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Following similar moves by the European Union, the UK will impose a carbon border tax on emissions-intensive goods imported from countries deemed to have weaker climate rules in 2027.
On October 1, the EU's Carbon Border Adjustment Mechanism (CBAM), the world's first "carbon tariff", was officially launched and entered a transitional phase.
The EU carbon tariff refers to the EU's additional carbon border adjustment fee for specific products imported from abroad, and its transition period will extend to the end of 2025, officially start on January 1, 2026, and be fully implemented before 2034.
According to the text of the regulation, the CBAM will target imports from carbon-intensive industrial sectors in the first phase, including steel, cement, aluminum, fertilizers, electricity, hydrogen and some downstream products. During the transition period, EU importers will only need to report information on the direct and indirect carbon emissions of their goods, as well as the carbon price paid abroad, and will not be required to pay a fee to the EU by purchasing a CBAM certificate. From 2026 onwards, when certain products are exported to Europe, if the carbon price of the production country is lower than that of the EU carbon market, the difference must be made up by purchasing a CBAM certificate.
According to the EU, the CBAM aims to protect climate action within the EU and avoid "carbon leakage" caused by local companies outsourcing carbon-intensive industries to countries with lower emission targets. The United Kingdom, across the continent from the continent, is at risk of becoming a "dumping ground" for carbon-intensive products taxed by the European Union.
In fact, the UK Treasury proposed the establishment of a carbon tariff mechanism in its net-zero strategic review back in October 2021, and said that the implementation process could be very complicated. When Sunak was the chancellor of the exchequer, he also discussed carbon tariffs with German Chancellor Olaf Scholz. Since last year, the European Union has accelerated the introduction of the world's first carbon tariff mechanism, and the United Kingdom has also accelerated the pace of establishing its own carbon tariff mechanism.
In March, the UK unveiled a series of environmental and energy security policies, including an inquiry that could lead to carbon tariffs on carbon-intensive goods. The UK** said it would hold a three-month consultation and public consultation on the potential carbon tariff measures to protect businesses from cheap imports from countries with lax climate policies.
On Monday, December 18, the United Kingdom** said that the United Kingdom will impose a new carbon import tax on some products from 2027 to help protect British manufacturers and match similar measures in the European Union. The announcement coincided with the UK** publishing a response to a series of domestic carbon leak mitigation consultations, which found that 85% of respondents said carbon leakage was a current or future risk to their decarbonisation efforts.
Chancellor of the Exchequer Jeremy Hunt said: "This levy will ensure that carbon-intensive products from overseas, such as steel and ceramics, are exposed to carbon** comparable to those produced in the UK, so that our decarbonisation efforts translate into reductions in global emissions." As the world transitions to net zero, this should give UK industry the confidence to invest in decarbonisation. ”
01 The content of the UK Carbon Border Adjustment Mechanism (CBAM).
According to the announcement, the UK** will implement the UK Carbon Border Adjustment Mechanism (CBAM) by 2027. The proposed Carbon Border Adjustment Mechanism (CBAM) would apply to carbon-intensive products in the iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors, which would ensure that these carbon-intensive products from overseas are exposed to carbon** equivalent to domestically produced products.
The UK CBAM is designed so that if other countries also have clear carbon**, their CBAM responsibilities for their goods will be adjusted accordingly. As such, the fees charged by CBAM will depend on the amount of carbon emissions from the production of imported goods, as well as the gap between the applicable carbon** (if any) in the country of origin and the carbon** faced by UK producers. Importers of imported products within the scope of the UK CBAM will be directly liable for the CBAM, based on the emissions embodied in the imported goods. The system does not involve the purchase or trading of emission certificates.
The UK CBAM will apply to specific precursor product emissions embodied in Scope 1, Scope 2 and imported products to ensure comparability with the coverage of the UK ETS.
Currently, the UK Emissions Trading Scheme (UK ETS) puts a price on greenhouse gas emissions emitted by producers in the UK. The UK Emissions Trading Scheme uses a cap-and-trade system, where the market determines the amount of allowances**. There are caps on the total amount of carbon emissions and allowances under the scheme and are reduced over time to encourage decarbonization.
The UK Emissions Trading Scheme Authority announced in July this year that there would be a 45% reduction in emissions trading scheme allowances that can be purchased from ** between 2023 and 2027 in line with the UK's net-zero emissions target. The UK CBAM will work closely with the UK Emissions Trading Scheme, including free allowances, to ensure that the carbon** of imported products is comparable to the carbon produced in the UK, thereby reducing the risk of carbon leakage.
