The EIUG views the current UK carbon border adjustment mechanism (CBAM) as inadequate and substandard to avoid carbon leakage. The design risks failing to achieve its objective and undermines support from manufacturing sectors to be included in the future. HMT should take the time between now and its introduction in 2027 to make the necessary improvements. The EIUG paper published today sets out what improvements HMT needs to make.
The EIUG supports long term and effective measures to reduce carbon leakage. This will require continuation of allocation of free allowances under the UK’s emission trading system and a well-designed CBAM, taking into account sector specific issues to help fulfil that role.
The EIUG believes HMT still has time to make the following necessary changes to strengthen the UK CBAM to what it should look like in the first place:
- Introduce default values per product, process and key trading partner where the carbon intensities are markedly different, just like the EU has done;
- HMT and DBT to align the UK CBAM and compensation for indirect emission costs due to the UK ETS, as part of the upcoming review of the EII compensation schemes;
- Set out publicly the process and timetable to expand the UK CBAM to other products, mirroring the EU CBAM;
- HMT to publish a monitoring and evaluation strategy for the UK CBAM;
- Government to adopt the recommendation from the Commission for Carbon Competitiveness to address carbon leakage in the export market;
- HMT officials to have in depth discussions with the European Commission and get a formal opinion of UK CBAM equivalence, as part of the Government’s effort to build closer relations with the EU.
The UK CBAM is in several aspects materially weaker to the EU CBAM. This risks that, when the UK Government and the EU agreed to link their respective emission trading systems, traders might circumvent the EU CBAM via the UK with its weaker CBAM. Linking the UK and EU emission trading systems whilst keeping the CBAMs in place for trade between the UK and EU is wholly suboptimal and the EIUG encourages HMT to adopt product, process and trading partner specific default values as the EU has done.
Arjan Geveke, Direct of the EIUG, said; “Treasury’s design of the UK carbon border adjustment mechanism is inadequate and substandard. It’s unlikely to deliver on its objective to avoid carbon leakage. They still has time to make changes to strengthen it to what it should look like in the first place”.
Background
The UK CBAM aims to ensure that highly traded, carbon intensive products from abroad face a comparable carbon price to that paid by UK manufacturers. Levelling the playing field in terms of carbon pricing means that UK decarbonisation efforts lead to a true reduction in global emissions rather than simply displacing carbon emissions overseas. This is called carbon leakage. In practice, the UK CBAM will place a carbon price or tariff on the emissions embodied in imports of specified goods in sectors such as aluminium, cement, fertiliser, hydrogen and iron & steel.