Debunking Benefit 2: Why Keeping 100% of Not-Very-Much Isn’t a Benefit

In which a revenue simulation becomes a miracle, context vanishes, and Brexit gets another imaginary dividend.

It completely flabbers my gasts just how much can be misconstrued about an exceptionally complex subject in just 480-odd words. That was the whole of chapter two. I have, quite honestly, had text messages that have been longer and more detailed.

If you glance at it quickly, the claim that serves as the foundation of the second Brexit benefit seems to be simple enough - Britain, now outside the EU, has created a shiny new thing called a Carbon Border Adjustment Mechanism¹ (or CBAM), that it’s “better catered to the UK Economy” and that, unlike those poor EU member states that haven’t left in a huff yet, we get to keep 100% of the revenue this mechanism creates, instead of 75% going towards EU debt repayments.

Throw in a £1.8bn revenue stream from CBAM into the UK, and presto! Brexit has magically given us billions in more cash-moneys a year out of thin air - someone get the pint-sized bottles of champagne out!

Claim: “The UK Carbon Border Adjustment Mechanism (CBAM) is better catered to the UK economy than the EU version that preceded it. 100% of the revenue generated by it will be spent on the priorities of the British Government, instead of 75% going on EU debt repayments.²”

Now, before we get in too deep into why the tiny bottles of Moet should rather be kept on ice for now, I am going to be very honest here - Carbon Taxation Mechanisms are not in any way or form sexy. I can chuck a mullet and a moustache on the subject as much as I want, but the fact is that it is technocratic, convoluted and a highly specialised area of work, so I’m going to try and explain what these concepts are in a way that I was able to work them out on my own to show why calling this a “benefit” is a bit… optimistic.

Some Basics

Starting with the main concept, a carbon price³ in this context is what boils down to a fine or penalty for polluting and made into a market instrument. Both the EU⁴ and the UK⁵ run Emissions Trading Systems⁶ (ETS) - these are cap and trade schemes that force big emitters to buy permits for every tonne of carbon dioxide that they pump gleefully into the atmosphere. The cap that these schemes impose is designed to fall over time, the permits become fewer and the idea behind it all is that the rising price nudges industry towards cleaner technologies - or that’s the theory anyway.

One of the biggest issues with carbon pricing is the concept of “carbon leakage⁷” which basically comes down to if you make it more expensive to pollute inside your borders, you run the risk of shifting your production (along with its emissions) to other parts of the world - and this is where CBAM as a tool comes into play.

Photo by Matthias Heyde on Unsplash

CBAM as a mechanism acts as what could be considered customs for carbon - if you want to import high-carbon materials like steel, cement or fertiliser into the EU as a member country, you’ll have to pay a charge that is approximately equal to the price you would have paid had you made that stuff within the EU borders instead. It’s not primarily or explicitly meant to be a cash grab - most of the actual serious work being done on this is very clear that CBAM is an environmental tool that’s designed to stop carbon leakage, not a piggy bank with smoke billowing out of it⁸.

The EU was first out of the starting blocks with its CBAM policy, having started work on it in 2021 and their scheme is already in a reporting phase with charges likely to start in 2026 - which basically means that everyone trading heavily with the bloc (as an example, the UK) has to put their own mechanisms and plans in place, which kicked off in 2023 and is due to become operational in 2027⁹.

Had we not done so, UK manufacturers who pay a UK carbon price here would be competing with imports from places that don’t meaning that UK exporters would still be hit by the EU’s CBAM when they sell into Europe¹⁰.

The Dreaded 75p

Mr Foyle’s chapter describing this particular Brexit “benefit” contains a couple of points that are… inaccurate, and the first one I’d like to discuss very briefly is the money side of things.

Under the EU model as described it is true to say that 75% of CBAM money that’s collected by member states goes to the EU budget as an “own resource” while 25% is retained by the member that first collected it, which Foyle deftly translates into “75% of the money goes on EU debt repayments”, which obviously sounds terrible - that is, until you read the documents that he hasn’t quoted.

The reality of the arrangement is that the 75% goes into the general EU budget and will go towards funding everything from regional development, agriculture, climate contributions and, pretty crucially, it reduces just how much each member state of the bloc has to contribute from its national budget¹¹. Yes, a part of that budget will ultimately service the debt that was taken on for post-COVID recovery in the EU under the NextGenerationEU programme¹², however, CBAM is only one revenue stream among many¹³ - not a dedicated “debt tax.”

The conversations that have been going on over the past several years have also been pretty clear that the CBAM revenues will be exceptionally modest - on the order of €1.5bn a year, which is less than 1% of the EU budget¹⁴, meaning that as a revenue stream it’s unlikely to make a massive impact anyway, and there are arguments made that any income gained should be used to support green industries and further decarbonisation efforts.

So when Mr Foyle writes in relation to this benefit as though 75p of every pound made from CBAM will be shovelled straight into some sort of Brussels-labelled debt furnace, he’s eliding a fairly important distinction that changes the context significantly - contributing to an overall budget that funds programmes (and reduces your other contributions) is not really the same thing as having your hard earned money disappear into “EU debt repayments.”

And a very similar thing happens when we look at the UK side of the story, in which Mr Foyle states that we’re expected to receive “up to £1.8bn a year” in CBAM revenue - a number that he’s taken from the previously cited Frontier Economics modelling exercise that was commissioned by the Commission for Carbon Competitiveness.

