On 31 March 2023, the Department for Energy and Net Zero launched a 12-week consultation on measures such as a potential carbon border tax in an effort to protect businesses against cheaper imports from countries with less strict climate policies.
Currently, the domestic emissions trading system (ETS) that charges power plants, factories and airlines for each tonne of carbon dioxide they emit is part of UK efforts to reach net zero emissions by 2050, but the department said it is looking at ways to prevent so-called ‘carbon leakage’ – a term used to describe when companies relocate production to countries with looser emissions targets and lower carbon costs.
Many countries have put a price on carbon emissions, but these vary greatly. The price of spot carbon allowances in the UK’s ETS currently stands at about £70 a tonne while allowances in China’s ETS, for instance, trade around 57 Chinese Yuan (£6.59) per tonne.
Potential measures to prevent carbon leakage could include a carbon border adjustment mechanism (CBAM) applied on imports to reflect both the carbon emitted in their production together with any gap between the carbon price already applied in the country of origin and the price in the UK, the consultation document says.
The proposed tax is likely to target energy-intensive products such as iron and steel, cement, aluminium and fertilisers, at first, and echoes a similar policy in the EU, known as the Carbon Border Adjustment Mechanism (CBAM), which will come into force in 2026, though reporting begins this year.
Potential impacts could include an increase cost of imports, changes to supply chains, additional compliance and reporting requirements, coupled with opportunities for carbon offset projects and an enhanced focus on ESG factors.
According to the Chartered Institute of Taxation, carbon border tax can play an important part in delivering net zero, but urged the government to ensure any policy did not restrict international trade purely to benefit domestic producers. “We actually need to incentivise low carbon-emitting production at home and abroad,” it said.
KPMG said that while the initial proposed outline has similarities to the EU CBAM (which will impact UK exporters of EU covered goods), the proposed UK CBAM would have a potentially significant impact on UK importers of UK covered goods. Businesses caught by both sets of rules could face further complications of having to comply with two similar, but distinct, regimes.
It added that organisations that have been closely following the EU CBAM will already be familiar with the implications of a carbon border adjustment mechanism: higher operating costs, new compliance and reporting obligations and carbon accounting challenges.
Details of the consultation can be found here.
Philip Smith is editor of The Treasurer