Carbon Border Adjustment Mechanism (CBAM)
Latest insight from AIC
In a nutshell
A UK Government consultation on addressing carbon leakage risk to support decarbonisation on strategic goals, policy options, and implementation considerations was launched on 30 March 2023 and was open for 12 weeks.
The consultation explored a range of potential policy measures to mitigate carbon leakage risk in the future and ensure the UK industry has the optimal policy environment to decarbonise.
Potential policies included:
- a carbon border adjustment mechanism (CBAM) applied on imports would 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 carbon price that would have been incurred had they been produced in the UK.
- mandatory product standards (MPS) would set an upper limit on the embodied emissions of specific industrial products and could be designed to increase in stringency over time.
- demand-side policies to help grow the market for low-carbon goods, such as product labelling (based on voluntary product standards) and public procurement initiatives.
- an embodied emissions reporting system which could support the implementation of carbon leakage mitigation policies.
As a result of carbon leakage, the objective of decarbonisation efforts – to reduce global emissions – would be undermined.
Carbon leakage risk could curtail private investment in decarbonisation to reduce industrial emissions, compromising efforts to avoid global warming.
Context: UK Emissions Trading Scheme (UK ETS)
The UK ETS places a price on the carbon emitted by domestic producers in the sectors covered. Total carbon emissions under the Scheme are capped, reducing overtime to incentivise decarbonisation. The UK ETS Authority has recently consulted to align the cap on total carbon emissions with net zero targets.
Carbon leakage risk is currently managed by at-risk sectors receiving a proportion of carbon allowances free of charge (free allocation). The UK ETS Authority has committed to maintain current levels of free allocation for industrial sectors until 2026.
The consultation responses are being considered at the moment and we are awaiting the formal response from the government shortly
There is expected to be a further consultation at the end of 2023 to better target the remaining free allocations toward sectors considered to be at risk of carbon leakage, due to be implemented in 2026.
Find out more on the GOV.UK website.
EU CBAM
The EU’s version officially came into force in 2022 after its publication in the Official Journal of the European Union, and its application will begin in October 2023 under a three-year transition phase.
During this time there will only be reporting obligations where EU importers of carbon-intensive goods must submit quarterly reports on their emissions to the European Commission.
In 2026, after the transition period expires, tariffs will gradually be phased in and will be fully applicable in 2034.
The carbon border tax will initially apply to cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen; however, it is expected that the CBAM will expand its scope to all products covered by the EU Emissions Trading System (EU ETS).
The CBAM will levy a tax – reflecting the domestic carbon price – on specific imported products based on the amount of carbon emissions associated with their production.
The process begins with calculating the embedded carbon content of the imported goods by determining the GHG emitted during their manufacturing.
AIC’s position on CBAM
AIC did not adopt a formal position as such, instead, it reflected to the Government the dynamics of the UK market and the balance of trade in fertilisers.
This reflects the fact that domestic producers and importers are both represented in AIC Membership, and it instead encouraged Members to submit responses to the consultation themselves to make specific representations about how carbon adjustments may impact them specifically.
The government will inevitably need to decide how to balance domestic produced and imported goods under scope, and how this aligns with the approach taken with the EU.