The EIUG has submitted its response to the consultation on the introduction of a UK carbon border adjustment mechanism (CBAM) from 2027. It fully agrees with the premise of the consultation that the objective of decarbonisation – to reduce global emissions – could be undermined by carbon leakage. The Government’s decision to introduce a UK CBAM for a number of sectors could ensure that highly traded and carbon-intensive goods from overseas face a comparable carbon price to those produced in the UK. This would level the playing field in terms of carbon pricing for those energy intensive industries (EIIs) that manufacture these goods, though some other issues resulting in relative high GB electricity prices still need to be addressed.
Since the European Union remains the biggest trading bloc for most UK businesses, differences between their respective ETS and CBAM schemes can present considerable trade challenges. The EIUG believes that linking the UK ETS and EU ETS at the appropriate time is in the best interest of EIIs in the UK. Linking different emission trading systems of similar ambition, would minimise competitive distortions due to different carbon prices, reduce price volatility and avoid EIIs having to trade under separate CBAMs.
The EIUG calls for a CBAM which it tailored to the UK’s specific and sectoral requirements, and extended to other manufacturing industries over time, based on their risk of carbon leakage. Any extension of UK CBAMs to other sectors should be based on sector-specific impact assessments and aligned with the EU CBAM to avoid trade distortions with the UK’s largest trading partner. The EU has currently not included ceramics and glass within scope of its CBAM as the European Commission has deemed them too complex for the time being. The EIUG therefore strongly recommend to exclude all ceramics and glass products until they are included in the EU CBAM. This would help Government avoid unnecessary complexity, prevent possibly a whole series of teething issues for HMRC and keep the UK CBAM simpler in its initial stages.
The differences between the EU and UK CBAM schemes as proposed will present a considerable challenge for industries in scope of either CBAM, in particular the 12-month difference of their full introduction. The EIUG fears that this risks trade diversion from the EU to the UK (or dumping) for carbon-intensive CBAM goods that are more fungible and globally traded. The EIUG therefore calls on HMT to bring the implementation of the UK CBAM forward to 2026 to minimise the risk of trade barriers and trade diversion.
As EIIs reflect the carbon price in their goods and invest to decarbonise their manufacturing process production, the increase in production costs will make these goods less competitive in overseas markets where carbon pricing is not yet established. This will lead to a deterioration of UK manufacturing production and an increase the production of these same products in these overseas markets, but with a higher carbon cost to the environment. The EIUG therefore encourage Government to give careful consideration to how reforms to the UK ETS and introduction of the UK CBAM could impact UK manufacturers’ ability to compete in export markets. It deems it vital to find a solution to this export problem that is compatible with WTO rules.