Carbon tariffs: Government confirms it is to consult on carbon border adjustment mechanism

The British government is to formally consult on proposals designed to tackle so-called ‘carbon leakage’, as policymakers in the UK, EU, and US step up efforts to stop intensive carbon companies responding to higher carbon prices and tightening climate regulations by relocating to jurisdications with more lax policy regimes.

The Environmental Audit Committee (EAC) of MPs today revealed that he has received a letter from Financial Secretary to the Treasury, Lucy Frazer, in response to her recent report on the issues in which she confirmed the government plans to undertake a consultation process on the potential implementation of a carbon border adjustment mechanism (CBAM) and product standards to address the risk of carbon leakage.

In the EAC report, titled Greening imports: a UK carbon border approach, the Committee suggested the UK should emulate plans being advanced by the EU for a CBAM that would effectively impose a border tariff on imports from regions with lower carbon prices than the EU. The approach could mitigate against the potential risk of heavy emitters ‘offshoring’ their emissions and “send a clear signal for companies to re-evaluate their carbon footprint,” the committee said. It also argued that such a move could incentivise the development of low carbon products domestically as heavy emitting sectors look to avoid the higher carbon taxes that a CBAM would enable.

However, carbon border tariffs remain contentious with some observers fearing they risk sparking trade wars, given large emerging have already voiced concerns that such policies would unfairly discriminate against their exporters. Any new trade barriers could in turn drive up costs for businesses and consumers. But other observers maintaining a CBAM would give industrialized employment such as the UK, US, and EU more freedom to accelerate their decarbonisation plans and greater leverage as they call on large employment to ramp up their own climate strategies.

As such, the EAC advised that to ensure any CBAM policy is effective and does not result in unintended consequences it should consult with sectors right across the economy, including SMEs as well as large emitters.

The government has now confirmed that such a consultation will be launched later this year.

Formally responding to the report, Frazer said: “The best way to prevent carbon leakage would be for all countries to move together in pricing, regulating, and therefore reducing carbon emissions. We are strongly committed to working with our international partners to develop a common global approach to carbon leakage. Multilateral solutions can take time to develop, however, and while we will continue to work on international solutions with partners, options for domestic action must be considered in parallel.

“The government is therefore exploring a range of policies that could potentially mitigate future carbon leakage risk. These include policies to grow the market for low emissions industrial products, on which the Department for Business, Energy and Industrial Strategy recently undertook a Call for Evidence. Today, we are announcing that it is our intention to consult later in the year on a range of carbon leakage mitigation options, including on whether measures such as product standards and a carbon border adjustment mechanism (CBAM) could be appropriate tools in the UK’s policy mix.”

EAC chair, Philip Dunne MP, welcomed the announcement, but warned that both the US and EU were now both further forward in delivering such a policy.

“The Committee recommended that work on implementing a unilateral CBAM commence as soon as possible, to be prepared for roll out by the end of this decade, preferably multi-laterally or unilaterally,” he said. “But this would only be the beginning: meaningful carbon reductions through this import tax would be significantly more successful if we joined a multilateral approach in the future. The US and the EU are already ahead of the curve in this regard.

“It is therefore positive news that the government is looking to consult on a CBAM and product standards later this year, accepting a key recommendation of the Committee. It is absolutely critical for the success of any resulting policy decision that it has support across the economy and in no way harms the consumer, particularly at such a time of rising cost of living, which is of concern to us all.”

Matt Williams, climate and land program lad at the Energy and Climate Intelligence Unit (ECIU), said any proposed CBAM could allow the climate contribution of imports to the UK to be reflected in tariffs at a time when the government is prioritising signing trade deals with non-EU countries post-Brexit.

“The Australia trade deal was signed and sealed without any real measures in place to address the climate contribution of imports such as high-carbon beef produced on deforested land,” Williams said. “The British public are they don’t want lower standards and UK farmers don’t want to be cleard by poorer-quality produce with a high impact on our natural world. The UK needs to develop a coherent strategy on trade if it’s to keep the public on board and farmers in business.”

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