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Updated Dec 19, 2023

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Government confirms CBAM

The UK hopes to achieve net zero carbon emissions by 2050, which would mean reducing emissions by two-thirds before 2035. This transformation will aid climate change, improve energy security and support UK economic growth and jobs. The primary risk associated with decarbonisation is carbon leakage which is caused by the movement of production between countries and subsequent emissions due to different levels of decarbonisation effort depending on carbon pricing and climate regulation. 

The main measure used to mitigate carbon leakage risk in the UK is the free allocation system under the UK Emissions Trading Scheme (ETS) (the Greenhouse Gas Emissions Trading Scheme Order SI 2020/1265). The 'Addressing carbon leakage risk to support decarbonisation' consultation in March-June 2023 is used as a basis for evidence supporting the government's approach to monitoring carbon leakage to reach net zero.

The government's formal response to the consultation has now been published and we have summarised the key points below:

Chapter 1: Carbon leakage policy measures

  • This chapter contemplates how the highly traded and carbon intensive sectors will pose the greatest risk for carbon leakage, as they are subject to climate policies which are not implemented consistently on an international scale;
  • Other factors impacting the risk are domestic cost and the availability of decarbonisation technologies, a sector’s ability to transition to low emission production processes, and the ability of customers to switch to low carbon alternatives;
  • Any new carbon leakage policy measures would be considered as part of a framework with other government policies which could affect the risk of carbon leakage, including the system of free allocation under the UK ETS.

Chapter 2: Carbon border adjustment mechanism

  • As a measure to mitigate carbon leakage risk to the UK in the future, the government will implement a carbon border adjustment mechanism (CBAM) which will involve a tariff on carbon intensive goods such as aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel;
  • This will ensure that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU and confirm the carbon price of imports is equivalent to the carbon price of domestic production;
  • The government hopes to implement this by 2027.

Chapter 3: Mandatory product standards

  • The government will continue to consider whether Mandatory Product Standards (MPS) could be an appropriate initiative to mitigate carbon leakage and support decarbonisation;
  • MPS would regulate products by imposing upper limits on the emissions of industrial products made in the UK or within its market, possibly extending to imports;
  • The focus would be on the way products are made, rather than its characteristics;
  • The primary aims of any MPS policy would be to:
    • Provide a minimum expectation of the pace of decarbonisation in targeted sectors, supported domestic and international efforts to reduce greenhouse gas emissions,
    • Reduce the potential for carbon leakage in the future by preventing the highest carbon products from entering the UK market and therefore potentially undermine lower carbon alternatives,
  • The government concluded that no MPS will be implemented for any specific sector at this point as further work is needed to gather evidence and analyse the rationale and impacts of any MPS for specific sectors.

Chapter 4: Cross cutting policy issues for CBAM and MPS

  • The government aims to minimise the impact on trade in the UK and internationally;
  • It is committed to addressing climate change and reducing poverty;
  • It also seeks to understand the effects of a CBAM, mostly on developing countries and looks to mitigate these concerns.

Chapter 5: Growing the market for low carbon products

  • The government considered methods to support a growing market for low carbon products, directly through public procurement policies and, indirectly, through product labelling and voluntary product standards;
  • Consumers could benefit from the policies as they could be more aware of the embodied emissions of products, through simple ways of recognising low and high carbon products and develop a better understanding of how they can use their purchasing power to achieve net zero;
  • In addition, the policies could improve the competitive position of low carbon products, therefore reducing the risk of carbon leakage;
  • The government also wants to explore options to use product labelling as a potential additional measure to support voluntary product standards. This will allow consumers to see which voluntary standard a product meets.

Chapter 6: Emissions reporting framework

  • Proposals for an embodied reporting framework were introduced which would underpin carbon leakage mitigation policies;
  • Two broad options were set out regarding how the embodied emissions of products could be measured and reported. The first option involved developing reporting requirements using installation level data, following reporting requirements under the UK ETS. Option two would use product level life cycle assessments, more closely linked with Environmental Product Declarations (EPDs) as well as other international reporting methodologies;
  • The government made clear its understanding that information regarding the embodied emissions of products is required for carbon leakage and demand-side policy measures to operate, whether in the form of actual emissions data or estimated values;
  • A key focus for the government would be attaining the necessary level of accurate data needed to implement policy while also minimising the burden on industry.

Chapter 7: Designing the Mechanism for Embodied Emissions Reporting

  • Focuses on the specifics of the reporting options set out in chapter 6, more specifically developing reporting requirements which draw on or align with the UK ETS;
  • It considers how deciding on a standardised life cycle assessment methodology for reporting could support businesses to differentiate low carbon products and decarbonise supply chains;
  • The government explored how it could identify a life cycle assessment methodology and require reporting of embodied emissions accordingly. This would then help to maintain consistent and comparable data which aligns with existing industry reporting both domestically and internationally.

Chapter 8: Reporting to government and delivery of the IT system

  • Explores the design and delivery of the reporting system explored in Chapters 6 and 7, including proposals on the IT product, frequency of reporting, verification of data, and how the information would be disclosed to the public;
  • The government considered reporting duplication, administrative cost, deliverability of options, and how each option aligns with other domestic and international reporting obligations faced by industry.

Next steps...

The government aims to implement CBAM by 2027 and therefore we expect there to be further consultations and Draft legislation to be published in the future before the final legislation to implement this is made. Keep up to date with our website where we will provide further news once this is released.


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