UK to launch carbon border tax regime in 2027

Goods that the UK imports from nations with a lower carbon price will face a new climate levy from 2027, the Treasury has confirmed. This is one year later than originally expected.

UK to launch carbon border tax regime in 2027

The UK’s Carbon Border Adjustment Mechanism (CBAM) was originally meant to enter a reporting phase in 2024 ahead of a 2026 launch.

But the Treasury confirmed on Monday (18 December) that Mechanism will launch in 2027. This is likely to be a year later than the EU.

Britain’s CBAM levies will apply to imports from high-carbon and hard-to-abate sectors including steel and aluminium, cement and ceramics.

Additional products may be added to the scope of the CBAM following additional consultations in 2024. Initial consultations

The Treasury is set to apply the levy on a sliding scale. Charges applied will depend on the greenhouse gas emissions generated in the production of the goods, plus the gap between the UK’s carbon price and the price applied in the country of origin, if any.

Businesses manufacturing in the UK have long been calling for clearer long-term direction on a CBAM to help shore up concerns over the British market being flooded with low-cost, high-carbon products that would undercut them on price. A poll last month found that 73% of British manufacturers are pro-CBAM

Chancellor Jeremy Hunt said the confirmation “should give UK industry the confidence to invest in decarbonisation as the world transitions to net-zero”.

Moreover, there is a risk that the UK simply displaces its emissions overseas, potentially undermining global efforts to deliver the Paris Agreement. Imports to the UK make up 43% of the UK’s consumption emissions.

Environmental Audit Committee (EAC) chair Philip Dunne MP said:Applying an appropriate carbon price at the border will go a long way towards closing carbon loopholes.

“It is very welcome that the Government has heeded EAC’s recommendations and has announced tangible steps towards establishing a UK CBAM. Not only will this protect UK businesses: it will also keep the UK at the forefront of the group of leading economies which are introducing comprehensive and effective measures to tackle global emissions while promoting growth.”

Dunne cautioned, however, that the UK will not introduce its CBAM ahead of the US and EU. As such, his Committee will seek assurances that British businesses “face no adverse impacts arising from any delay in implementing a UK CBAM”.

Product standards

To further support UK-based manufacturers, the Government will draw up product standards for measuring the carbon footprint of goods and communicating this information with commercial customers. These standards will be voluntary in the first instance, but business collaboration The Aldersgate Group wants Ministers to “look seriously” at a potential mandate.

The Group’s executive director Rachel Solomon Williams said:As we know from extensive discussions with industry, voluntary standards are unlikely to produce the change needed to establish markets for low carbon industrial products: they must be made mandatory to effectively reduce emissions and to set the foundations for a strong low-carbon industrial sector.”

Williams did note, however, that even voluntary standards will “be helpful in providing a framework to grow demand for low-carbon products”.

Emissions Trading Scheme updates

Also today, the Treasury firmed up plans to consult on the UK’s post-Brexit Emissions Trading Scheme (ETS) with businesses in sectors including aviation, heavy industry and power generation.

The consultation will aim to identify mechanisms for tackling carbon leakage. Another focus is ensuring that participants are incentivised to decarbonise rather than simply purchasing allowances.

The UK launched a new ETS in 2021 and, by January 2022, carbon prices had reached around £72 per tonne. This was, at the time, a record peak. It was exceeded in August 2022 when prices almost hit £100 per tonne.

Carbon prices under the UK ETS have been broadly declining since April 2023. The lowest prices seen this year were between £35 and £40.

Intervening in October, Ministers outlined plans to align the ETS with the UK’s 2050 net-zero goal by decreasing carbon allowances and better targeting them at only the hardest-to-abate sectors.

A 12.4% year-on-year decrease in allowances was confirmed for 2024. By 2027, the annual allocation should be 45% lower than in 2023. There is then an even sharper decrease in permit allocations through to 2030.

The ETS will run past 2050, the Treasury confirmed today.

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