This morning, the government has announced that the UK will implement a new carbon import levy on some products from 2027 to help to protect businesses against cheaper imports from countries with less strict climate policies.
A consultation ‘Addressing carbon leakage risk to support decarbonisation' ran from 30 March to 22 June 2023. The planned carbon border adjustment mechanism (CBAM) will apply to carbon-intensive products in the iron, steel, aluminum, fertiliser, hydrogen, ceramics, glass, and cement sectors.
The charge will depend on the amount of carbon emitted in the production of the imported good and any gap between the carbon price applied in the country of origin and the carbon price faced by UK producers.
The Chancellor announced:
"This levy will make sure carbon intensive products from overseas - like steel and ceramics - face a comparable carbon price to those produced in the UK, so that decarbonisation efforts translate into reductions in global emissions.”
Linking to this, in 2021, the UK launched an Emissions Trading Scheme (ETS), a cap-and-trade system which caps the total level of GHG emissions, creating a carbon market with a carbon price signal to incentivise decarbonisation.
Many other regions, including the European Union, operate such schemes, but prices within the schemes vary. Britain said the levy would help to reduce the risk of so-called carbon leakage, whereby emissions being displaced to other countries because they have a lower or no carbon price.
Participants in the scheme are required to obtain and surrender allowances to cover their annual greenhouse gas emissions. Participants can purchase allowances at auction or trade them amongst themselves, which allows the market to find the most cost-effective way to reduce emissions. Industrial sectors at risk of carbon leakage receive a proportion of allowances for free.
What next?
The delivery of the CBAM will be subject to further consultation in 2024.
The government also announced 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 consumers; and to develop an embodied emissions reporting framework that could serve future carbon leakage and decarbonisation policies. These measures will also be subject to further technical consultation in 2024.