The government has committed to consult on implementation of a domestic carbon border adjustment mechanism (CBAM) and product standards, to level up the playing field for UK manufacturers.

It follows a report by the Environmental Audit Committee (EAC), which highlighted that a CBAM could incentivise the development of more low carbon products domestically. It concluded that heavy emitting sectors would look to avoid the higher taxes that a CBAM or enhanced product standards would incur.

The report said a CBAM would further mitigate the potential for heavy emitters to ‘offshore’ their emissions and send a clear signal for companies to re-evaluate their carbon footprint.

Aligning with EU carbon border policy

In its response to the EAC, published on 21 June, the government also expresses its desire to work closely with low- and middle-income countries and to align any resulting policy around a CBAM or on product standards with the interests of consumers.

The government has confirmed that it is engaging actively with the EU on the Commission’s proposal for an EU CBAM. In the response, Ministers have committed to “building a full understanding” of the implication of the EU’s mechanism on the UK’s trading relationship with the EU, including with respect to Northern Ireland.

Carbon leakage

A CBAM works by extending the carbon price levied on domestic production to imports of the equivalent products.

It is designed to prevent “carbon leakage” – when businesses operating in countries with strong climate policies transfer production to countries with fewer emissions constraints. This simply moves the emissions elsewhere rather than reducing them, and in some instances may lead to an increase in total emissions.

The risk of carbon leakage is higher in energy-intensive industries. In response, the UK government has extended the Energy Intensive Industries exemption scheme for a further three years, which provides businesses with relief for the costs of the UK Emissions Trading Scheme, (UKETS) and Carbon Price Support mechanism.

Environmental Audit Committee Chairman, Rt Hon Philip Dunne MP, said: “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. 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.”

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