New UK levy to level carbon pricing

Goods imported into the UK from countries with a lower or no carbon price will have to pay a levy by 2027, ensuring products from overseas face a comparable carbon price to those produced in the UK. 

The UK was the first major economy to legislate for net zero and, according to the UK government, are reducing emissions faster than any other G7 country. Decarbonising UK industry forms an important part of delivering the energy transformation needed to achieve net zero. But these efforts will not succeed if decarbonisation in the UK simply leads to higher emissions abroad.

The carbon border adjustment mechanism (CBAM) will ensure highly traded, carbon-intensive products from overseas in the iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors face a comparable carbon price to those produced here.

The new rules will tackle ‘carbon leakage’, reducing the risk of production and associated emissions being displaced to other countries because they have a lower or no carbon price. Carbon leakage undermines the country’s efforts to decarbonise as the world transitions to net zero.

The charge applied by the CBAM will depend on the amount of carbon emitted in the production of the imported good, and the gap between the carbon price applied in the country of origin, if any, and the carbon price faced by UK producers.

Taking this action will ensure the environmental integrity of the UK’s decarbonisation policies and will give industry in the UK the confidence to continue to invest in decarbonisation, with the knowledge that it will result in a true net reduction in global emissions.  

Chancellor of the Exchequer Jeremy Hunt said: “This levy will make sure carbon-intensive products from overseas face a comparable carbon price to those produced in the UK, so that our decarbonisation efforts translate into reductions in global emissions.

“This should give UK industry the confidence to invest in decarbonisation as the world transitions to net zero.”

This news comes as the government publishes its response to a consultation on a range of domestic carbon leakage mitigation measures, which found 85% of respondents said that carbon leakage is a current or future risk to their decarbonisation efforts. This is because not all jurisdictions are moving at the same pace with the risk that UK emissions reductions do not translate into global emissions reductions, but rather that UK emissions get displaced to other less climate ambitious countries. The action announced on 18 December will help address that risk.

The design and delivery of the CBAM will be subject to further consultation in 2024, including the precise list of products in scope. The government will also engage with trade partners, including developing countries, and affected businesses and organisations, to minimise the impact on trade and the necessary compliance steps.

Alongside a CBAM, the government is also announcing its intention to work with industry to establish voluntary product standards that businesses could choose to adopt to help promote their low-carbon products to customers; and to develop a framework which measures the carbon content of goods, that could support other decarbonisation policies in future.

In addition to the government announcing a UK CBAM, stakeholders including power, aviation and industrial sectors, have been invited to offer their views on proposed changes to the UK Emissions Trading Scheme, that will ensure it continues to support the UK’s progress to net zero.

A CBAM will work alongside the UK Emissions Trading Scheme to mitigate the risk of carbon leakage. The ETS Authority is consulting how to better target free allocations of carbon allowances for industries most at risk of carbon leakage, under the ETS. The Authority will also review whether free allocation should be adjusted to reflect any changes to carbon leakage risk for given sectors. 

It is also setting out plans to ensure the ETS market continues to offer an effective financial incentive that drives its participants to decarbonise, following a call for evidence last year, with industries being asked for their view on a range of potential measures, including on the design of a new Supply Adjustment Mechanism.

The government remains committed to supporting industry to decarbonise including with the Industrial Energy Transformation Fund, the Net Zero Innovation Portfolio and £20 billion investment in development of carbon capture and storage.

Ruth Herbert, chief executive, The Carbon Capture & Storage Association said: “Fantastic to see today’s commitment to a Carbon Border Adjustment Mechanism, which is a good starting point for tackling carbon leakage on the most carbon-intensive products. 

“This will help some UK manufacturers to invest in low carbon technologies such as Carbon Capture, Utilisation and Storage (CCUS), to develop new low-carbon products, without fear of being undercut by producers elsewhere. 

“This is a smart move, given the UK’s geological assets and technical capabilities, which mean it has a clear advantage in the transition to a global net zero economy.  The details of this policy will need to ensure that exports are not disadvantaged, and that other sectors, such as refining or electricity production can benefit, as many are ideally situated in industrial clusters where they can deploy CCUS.

Combined with the UK government’s recent announcement at COP28, alongside Canada, Germany and the US, to use public procurement to buy low-carbon steel, cement and concrete, this is very welcome news to those who are trying to develop the low-carbon industries of the future.

“It is also an important step for the long-term development of the UK CCUS industry, alongside further deployment measures, which we hope to see in the government’s ‘CCUS vision to 2035’ later this week.”

John Egan, Peak Cluster Project director said:  “Peak Cluster will decarbonise 40% of the UK’s cement and lime production by 2030.  An environmental and economic imperative, the project is essential for a sustainable construction sector in this country.

“We welcome the decision to implement a CBAM as a very positive step in encouraging investment into essential industrial decarbonisation.”