Britain is preparing to introduce a carbon tax on imported goods, known as the Carbon Border Adjustment Mechanism (CBAM), in order to protect UK businesses from being outcompeted by foreign manufacturers. The tax, set to be implemented in 2027, aims to ensure that imported products such as iron, steel, aluminum, ceramics, and cement face a similar carbon price to domestic goods, thereby maintaining fairness in the market.
Governments use carbon pricing as a tool to reduce emissions by imposing charges on carbon pollution, encouraging industries to decrease their greenhouse gas emissions. Chancellor Jeremy Hunt highlighted the role of the UK CBAM, stating that it would ensure that carbon-intensive products from overseas, such as steel and ceramics, face a comparable carbon price to those produced in the UK, resulting in reductions in global emissions.
The UK government identified the new tax as a means to address “carbon leakage,” where emissions are displaced to countries with lower or no carbon pricing mechanisms. The CBAM will work alongside the UK Emissions Trading Scheme (ETS), similar to how the EU’s CBAM functions alongside the EU’s ETS. These plans aim to level the playing field and encourage investment in net zero efforts.
Under the proposed CBAM, charges will be based on the volume of carbon emissions generated during product manufacturing. The difference between the carbon price in the country of origin and that paid by comparable UK manufacturers will also impact these charges.
The UK CBAM will cover Scope 1, Scope 2, and specific precursor product emissions in imported goods, aligning with the coverage provided by the UK ETS. The UK ETS regulates and prices greenhouse gas emissions produced by domestic industries. It operates on a cap-and-trade mechanism, allowing the market to determine the value of emission allowances, gradually reducing the total carbon emissions allowed over time.
To address the risk of carbon leakage within sectors covered by the UK ETS, a portion of UK ETS allowances (UKAs) is allocated to operators in exposed sectors without charge. This allocation reduces their exposure to the carbon price while maintaining the overall emissions cap across the included sectors.
Following a consultation on carbon leakage solutions, the Treasury reported that 85% of respondents identified the issue as a present or future risk to their decarbonization efforts. There is concern that while UK companies work towards reducing greenhouse gas emissions, equivalent efforts are not mirrored abroad, potentially resulting in emissions shifting to countries with less ambitious net zero targets.
To address these concerns, implementing a suitable carbon price like CBAM is seen as a significant step in closing carbon loopholes. The Treasury plans to engage in further consultations in 2024 to determine the specifics of the levy, including its design, implementation, and the comprehensive list of goods subject to the tax. Input will be sought from various sectors, including power, aviation, and industry, regarding the UK ETS.
The Chairman of the Environmental Audit Committee emphasized the need to address emissions associated with imports, which account for 43% of the UK’s consumption emissions. Implementing a carbon price at the border will play a crucial role in closing carbon loopholes and supporting the UK’s decarbonization efforts.
The introduction of the carbon tax in the UK marks a significant step towards aligning carbon pricing and ensuring fairness in global markets. By covering a wide scope of emissions, the CBAM aims to close carbon loopholes, incentivize industries to invest in net zero efforts, and support the nation’s decarbonization journey.