It’s not a tax, it’s an adjustment mechanism

A ‘carbon border adjustment mechanism’ on imported goods from polluting factories overseas could help the address the issue of carbon leakage

 

Cheap imports of steel, cement and other energy intensive goods made in polluting factories overseas could be hit with extra taxes, in order to protect British manufacturers that face extra costs from tough environmental rules.

The Treasury has promised to consult “later this year” on addressing this problem of “carbon leakage.” It occurs when governments impose stringent environmental requirements upon domestic industries, which can result in these industries losing out to competitors in more ecologically lax countries. Imports currently are estimated to make up 43 per cent of the UK’s consumption emissions.

There have been two major stimuli that have galvanised the UK government into this, as yet cautious, action. The most obvious has been that the concept has long been promoted in the European Union,and is now accepted in principle by the European Parliament and the European Council of 27-member state governments. It is due to come into force next year across the EU27 but could be delayed until 2024.

When European Commission President, Ursula von der Leyen, first floated the idea in July 2019, she called it a carbon border tax. The concept has evolved since then, earning a new name: carbon border adjustment mechanism. Or CBAM.Whereas a tax could draw the ire of the World Trade Organization, which doesn’t like protectionism, a border adjustment mechanism will spare products produced in the small minority of countries that already put a price on emissions. The UK is positioning itself to become one such country.

The second progenitor is the powerful House of Commons Environmental Audit Committee (EAC).In a magisterial report published this April, the cross-party committee argued that a CBAM could drive green policies in industries across the UK economy, as the practice of ‘offshoring’ the UK’s emissions was addressed. Members felt that placing a price upon imported carbon would incentivise sectors to move away from carbon intensive practices and promote behaviour change towards more low-carbon products.

Currently, the UK’s emissions figures did not include carbon from imports, thus understating the true picture of the carbon associated with UK consumption. A CBAM could help address this.

Committee chairman, Rt Hon Philip Dunne MP, commented: “The targets, timetable and overall strategy for meeting net zero have been set. Now the work must speed up to make the ambitions a reality. A carbon border adjustment mechanism can drive change, not only by addressing carbon leakage, but also by driving low-carbon change across our economy.

“Our Committee is under no illusions that this will be a challenging policy to get right, with a clear advantage to moving multi-laterally with other trading partners. Therefore, all businesses must have a voice in the discussions and the Government must be upfront with its intentions.

“Our Committee is clear that the pros of a CBAM outweigh the cons. For too long the emissions from our consumption have effectively been ‘offshored’, leaving the problem as out of sight and out of mind. But we must all take greater responsibility for our consumption, and the practices that our businesses and organisations adopt.”

However, when taking evidence, the Committee also heard concerns expressed that carbon pricing might lead to producers increasing the costs of high carbon products for consumers. This could exacerbate the current cost of living crisis. It was necessary, the EAC argued, for the CBAM to incentivise the development of more low-carbon products to ensure people were not adversely affected. The Government should also improve awareness raising around carbon pricing and a CBAM, if introduced, to demystify the policy for consumers.

The EAC recognised that those sectors hardest to decarbonise would need greater support. It was therefore integral, when designing a CBAM, that the Government consulted widely across the economy and especially SMEs, to ensure the approach works. A one-size-fits-all scheme was unlikely to suffice.

Importantly, the Committee warned that a CBAM would not deliver the desired results alone. Complementary mechanisms such as standards, regulation and support for low-carbon technologies were also needed. This pointer has been overtly picked up by the Treasury, which is emphasising that they intend consulting simultaneously on key issues like higher product standards.

There is universal awareness that no unilateral CBAM can drive significant change to reduce global emissions. A multilateral CBAM is the preferred and more effective option. Treasury Minister Lucy Fraser is emphatic that “the best way to prevent carbon leakage would be for all countries to move together in pricing, regulating, and therefore reducing carbon emissions. We are strongly committed to working with our international partners to develop a common global approach to carbon leakage.”

But she warns that“multilateral solutions can take time to develop, however. So while we will continue to work on international solutions with partners, options for domestic action must be considered in parallel.”

That chimes with the EAC report. It emphasises that “work on a unilateral CBAM can be championed much sooner by the Government, with a view to opening discussions on a multilateral CBAM in the future. The UK is in a strong position to lead efforts on CBAM development internationally, while holding the presidency of COP, and engaging in trade discussions with many countries around the world as a strong trading partner.”

But I do so agree with Chris Stark of the Committee on Climate Change. Surely, we can find a better acronym than CBAM.

• Andrew Warren is chairman of the British Energy Efficiency Federation