UK CBAM by 2027

HM Treasury has announced that the UK will introduce a carbon border adjustment mechanism (CBAM) "by 2027". A consultation response document has been published alongside the announcement that provides a summary of responses to the March 2023 consultation that sought feedback on a number of measures to support decarbonisation, including a CBAM but also other measures such as mandatory product standards and demand side policies to help grow the market for low carbon goods.

Background

A CBAM is seen as one of a range of options to counter so-called "carbon leakage". Carbon leakage is where countries impose local environmental requirements on domestic industries, which results in these industries either relocating or losing out to competitors in cheaper countries with lower environmental standards.

The introduction of a CBAM was agreed in principle within the EU in March 2022 and was introduced from October 2023 but with a transition period where the obligations of the importer is initially limited to reporting only. However, the full CBAM scheme will be phased in as the free allowances under the ETS are phased out - meaning that CBAM will therefore commence in earnest in 2026 and be fully phased in by 2034.

In the UK, the Environmental Audit Committee published a report, "Greening imports: a UK carbon border approach" on 4 April 2022. In that Report, the Committee recommended that the government should commence work immediately on developing a comprehensive UK carbon border approach, in order that this might be implemented during the 2020s. In particular, the Committee recommended that this should include a CBAM as part of a co-ordinated set of policies including product standards, alongside work to build consensus with trading partners, industry and consumers on the need for this policy response.

In response, the government published a consultation, "Addressing carbon leakage risk to support decarbonisation: A consultation on strategic goals, policy options, and implementation considerations", in March 2023. For further details of the consultation, see our earlier Insights article.

HM Treasury announcement

The consultation response has announced that, following an analysis of the responses received, the government will implement a carbon border adjustment mechanism (CBAM) by 2027.  The liability applied by the CBAM will depend on the greenhouse gas emissions intensity of the imported good and the gap between the carbon price applied in the country of origin (if any) and the carbon price that would have been applied had the good been produced in the UK.

However, little details is provided at this stage as the further design and delivery of the CBAM will be subject to further consultation in 2024.

The CBAM will involve the application of a carbon price to imported goods from the following sectors: aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron, and steel. The CBAM will be applied to both Scope 1 (eg emissions of manufacturers or direct fuel combustion) and Scope 2 emissions (eg a business' indirect emissions through the consumption of purchased electricity, heat etc). The UK CBAM will also be applied to "select precursor production emissions embodied in products", such as emissions in the production of precursor goods by another manufacturer in the supply chain or emissions in transportation by air of finished products by subsequent entities. Further detail, including the precise list of products in scope, will be the subject of consultation in 2024.

It has also been announced that any UK CBAM liability will lie directly with the importer of imported products within scope of the UK CBAM on the basis of emissions embodied in imported goods. It appears that, unlike the EU system, the UK system will not involve the purchase or trading of emissions certificates.

Other measures

A UK CBAM is seen as only one of a number of measures that may be adopted to encourage decarbonisation and achieve net zero. Other policies covered by the consultation response include:

• mandatory product standards (MPS) which would set an upper limit on the embodied emissions of specific industrial products and could be designed to increase in stringency over time.
• demand side policies to help grow the market for low carbon goods, such as product labelling (based on voluntary product standards) and public procurement initiatives.
• an embodied emissions reporting system which could support the implementation of carbon leakage mitigation policies.

Comment

Whilst the principles behind the introduction of a CBAM are easy to appreciate, the operation of such a scheme (including the identification and measurement of emissions from multiple layers of the production and distribution process) is likely to be challenging in the extreme. In this context, it is to be hoped that the UK government will, at the very least, adopt a process of identification that is compatible with that the EU introduces such that it will not be necessary for MNEs to use different measures for imports of affected products into the UK compared with the EU. It will be important for affected businesses to be fully involved in the consultation to be launched by the government in 2024.