The UK government yesterday (30 October) published its response to an industry consultation on the introduction of a carbon border adjustment mechanism (CBAM), similar to the measures brought in by the EU last year.
The measure is designed to tax imports of goods made with more carbon-intensive production processes than within the UK, creating fairer competition between international and domestic producers already subject to environmental measures.
A government response to the UK consultation said that:
“Introducing a UK CBAM will ensure highly traded, carbon-intensive goods imported from overseas face a carbon price that is comparable to what would have been payable had they been produced in the UK”.
Support
Introducing a UK CBAM was popular among industry, with the government statement noting that 70% of respondents support “the use of domestic measures, alongside international action, to mitigate carbon leakage”.
However, the timing of a UK CBAM may still be a cause for industry concern. It has previously been a point of contention among UK firms, with British steel makers warning that the UK risks becoming a destination for cheap exports if its CBAM is introduced significantly later than the EU’s.
However, the consultation response says that the UK will stick with the introduction date of 1 January 2027 – a full year after the EU’s CBAM will be fully in effect.
The response says that the date is designed to “strike a balance” given that:
“It is important to balance the need for expedient action on carbon leakage with the imperative to give businesses time to prepare for the introduction of a novel and complex measure”.
Category is?
The response also set out the scope of different sectors to be affected under a UK CBAM, listing a “smaller number of economic sectors” than the EU, including “aluminium, cement, fertiliser, hydrogen and iron & steel”.
The EU’s CBAM also includes glass and ceramics as sectors.
The rationales for inclusion set out later in the government response include the possibility of those products becoming part of the UK Emissions Trading Scheme (ETS), which allows firms to trade credits relating to carbon-intensive goods. The EU operates its own ETS, with calls for the two to be aligned in order to prevent UK exporters facing greater competition from the bloc’s domestic producers.
“Carbon leakage risk” was also a key factor – this being a situation in which goods more likely to lead to higher global emissions through carbon-intensive production processes being offshored to countries with less stringent climate regulations.
Finally, “feasibility and effectiveness” was also considered, with the response noting that “UK CBAM would not be introduced in a sector where it would create significant circumvention risks that would undermine its purpose”.
Consultation
From 21 March 2024, the government ran a 12-week consultation in which industry could respond to over 40 questions covering the application of a CBAM in the UK, calculating CBAM liability, and the administration, payment and compliance with a UK CBAM.
The consultation received submission from nine individuals and 290 organisations, including the Chartered Institute of Export & International Trade.
Next steps
Moving forward, the response states that the government will continue to engage with key stakeholders, including through the creation of both a CBAM industry working group and an international group to consult exporters from other countries.
HMRC will also begin drafting both the primary and secondary legislation to pass CBAM into law, as well as working on guidance for businesses ahead of its implementation.