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Jeremy Hunt, the UK chancellor, is planning to introduce levies on imported carbon-intensive goods from countries with weaker climate regulations from 2026, mirroring measures being introduced by the EU.
The plan, which could be announced in this month’s Autumn Statement, follows a consultation earlier this year on whether to introduce a “carbon border adjustment mechanism”, or CBAM, to protect industries from unfair competition from regions with lower carbon costs.
The EU soft-launched its CBAM programme in September to tackle “carbon leakage”, when companies move production to countries with weaker or non-existent carbon costs while retaining free access to markets where heavy industry pays for emissions.
Hunt is expected to announce that the UK will launch its own CBAM programme in 2026, when the EU mechanism takes effect, to avoid the risk of the UK becoming a dumping ground for carbon-intensive products facing levies by the EU.
Confirmation that the government was going ahead with the plan would be welcomed by UK industries, although officials cautioned that cross-Whitehall negotiations were continuing and any announcement could slip to the spring Budget.
“As the UK steel industry is transiting to green steel production, it is essential that it is not continually outcompeted by high-emission, imported steel,” said Gareth Stace, director-general of trade body UK Steel.
“Europe is implementing its own CBAM, and the UK risks a damaging trade barrier with our biggest trade partner if we don’t develop and implement our own measures quickly.”
The government also faces a challenge in aligning its own carbon market with the EU’s to avoid British manufacturers facing levies on their own exports under CBAM, as carbon prices in the UK market are far lower than those on the EU market.
The Treasury raised the prospect of a CBAM in its net zero review in October 2021 but warned it would be complicated to implement. Rishi Sunak, the prime minister, said earlier this year that the idea was “reasonable and sensible” and hinted that Britain could co-operate with Brussels over its plans.
The EU’s CBAM, which initially requires importers to collect information without charging the levy, has been “the biggest climate law ever in Europe, and some say in the world”, Peter Liese, lead negotiator for the European parliament, said last year.
Companies selling products such as iron, cement, fertiliser and power supplies into Europe from outside the bloc, and who do not face comparable carbon costs, will face new levies linked to the carbon price under the EU Emissions Trading System.
But regardless of whether the UK creates a CBAM, if it does not legally link its carbon pricing to the EU’s, British exports could still face levies if UK carbon prices remain lower.
Even exports of renewable electricity could face levies because it is not possible to identify whether power supplies come from green sources or fossil fuels when exporting from one grid to another.
“Linking our carbon pricing regime with the EU’s would exempt UK companies from these costs,” said Adam Berman, deputy director of industry body Energy UK.
The UK’s post-Brexit carbon market is a close copy of the EU ETS, but this year British carbon prices fell sharply as Sunak’s government made more carbon allowances available than previously expected. The UK carbon price is about £41 a tonne compared with £66 (€76) a tonne in the EU.
Energy UK calculates the Treasury is losing out on almost £3bn of revenue annually from weak carbon prices and has warned that about £500mn a year in border taxes will in effect be captured by the EU rather than the UK if prices continue to trade at a discount.
Jess Ralston, head of energy at the Energy and Climate Intelligence Unit, said a CBAM could help reinstate some green investor confidence that was “shaken” by Sunak’s net zero U-turns in September.
“With the EU leaping ahead with its CBAM, and the ever-present spectre of the US Inflation Reduction Act luring low-carbon investment across the Atlantic, the UK really does have to act.”
A survey last month of 400 senior managers in the UK manufacturing industry covering sectors from construction and machinery to automotives and food found that three-quarters backed the introduction of a UK CBAM, with only 8 per cent opposing it.
The survey, commissioned by think-tank E3G, found that seven in 10 British manufacturers said any future UK carbon border measure should be compatible with the European scheme.
But CBAM has been criticised by some trading rivals — in particular the US, China and South Africa — who believe the policy will unfairly penalise their manufacturers.
The Treasury said it would announce its next steps in due course. “We do not comment on speculation ahead of fiscal events.”