for example, receive at the moment. It is going to be reduced by about 2.5% in 2026, so that is fairly minimal. The thing that officials have perhaps left out is the fact that there is already a gap between the free allocations you receive and the actual emission profile. By our estimation and the latest data, it suggests that it is about 25% short, plus the 2.5%. You get to about 27.5% short in terms of emissions and free allocation. That is what importers have to pay. At that point, really, you are looking at a potential cost of around €40 per tonne of steel. The steel industry is very trade intensive. Contracts are usually made on less than £5 per tonne of steel, so if you suddenly have to pay £40 at the border you may not be able to compete. All that high-emission steel that cannot compete and is suddenly stopped at the EU border is going to be displaced to other markets, such as the UK, and cause massive damage to the domestic steel industry. We are very concerned that Treasury has not really taken in the entire aspects of that.

Rebecca, you have highlighted the issue around electricity trading schemes. Charlie Maynard has a question.

I have three very short questions. First, do you think it is a sensible goal to be heading towards a single market in electricity with the EU? Secondly, many interconnectors across the North Sea are linear, from A to B. Do you think we should be heading towards a mesh or a grid network in the North Sea with partners? Thirdly, what do you see as the biggest hurdles to building out interconnector networks out of the UK?

On the single electricity market, before Brexit the UK was part of a mechanism called the single day-ahead coupling, which meant that, whatever borders across European countries you wanted to pass electrons through, you entered your orders and the whole thing was optimised for you. The UK was cut out of that following Brexit. That means that people who want to trade electricity interconnectors to the UK or to any other country have to enter it via different systems, enter all their different buys and sells, their trades, as well as entering the European market coupling. This is inefficient. This has been proven time and time again to cost UK consumers and European consumers. It adds a cost. It means that the trade flow is just far, far less optimised. We believe that we should go back into the single day-ahead coupling and we have the support of many of the European grid companies as well. It would be a much more efficient way to run what is already a physically connected network. With regards to the current interconnectors being linear, you are absolutely right: they are connecting country A to country B. They are indeed very flexible, but go to two different locations. National Grid is pioneering the first offshore hybrid assets. It is a joint venture with TenneT, the Dutch grid. It not only connects two countries, but it connects what is going to be a very large offshore wind farm, which will be at least 100 km off the Dutch shore. This is the first example of what you can see as a hybrid interconnector, which is starting to combine different infrastructure. If we remember, we have huge ambitions in the North Sea between us and the North Sea countries: 300 gigawatts of offshore wind potential by 2050. We believe some of those assets will be hybrids, connecting to not just one or two, but potentially three or four markets. The technology is there. We are implementing it now. On the hurdles to further investment in interconnectors, we have heard about the European CBAM. If you believe there is going to be a tax on exports, that will no doubt dampen appetite for efficient trading. We are of course aware of challenges in the supply chain market today and challenges with planning, which we really hope will be supported by the clean power 2030 plan and the further efforts that the Government are making on strategic planning. What really supports interconnection between countries is, of course, energy collaboration at a political level, bringing together joint venture partnerships such as National Grid has with the state-owned grid companies across the North Sea, which benefit consumers every day by flowing the cheapest-price electricity to the most expensive country, with flexibility that changes in seconds, therefore really supporting the build-out of wind generation.

The UK’s policy on product standards is what I wanted to pick up, around eco-design requirements and reducing carbon emissions. What are your thoughts on how policy could be changed or improved to assist with that? We know we need to move towards an environment where we stop throwing things away all the time, and we reward repairable items and more recyclable items. Could you comment on that? I will slightly adjust the question afterwards and come to you, Frank, on industry more generally.

Eco-design standards are a really well-established set of product rules that have done some really helpful things. Combined with energy labelling, they save UK consumers £100 on their annual energy bills. They have been a real positive. It is obviously mostly focused on energy efficiency and household appliances, but we see no reason why that cannot be expanded. Indeed, the EU has been expanding its product standard rules, focusing much more on repairability and recycling, et cetera, and prioritising reuse. Unfortunately, after Brexit the UK put that area of policy development slightly on pause. It had other things to get on with, so we have seen increasing divergence in this area. We need to catch up with that. We now have the Product Regulation and Metrology Bill going through Parliament to try to allow some of the product standards that have been brought into place in the EU, so we can automatically uplift our own. Obviously when that is improving our standards that needs to be really clear. There is a lot of opportunity to make improvements in that area. As I said earlier, reducing demand for materials and keeping them in circulation longer all helps improve the UK’s resilience generally.

Frank, from an industry perspective around that circular economy and the carbon emissions factor, what do you think could improve from the same perspective around those products that are being created?

From a steel point of view, we already have a very good track record. Steel is technically infinitely recyclable, and is recyclable today. I believe that over 90% of it is recovered and recycled today. As we are moving to an electric arc furnace future for steelmaking, our steelmaking will be closer to 100% scrap-based steelmaking. There are already economic signals and incentives to recover reused steel and used it for further production. Things we could see in the future include digitalisation and digital catalogues, where, rather than being used as scrap and reproduced, it could be reused in certain places. If the steel—let us call it beams or rebar, for example—is still good enough quality, perhaps it can be reused, rather than having to be reproduced in an electric arc furnace. From a steel sector, I do not think there is a huge lot more to gain, relatively speaking; it is already a very circular economy or a circular production method.

Thank you very much. That takes us to the end of this panel, I am afraid. Our time has been slightly short this afternoon, but thank you very much indeed for a brilliant set of evidence. That has really helped us understand some of the guardrails that we are going to need to ensure are in place for trade strategy in the future when it comes to carbon. Thank you very much indeed for your time and for your evidence. That concludes this panel.