Consulting on a UK CBAM

Update: The UK has now announced that a CBAM will be introduced by 2027, see our Insights article. The government has also responded to this consultation, see our further Insights article.

On 30 March 2023, the government published its long-awaited consultation on the potential introduction of a carbon border adjustment mechanism (CBAM). The consultation, "Addressing carbon leakage risk to support decarbonisation: A consultation on strategic goals, policy options, and implementation considerations" will be open for 12 weeks until 22 June.

The consultation does not commit the UK government to implementing a UK CBAM at this stage, which is seen as only one of a number of policies to counter carbon leakage and provide a broader policy environment for decarbonisation in general. If a UK CBAM were to be taken forwards, the consultation notes that the earliest date for introduction would be 2026.

This is clearly an important development and all affected businesses should consider responding to the consultation and monitoring developments as further details and proposals are brought forwards.

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, with further details finalised in December 2022. It is due to be introduced from October 2023 but with a transition period where the obligations of the importer will initially be limited to reporting only. However, the 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 committed to consult on a range of carbon leakage mitigation options, including on a UK CBAM. The consultation published on 30 March is the government's (overdue) consultation on this important issue.

The consultation

The consultation explores a range of potential policy measures to mitigate carbon leakage risk in the future and ensure UK industry has the optimal policy environment to decarbonise, including but not limited to a CBAM. Indeed, the consultation includes a range of other policy measures, such as mandatory product standards (MPS), and other policy measures to help grow the market for low carbon products, as well as emissions reporting that could support the implementation of these policies.

A UK CBAM?

The consultation emphasises that the government is exploring whether a  UK CBAM would be an appropriate policy measure to mitigate carbon leakage risk in the future. A CBAM would apply to imported products to ensure they are subject to a comparable carbon price to that incurred by UK-based production.

The consultation seeks views on six broad questions to shape the design and implementation of a potential UK CBAM. These are:

• Sectoral targeting: to which sectors and products should a UK CBAM apply?
• Emissions measurement: how should emissions be measured as part of a UK CBAM?
• Emissions scope: which emissions should be in scope of a UK CBAM?
• Price measurement: how should a UK CBAM price be calculated?
• Implementation: how and when should businesses be required to comply with a UK CBAM?
• Timing: when should a UK CBAM be introduced?

How should it be targeted?

The purpose of a CBAM would be to mitigate the risk of carbon leakage resulting from domestic carbon pricing. Therefore, the government is minded to only consider a potential CBAM for products in sectors subject to the UK emissions trading system (ETS) in the first instance. Within those sectors, any potential CBAM should only apply to sectors deemed at risk of carbon leakage.

The sectors considered as part of the consultation include: cement; chemicals; glass; iron and steel; non-ferrous metals; non-metallic minerals; paper & pulp; refining; fertilisers; and power generation.

Given CBAMs are complex measures, the government considers that it may not be deemed suitable for products in all sectors subject to the UK ETS and at risk of carbon leakage. Since any CBAM would involve administrative burdens for business, the government considers that a CBAM should only be introduced where the evidence of carbon leakage risk and the need for such measures is sufficiently compelling to justify it on environmental grounds. For example, some sectors may be able to provide data on embodied emissions at a product level, whereas this may not be possible for sectors or products with more complex supply chains.

A potential option would be introducing a CBAM for a limited number of sectors and products and expanding to new sectors or products in a phased way. The government notes that this could also support businesses to build and optimise their compliance processes as their understanding of the measure improves.

How should it be calculated?

The government is seeking views on whether the price applied by a CBAM be comparable to the effective domestic carbon price paid, including accounting for any discounts available through free allowances or compensation. The consultation considers measures for the calculation of the effective UK carbon price of goods and also the carbon price differential between jurisdictions. Ultimately, the question is whether the CBAM levy should be based on the value of the effective carbon price differential between the UK and the country where that good was produced and whether (and if so how) it is practicable for importers to provide information on the effective carbon price already paid on products in the originating country.

How and when should a CBAM be introduced?

Were the government to implement a CBAM, it emphasises that it would need to consider how a CBAM would fit with existing UK customs and border objectives. The 2025 UK Border Strategy laid out the government's vision for the UK border: a border which simplifies processes for traders, and, as such, the government stresses it would need to ensure a CBAM is designed in a way that facilitates the smooth flow of trade and is simple to understand, to minimise impacts on businesses. In particular, the government notes that it would explore ways of re-creating the degree of flexibility provided by the UK ETS in a CBAM. In the UK ETS, domestic producers are able to choose when to purchase any allowances required for future surrender.

The consultation notes that the earliest date for implementation of a potential CBAM would be 2026. The government's 2022 consultation 'Developing the UK Emissions Trading Scheme' noted that structural changes to the ETS would be implemented by 2024, and proposed that free allowances allocated to industry would not be reduced before 2026. In line with that, 2026 would be the earliest that the government would consider the introduction of a CBAM to ensure carbon leakage policies are appropriately targeted.

(The UK ETS places a price on the carbon emitted by domestic producers in the sectors covered. Total carbon emissions under the Scheme are capped, reducing over time to incentivise decarbonisation.)

Other measures

A possible 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 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

As the government recognises that this consultation explores a range of complex policy proposals, it has set a consultation period of 12 weeks to ensure stakeholders have sufficient time to develop their responses. Responses to the consultation should be submitted by 22 June 2023 and should be sent to carbonleakage.consultation@beis.gov.uk.