While the report in question does indeed mention the amount of £1.8bn, it also mentions a lower range of £340m with another two scenarios in between - with the higher number being the rosiest combination of assumptions about carbon prices, product coverage and trade patterns. The authors themselves describe their work as simulations, not forecasts and are pretty explicit that the revenues depend very heavily on exactly how the scheme itself is designed and, pretty importantly, how other countries respond.

“The estimates are therefore “what-if” simulations, not forecasts” - Frontier Economics, UK Competitiveness and Carbon Pricing, 11 March 2024

Very conveniently, this context is not included in the chapter - you’re only told about the BIG NUMBER which is presented as if it were a realistic expectation instead of a “best case scenario if everything breaks our way and no one changes their behaviour at all.”

The Question of Bespokeness

This brings me to the point of design - in the chapter, Foyle describes the UK’s CBAM system as “better catered to the UK economy than the EU version” because it is “subtly different in terms of impacted sectors” - except that the consultation trail tells a bit of a different tale.

The UK originally wanted to cover seven sectors¹⁵, and then eventually decided to drop glass and ceramics because they were “less emissions intensive” and raised “feasibility concerns¹⁶”, so our CBAM now covers five sectors (aluminium, cement, fertiliser, hydrogen, iron and steel¹⁷), while the EU’s covers a very similar set, but also includes electricity and is designed from the ground up to be expandable¹⁸.

UK Authorities have also gone out of their way to stress and reiterate that they’re aligning the methodology for our CBAM to the EU’s to “avoid competitive distortions” for firms that trade across both markets¹⁹, or, said in a different way, we’re just not boldly tailoring a bespoke system to the heart of Britain’s sovereign needs, we’re building a somewhat smaller and slightly more fiddly version of the EU system because we’re genuinely not keen to diverge too far from our closest and biggest trading partner - because, well, consequences.

The Counterfactual and Omissions

Now, if we were feeling generous and decided to take Mr Foyle’s claim of £1.8bn in income from CBAM at face value, the claim still topples over awkwardly as soon as you ask the question that Brexit boosters can never quite answer:

Compared to what, exactly?

Because, again, you have to look at the actual counterfactual here which is that had the UK remained in the EU we would have:

• Kept 25% of CBAM that we collected in revenue at UK borders and had the other 75% go into the broader EU budget.

• We would have continued to receive EU expenditure in the UK which worked out to a good whack of money in the pre-Brexit period across agriculture, regional development²⁰.

• Completely avoided exporters being hit by EU’s CBAM when selling into Europe.

And that brings us to the final and most glaring omissions in the second of Mr Foyle’s Brexit Benefits - which is that because UK carbon prices have tended to be somewhat lower than EU prices since 2022, any UK manufacturer that exports to the EU will unfortunately also face top up charges under the EU CBAM, with Frontier Economics estimating that UK firms could end up paying around about £800m to the EU²¹ between 2026 and 2030 across the key sectors of steel, aluminium, cement and fertiliser.

This bit of arithmetic appears nowhere in the supposed benefit described by Mr Foyle - and neither do the administrative, design and compliance cost of running our own CBAM and ETS infrastructure, which is made up of civil servants, IT Systems, regulators and auditors, while there is also zero mention of the trade friction that will be imposed on businesses that now have to deal with two overlapping carbon regimes when they trade across both the United Kingdom and the European Union.

Contextualisation

And this brings us quite neatly to the final bit of conjuring delivered (or rather not) by Mr Foyle: Context.

Even if we had to indulge every single optimistic assumption around the high £1.8bn that we’re expected to receive, we are still talking about single-digit billions in a country where the NBER has recently found that Brexit has cost us roughly 6 to 8% off our GDP²². That loss being in single percentage points may sound negligible in turn, but that works out to roughly £80 to £100bn that has disappeared out of this country. When considered against that overall cost, the potential maximum income that we could derive from CBAM revenue starts looking less like a windfall and more like finding a two pound coin down the back of the sofa you’re moving out of your house that you’ve just lost because you didn’t want to pay your mortgage anymore.

I would like to add to the conversation that I don’t believe that CBAM in and of itself is a bad idea - as a climate policy done and implemented properly, it does appear that it can be useful, and overall I’m a proponent of systems like these being introduced by the UK to give us a level playing field and to potentially have a positive impact on the environment.

The problem comes when you try to sell any of this as a Brexit benefit when it’s doing a lot less, a lot differently to that. The results just don’t translate. Our country is not suddenly £1.8bn a year better off because we’re heroically not sending 75% of our CBAM money to Brussels - we’re merely running our own parallel system because we have to in order to stay relevant. We gain a tiny bit of autonomy, yes, but this is completely at the margins, and the cost of that autonomy is that we lose scale, simplicity, funding and protection.

What chapter two has managed to do in under 500 words, and which has taken me more than 2,200 words to counter, is a miniature of the entire Brexit sales pitch:

1. Identify a highly complex technocratic policy.

2. Strip out every convenient bit you can (costs, counterfactuals, nuance, reciprocal flows).

3. Inflate the top-end revenue into a BIG NUMBER.

4. Slap on the “We Now Keep 100%” label.

5. Blame the EU for having the audacity of running a shared budget.

By the time you get the point that you’ve untangled all of that and managed to fit the missing pieces back into the narrative, the “benefit” we’re told about with such confidence turns out to be less of a sturdy pillar of “sovereign revenue” and more a slightly wonky folding table - something that’s useful in a very specific context, but definitely not something you would build your whole house around.

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Chapter two down, seventy-three to go. At this rate I may become the first documented case of CBAM-induced eyestrain. If you’d like to support this increasingly unhinged project, a paid subscription is wonderfully helpful - and always optional.

And if a one-off coffee is more your style, that’s also very warmly received.

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