On 30 March 2023, the UK government followed through with its May 2022 promise and opened an exploratory consultation to consider a range of possible policy measures to mitigate carbon leakage and to ensure that the UK industry has the correct policy infrastructure to decarbonise.
The consultation is split into two parts: (i) Part 1 sets out potential measures that the UK government could introduce to mitigate carbon leakage risk at all stages of the UK’s net zero transition; (ii) Part 2 sets out proposals on design and delivery features of embodied emissions reporting that could underpin future carbon leakage policy measures.
Part 1: Potential measures to mitigate carbon leakage
- Carbon border adjustment mechanism (CBAM): As the EU will introduce its CBAM in October 2023, the UK government is considering its own domestic CBAM which, when applied to imports into the UK, would reflect the carbon emitted in the production of the imported product and also any gap between the carbon price already applied in the country of origin and the carbon price that would have been incurred had the products been produced in the UK. The scope of any UK CBAM is currently unknown, but it may include products covered by the UK’s Emissions Trading Scheme and may also be rolled out in phases.
- Mandatory product standards (MPS): The UK government intends to pilot MPS on embodied emissions with a small number of sectors initially. MPS may then be rolled out on a more widescale basis. MPS would set an upper limit on the embodied emissions of specific industrial products and could be designed to increase in stringency over time.
- Demand-side policies: Such policies would aim to boost the market for low-carbon goods by increasing demand. Suggestions include product labelling and various public and private procurement initiatives.
Part 2: Proposals on design and delivery features of embodied emissions reporting
The UK government set out an embodied emissions reporting system that would help to support the implementation of carbon leakage mitigation policies. The consultation notes the potential administrative burden of such a system and recognises the need for any such system to align, where possible, with reporting standards used by other countries and within the EU.
The consultation runs until 22 June 2023, and interested parties can submit their response via online (see here).
The UK’s intention to introduce its own CBAM would be its response to the EU CBAM. It will be important for interested stakeholders to closely monitor the development of the UK CBAM and its differences with the EU CBAM, if any.
EU CBAM: The EU CBAM will be implemented from October 2023. During a transition period (1 October 2023 – 31 December 2025), EU importers will have to comply with reporting requirements, but will not need to purchase CBAM certificates yet. Once CBAM is fully in place from 2026 onward, EU importers will be obliged to purchase. (See our alert here)
This post was co-authored by London associate Alexander Rackow.
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Any questions? Please do not hesitate to contact Reed Smith. With our deep understanding of environmental and customs/trade law, we are uniquely positioned to help businesses understand the EU/UK CBAM as it develops, assess the risk and impact on business operations, and provide practical solutions.