The UK is reported to be on the verge of introducing a carbon border adjustment mechanism (CBAM) that would apply a carbon price to imports into the UK based on their emissions intensity. It is an idea that the EU are ploughing ahead with, whilst the UK has been quietly pondering whether to follow suit. A decision is expected in the Autumn Policy Statement from the UK Chancellor scheduled for Wednesday 22 November. It is expected the UK CBAM would kick in from 2026 in line with the EU’s version.
The UK Government consulted in this space back in March-June 2023, but that was vaguely billed as an:
“exploratory consultation considering a range of potential policy measures to mitigate carbon leakage risk in the future and ensure UK industry has the optimal policy environment to decarbonise.”
See our earlier publication on the consultation.
Potential policies under consideration included a CBAM, alongside other alternatives such as mandatory product standards to help grow the market for low carbon products, and additional emissions reporting as a supporting measure.
Before that, in late 2021/early 2022, the Environmental Audit Committee (EAC) ran an inquiry into the idea of a UK CBAM, hearing from the likes of renowned professor of economic policy at Oxford University, Sir Dieter Helm. Sir Dieter supports a CBAM, not least on the basis that otherwise the UK would be able to meet its 2050 Net Zero target without addressing carbon embedded in the goods that we import, and also as a more effective step than waiting for the ‘top-down’ approach of the Paris Agreement which imposes emissions reductions expectations on states. He said in evidence to the EAC:
“The great virtue of the CBAM is that it allows you
unilaterally to start to build a coalition of the willing bottom-up, so that
the British public can know, whatever else is going on in climate change,
that we will no longer be causing climate change in 2050. Whether you
think that is a good idea or not, I think it is a good idea. The fact is that
our current targets do not do that and the CBAM would be a major step in
the right direction.”
A CBAM aims to prevent “carbon leakage” from the country in which they are introduced, i.e., the displacement of production (and its associated carbon emissions) from countries with stricter climate policies to those with weaker ones. At the same time, it provides an incentive for global decarbonisation – since exporting countries face increased costs at the border of countries with a CBAM unless they adopt equivalent climate measures at home. Less esoterically, imposing a CBAM may serve as a revenue raising measure, whether or not it is strictly a ‘tax’.
However, there are challenges, amongst them possible negative impacts on trade, on overseas development and on consumer prices.
The adoption of a CBAM by the EU is problematic for UK business:
- the sectors subject to the EU CBAM (i.e., cement, fertilizers, iron and steel, aluminium, electricity and hydrogen) who are seeking to export to the EU (still the UK's largest trading partner) have no certainty of the UK’s carbon pricing regime being treated as sufficiently robust to gain UK exporters an exemption from having to purchase EU CBAM certificates during the definitive period (ie, from 1 January 2026); and as a matter of fact the EU seems inclined to exempt from the CBAM only countries that have linked their ETS to the EU’s, which is not the case for the UK;
- unless the UK imposes a similar policy, increased amounts of high-carbon products that are deterred from entering the EU market by the EU CBAM may make their way instead onto the UK market, competing with domestically produced goods;
- however, the costs of complying with a UK CBAM will likely be passed on to UK purchasers reliant on imported raw materials and pose a significant administrative burden for importers; and
- a CBAM could possibly be challenged by trading partners who may view it as an unjustified barrier to trade that violates WTO rules or UK free trade agreements.
Whether the introduction of a UK CBAM will be sufficient without further Government support measures to safeguard British businesses at risk of carbon leakage, such as the steel sector, which is under pressure to decarbonise, is another question.
Measures unilaterally imposed by states in this way have the advantage of being quicker (if not simpler) to implement than multilateral agreements, and that could certainly be justified given the imperative of accelerating progress in addressing climate change. However, it adds complexity for global trade and multinational enterprises. The holy grail remains agreement at the international level on multilateral carbon pricing. Probably a distant dream. In the meantime, further detail on the UK proposal should emerge soon.
Please reach out to the authors with any questions.