The UK government have published their response to a consultation that ran from March 2024 to June 2024, into proposals for addressing carbon leakage in the UK.
Carbon leakage means any movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation. Decarbonisation efforts to reduce global emissions are undermined as a result of carbon leakage.
Carbon Border Adjustment Mechanisms (CBAM)
As part of the consultation, the introduction of a UK Carbon Border Adjustment Mechanisms (CBAM) was considered. CBAMs are a legislative tool aimed at preventing carbon leakage. They work by supplementing an emissions trading scheme (ETS) and imposing a fair price on the carbon emitted during the production of energy intensive goods, for example cement and steel.
A CBAM puts a price on the embedded carbon emissions of certain imported goods that is equivalent to the charges imposed on the same goods produced domestically as a result of an ETS. The price implemented is adjusted to take into account any mandatory carbon prices in the country exporting the goods. This effectively means that energy intensive goods that are placed on the market where a CBAM is operational, face the same carbon price per tonne of CO2 equivalent, regardless of whether the goods were imported or produced domestically.
The European Union were the first to launch a CBAM, and its transitional phase began on 1 October 2023.
It has been confirmed by the government that they will introduce a UK CBAM, which will come into force from 1 January 2027. The consultation found that there was broad support for adopting this approach across the UK, with over 70% respondents in favour.
In terms of the scope of a UK CBAM, the government have announced that this will cover some of the most emissions intensive industrial goods imported to the UK from the aluminium, cement, fertiliser, hydrogen and iron and steel sectors that are at risk of carbon leakage. This means that the only sectoral difference in scope between the UK and EU CBAM will be the inclusion of electricity generation in the EU CBAM.
Although initial plans for a UK CBAM intended to include products from the glass and ceramics sectors, the government have announced that these will not fall under scope from 2027, but will be considered for future inclusion. They said that these sectors are generally less emissions intensive than those other products that will be in scope, so have less risk of carbon leakage comparatively.
Beyond 2027 the government will continue to keep the sectoral scope of the UK CBAM under review, and work alongside industry to address any feasibility concerns.
The UK CBAM will be applied to 'direct', 'indirect' and select 'precursor' product emissions embodied in imported CBAM goods, to ensure comparable coverage relative to the UK ETS.
Next steps
New legislation will need to be created in order to implement a UK CBAM. The government intend to publish Draft legislation on this prior to its introduction to Parliament. They have said that they will continue to keep all aspects of the design and implementation of a UK CBAM under review, and welcome continued engagement from interested parties.
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