This will be followed by further consultation on the design and implementation of CBAM in 2024, including an exact list of products in scope and the UK's CBAM criteria for recognising carbon** elsewhere in the world.
02Welcome and concern, the industry hopes that the plan will be implemented as soon as possible
The UK**'s statement confirming CBAM's proposed timeline has been widely welcomed by UK business and climate policy experts. Chris Stark, chief executive of the Climate Opportunity Commission, said the new CBAM scheme was "very welcome", while the CBI, the UK's largest business lobby group, said the move was essential to avoid carbon leakage while reducing emissions.
"The decarbonisation of UK industry plays a vital role in both the demand and the need for net-zero technologies", the Confederation of British Industry said in a statement, while stressing the importance of proper coordination between CBAM and ETS.
However, it is worth noting that UK carbon credits are traded** much lower than those in the EU, and if this discrepancy persists, UK companies will face tariffs on any product exported to the EU when the EU implements its plan in 2026. The EU's CBAM will come into force in 2026, one year earlier than the UK, and the list of affected industries will be different. Unlike the EU's CBAM, the UK's carbon border tax will not apply to the power sector, but to ceramics and glass, which are outside the scope of EU policy.
The UK launched its new post-Brexit emissions trading scheme (UK ETS) in 2021 and in August 2022, carbon** reached a peak of nearly £100 per tonne of CO2e. But since April 2023, the UK's ETS carbon** has been falling substantially. At the start of December, UK carbon allowances** fell to a record low of just over £32 tonnes of CO2e, while the spread between UK allowances** and EU allowances widened in 2023.
According to UK Steel, the steel industry** body, the UK CBAM is likely to create a level playing field for carbon pricing, but the timeline should be in line with the EU's. The current timeline could mean that some of the high-emitting steel currently exported to the EU will be diverted to the UK and put pressure on UK steel. Gareth Stace, director general of British Steel, noted that 90% of global steel production does not face any carbon cost.
British Steel warned on December 18 that "by confirming the CBAM from 2027 onwards, rather than matching the EU's 2026 timetable, ** will be at risk of dumping high-emitting steel in the UK from 2026 when the EU CBAM comes into force." ”
Make UK, which represents UK industry, also said the plan should be implemented "as soon as possible" to align with the EU's timeline, which is set to introduce its own carbon border tax in 2026 and has already begun trials.
In addition, the consultation paper does not propose linking the UK system to the EU system in an attempt to bridge the gap that has emerged. Energyuk, a British lobby group, says the UK's weak and volatile carbon price could undermine investment in clean energy and cost the Treasury billions of dollars in lost revenue.
Laith Kharus Whitwham, senior policy adviser at think tank E3G, also expressed his concerns, warning that the opportunity to provide needed certainty to industrial companies and the wider carbon market has been missed.
"The decision to implement CBAM in the UK is a very welcome step that will apply the polluter pays principle on a broader basis and ensure that domestic industries working to decarbonise are not weakened by cheap, high-carbon imports," he said. However, key decisions about the design of the scheme, including the phasing out of free allowances under the UK ETS, have been left to the next edition** and the opportunity to adjust the scheme has been missed. The UK's carbon pricing system is different from the EU's, which could result in higher short-term costs for domestic producers. ”
03 A New Era of Green Protectionism?
Both the EU and the UK** have said that imposing carbon tariffs would help reduce the risk of so-called carbon leakage, i.e. avoiding companies from shifting production to countries with weaker climate regulations.
Advocates of the Carbon Border Adjustment Mechanism (CBAM) argue that in addition to tackling "carbon leakage", the policy can drive domestic investment to achieve a net-zero transition and is a valuable tool to persuade other economies to adopt their own carbon pricing systems. The EU and UK CBAM provide a mechanism to encourage major emerging economies to adopt more ambitious decarbonisation policies.
But the CBAM has also sparked accusations of green protectionism, and developing countries will face further increased costs for their domestic industries when exporting to the UK and EU in the future, which has also become a point of contention at the 28th UN climate summit. As countries consider introducing retaliatory tariffs, there is also the risk of triggering a green war.
The landmark UAE Consensus, adopted at COP28 last week, included a strongly worded warning that "measures to combat climate change, including unilateral changes, should not constitute arbitrary or unjustified discrimination or a disguised restriction of international **".
At present, the trading of China's carbon emission trading system is about 71 per metric ton60 yuan, much lower than the EU and UK carbon prices, and only included in the power sector. With the advancement of the carbon tariff policy between the EU and the UK, it is expected that China will accelerate the EU's restrictions on the issuance of free allowances, accelerate the expansion of the carbon market, and the carbon price is expected to increase.
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