Last month, the Environmental Audit Committee (‘EAC’) launched an inquiry into a potential future carbon border adjustment mechanism (‘CBAM’) for the UK. The objective of introducing a CBAM would primarily be to address the risk of carbon leakage in the UK industrial sectors caught by the nascent UK Emissions Trading Scheme (‘UK ETS’), i.e. switching to foreign production of those goods to avoid the additional costs associated of compliance with the UK ETS passed through by UK operators. The move would be consistent with the EU, which is in the process of introducing its own CBAM for the same purpose.
The inquiry follows recommendations made by the EAC as part of its ‘Growing Back Better: Putting Nature and Net Zero at the Heart of the Economic Recovery’ report, whereby it recommended that the Government investigates the merits of a CBAM. The inquiry will assess the role of a CBAM in addressing carbon leakage concerns and meeting wider environmental objectives, such as long-term UK decarbonisation. The inquiry will also consider the impacts, risks and opportunities of introducing a unilateral CBAM in the UK, i.e. separately from the EU. The EAC is inviting written submissions on a range of questions including; whether the UK should pursue a CBAM; the form it should take; how it should be implemented; the practical and administrative challenges; and the potential impact. Evidence must be submitted by 25 October 2021.
A CBAM is a border tax on imported products based on their embedded emissions, or carbon footprint. The tax is aimed at ensuring that imported goods in energy intensive industries (‘EIIs’) are subject to equivalent carbon costs as domestically produced EII goods. A CBAM can be used to address carbon leakage, i.e. the risk that climate policies often lead to companies relocating to countries with lower climate ambitions. Whilst the UK partially addresses this risk in the UK ETS by permitting manufacturers at risk of carbon leakage free allowances for emissions, this may not be enough to incentivise long-term UK decarbonisation in line with the UK’s wider environmental objectives. It is worth noting that any CBAM would need to comply with the obligations under the Paris Agreement and WTO rules relating to discrimination between domestic and imported products.
The EU has proposed to introduce its own CBAM from 2023, under which importers would purchase CBAM certificates that mirror the EU ETS price, to bring the carbon price on imports to the EU in line with the carbon price paid by EU producers. Some form of CBAM has also been considered by other countries: the US considered the introduction of a CBAM within its 2021 Trade Policy, and Canada also recently explored the establishment of a CBAM, with the aim of opening a global dialogue on the mechanism. Whilst no country currently applies a CBAM, COP26 President Alok Sharma has stated that a CBAM has the potential to affect the overall context of the upcoming climate conference, despite not being a formal part of the programme.
Following a review of the evidence submitted in the inquiry, the EAC will make recommendations to the UK Government on the possibility of introducing a unilateral CBAM in the UK. The inquiry is available here.