UK Implements New Carbon Pricing Mechanism to Equalise Imports and Local Production

The United Kingdom is set to introduce a pioneering import carbon pricing mechanism by 2027, aimed at bolstering the nation's drive toward decarbonisation.

According to a recent release by the UK government, this initiative will enforce a comparable carbon price on imports of crucial goods such as iron, steel, aluminium, ceramics and cement originating from overseas, ensuring parity with goods produced within the UK.

The primary objective behind this move is to mitigate the risk of 'carbon leakage', a phenomenon where emissions are displaced to other countries due to varying or non-existent carbon pricing structures. Products imported into the UK from regions with lower or no carbon pricing will be subject to a levy by 2027, aligning their pricing with those produced domestically.

Highlighting the UK's exceptional track record in decarbonisation, officials highlighted the nation's distinction as the first major economy to legislate for net zero and its rapid reduction of emissions, surpassing all other G7 countries.

The industrial sector plays a pivotal role in the UK's journey toward achieving net zero emissions. However, efforts directed solely at domestic decarbonisation risk inadvertently increasing emissions abroad, undermining global climate goals.

The proposed carbon border adjustment mechanism (CBAM) targets carbon-intensive products from overseas, covering sectors such as iron, steel, aluminium, fertilisers, hydrogen, ceramics, glass and cement. By aligning the carbon pricing of imported goods with local products, this measure aims to prevent carbon leakage and uphold the integrity of decarbonisation policies.

The levy imposed by the CBAM will be contingent on the carbon emissions generated during the production of the imported goods and the variance between the carbon pricing in the country of origin, if any, and the pricing faced by UK producers. This strategic action intends to reassure UK industries investing in decarbonisation by ensuring a genuine net reduction in global emissions.

Chancellor of the Exchequer, Jeremy Hunt, expressed the pivotal role of this levy in ensuring comparable carbon pricing for products like steel and ceramics, fostering confidence within UK industries to invest in decarbonisation amidst the global transition to net zero.

The government's decision follows a consultation revealing that 85 per cent of respondents perceive carbon leakage as a present or future risk to their decarbonisation endeavours. The disparity in the pace of emission reduction across different jurisdictions poses a potential threat, where UK emissions could be displaced to less climate-ambitious countries, negating global emissions reductions. The announced action aims to confront and mitigate this risk.

The forthcoming design and implementation of the CBAM will undergo further consultation in 2024, including a detailed review of the products falling under its scope. Additionally, the government pledges to engage with trade partners, including developing nations and affected businesses to minimise trade impacts and facilitate necessary compliance steps.

In tandem with the CBAM, the government plans to collaborate with industries to establish voluntary product standards, allowing businesses to showcase their low-carbon products to consumers. Moreover, there are intentions to develop a framework measuring the carbon content of goods, complementing future decarbonisation policies.

Today's announcements also invite stakeholders from power, aviation and industrial sectors to contribute their insights into proposed modifications to the UK Emissions Trading Scheme (ETS). These changes aim to fortify the scheme's alignment with the nation's net-zero progress.

A critical aspect of the CBAM's implementation involves its integration with the UK Emissions Trading Scheme to counter the risk of carbon leakage. The ETS Authority is actively seeking industry feedback on refining the allocation of free carbon allowances, particularly targeting industries susceptible to carbon leakage. Further adjustments to free allocation will be reviewed in response to changes in carbon leakage risk for specific sectors.

Moreover, plans are outlined to sustain an effective financial incentive within the ETS market, compelling participants to decarbonise. This involves the exploration of potential measures, including the design of a new Supply Adjustment Mechanism, following last year's call for evidence.

The government remains steadfast in supporting industries in their decarbonisation endeavours, evident through initiatives like the Industrial Energy Transformation Fund, the Net Zero Innovation Portfolio and a substantial £20 billion investment in carbon capture and storage development.