The EIUG has published a position paper today setting out the changes that HMT should make to improve the design of the UK carbon border adjustment mechanism (CBAM). The EIUG supports long term, effective carbon leakage mitigation, requiring continuation of both UK ETS free allocation and a well-designed CBAM, taking into account sector specific issues to help fulfil that role.
In the view of the EIUG, as it currently stands, the design of the UK CBAM does not meet the quality of a minimum viable product. It risks failing to achieve its objective and undermining support for other manufacturing sectors to be included in the future.
The UK CBAM aims to ensure that highly traded, carbon intensive products from jurisdictions outside the UK face a comparable carbon price to that paid by UK manufacturers, so that UK decarbonisation efforts lead to a true reduction in global emissions rather than simply displacing carbon emissions overseas, called carbon leakage. In practice, the CBAM will place a carbon price or tariff on the emissions embodied in imports of specified goods in the following sectors; aluminium, cement, fertiliser, hydrogen and iron & steel.
With regards to the EU CBAM, the current design of 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. This would undermine the integrity of the EU’s single market and the EIUG therefore thinks that the EU CBAM is likely to remain in place for imports from the UK until the European Commission has assessed the UK CBAM as equivalent. This means that one of the benefits of linking the emission trading systems could fall away, as we see ETS linking and mutually recognition of the EU and UK CBAMs as connected.
The EIUG believes HMT still has time to introduce changes and the position paper sets out its recommendations to strengthen the UK CBAM to what it should look like in the first place.