As the government tightens the screw on carbon emissions, the prospect of industries simply leaving the UK to avoid the extra cost increases, a prospect known as carbon leakage. A Carbon Border Adjustment Mechanism (CBAM) would reduce this risk by placing an extra charge on goods made in countries with less ambitious emissions policies.
Such a tariff would protect domestic industries from being undercut by foreign competitors, though the prospect has also opened diplomatic ructions with India and China.
To meet World Trade Organization rules, the tax would have to cover the same industries as the UK’s Emissions Trading Scheme – which the government is considering extending to cover agriculture and land use.
But it could allow the removal of free emissions allowances, the current approach to addressing carbon leakage. A review of the current system will be undertaken this year.
Asked about the plan yesterday, the prime minister’s official spokesperson said that the Department for Business, Energy, Innovation and Skills (BEIS) is “looking into” the idea.
“We recognise the importance of making sure our policies to tackle climate change are not undermined by emissions, industrial activity and jobs simply moving overseas. We are therefore committed to encouraging our trading partners to work with each other to mitigate the effects of climate change through diplomacy, so that different countries are not regulating emissions at different rates,” said a BEIS spokesperson.
The introduction of such a charge is one of the policies set out in the European Commission’s Green Deal and could be in force by the end of 2022. Its proposals are due in mid-July and are being followed “with interest” said a government source.
“A failure by the UK to coordinate or keep pace with the EU’s level of policy stringency for industrial sectors could risk important UK exports being penalised by the CBAM,” said a report from the Grantham Research Institute last month. Steel producers – an already troubled industry – would be hit “particularly hard”, it added.
There are increasing signs that the Conservatives are supportive.
In a speech for the Centre for Policy Studies think tank yesterday, Fox spoke in favour of the idea, “perhaps best seen as a carbon border tariff”. This is despite the right-winger’s long-term support for free trade.
“There’s no point in damaging the competitiveness of an economy such as the UK while other countries maintain their competitive edge at a cost to the global climate,” he said.
“I believe, unsurprisingly, that using market mechanisms offer the best hope, and a carbon border adjustment mechanism of some sort is already being considered in several parts of the world,” including the US. President Biden is “particularly interested” in the idea, Fox added, as it would allow the US to be “simultaneously tough on countries like China , while emphasising their environmental credentials”.
He was introduced by the prime minister’s father, Stanley Johnson, who said that the “the logic of a carbon border tax is irrefutable”.
A CBAM was identified as a possible policy option in the Treasury’s interim Net Zero Review. More analysis of the risks of carbon leakage and mitigation options will emerge in its final version.
In another sign of growing consensus, another Conservative-aligned think tank, the green-leaning Council on Geostrategy (CoG), published its own thoughts on the subject yesterday. It said that the UK should “Channel the widespread developed world interest in pre-empting carbon leakage and enthusiasm for the CBAM concept into a multilateral process” at the COP26 talks.
There are already strong signs that this is the approach that the government wants to take. In December, business secretary Kwasi Kwarteng told the Commons that CBAM “is an important subject, but it has to be treated as part of international multilateral effort which is the best way to prevent carbon leakage. If we impose a tax unilaterally on carbon-intensive products coming into this country, we may well be disadvantaging UK consumers if others around the world are not placing such a tax. The government feels that multilateral co-operation in this regard is by far the best way to prevent carbon leakage.”
COG said a multinational approach would underpin the assessment of embedded emissions in trade-exposed industries such as steel, and set the principles by which tariffs would be set, and direct foreign aid to support the industrial decarbonisation efforts. But it did admit to there being serious stumbling blocks: “a CBAM could be a significant source of tension between the developed and the developing world, undermining efforts to secure enhanced Nationally Determined Contributions (NDCs) and increasing the conditions which countries like Brazil and India place on them,” said its report.
Another problem is that there is “no accepted framework” for how embedded emissions should be calculated, it added.