The UK government has announced plans to introduce a new import carbon pricing mechanism on imports of iron, steel, aluminium, ceramics and cement from overseas.
According to the government, the proposed carbon pricing levy will be implemented by 2027 and will ensure products from overseas face a comparable carbon price to those produced in the UK.
The carbon border adjustment mechanism (CBAM) will ensure highly traded, carbon intensive products from overseas in the iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors face a comparable carbon price to those produced domestically. This could incentivise growth in the UK’s industrial sectors.
It will also help solve what is known as “carbon leakage,” reducing the risk of production and associated emissions being displaced to other countries because they have a lower or no carbon price.
The government confirmed that the charge applied by the CBAM will depend on the amount of carbon emitted in the production of the imported good and the gap between the carbon price applied in the country of origin, if there is one, and the carbon price faced by UK producers.
The design and delivery of the CBAM will be subject to further consultation in 2024, including the list of products in scope. The government will also engage with trade partners, including developing countries, and affected businesses and organisations, to minimise the impact on trade and the necessary compliance steps.
Chancellor of the Exchequer Jeremy Hunt said: “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 our decarbonisation efforts translate into reductions in global emissions.
“This should give UK industry the confidence to invest in decarbonisation as the world transitions to net zero.”
The EU implemented reporting obligations for it’s own CBAM from the 1 October 2023, with first reports due in January 2024.
Similarly to the UK’s CBAM, the EU’s mechanism will impose a border tax on imported goods that have paid a lower price than the EU ETS. According to Energy UK, the disparities between the EU and UK ETS prices could mean this carbon tax costs UK businesses over £500 million per year.
Integration of a ‘carbon border’ could bolster domestic industrial investment
News of the UK’s carbon pricing mechanism has been widely welcomed by industry. For hydrogen especially, this could be a key method in supporting domestic green hydrogen production and adoption.
Clare Jackson, CEO of Hydrogen UK said: “Hydrogen UK supports the introduction of this CBAM. Carbon Pricing is one of the key tools available to accelerate decarbonisation and ensure polluters pay the price of their emissions. Historically, implementing an effective carbon price has been challenging due to the risk of industries relocating to regions without strong climate policy.
“The CBAM will reduce this carbon leakage risk and ensure the UK can charge a strong price for emissions, incentivising the switch to low carbon energy such as hydrogen, while protecting UK industry from cheap imports.”
Sam Richards CEO of think tank Britain Remade, believes the introduction of this “carbon border” could provide long term certainty for investment in the UK’s industrial sectors.
“The introduction of a carbon border adjustment mechanism for energy intensive products will give certainty to businesses in Britain that investments they make to reduce their carbon emissions will not be undermined by imports from countries that still get most of their power from coal,” Richards said.
“We can’t cut emissions from industry at home, only to then import them from abroad and losing jobs in the process in places like Teesside and Stoke-On-Trent.
“The announcement is a welcome first step, but the government must now work at speed to develop the guidance industry here needs in order to make the carbon border as successful as possible.”