UK Plans to Implement Carbon Border Tax in 2026, Following EU’s Lead

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UK ( Parliament Politics Maganize ) – The UK Chancellor, Jeremy Hunt, is considering the implementation of levies on imported carbon-intensive goods from countries with less stringent climate regulations starting in 2026, aligning with measures introduced by the EU. 

This potential initiative, which may be disclosed in this month’s Autumn Statement, stems from a prior consultation on the establishment of a “carbon border adjustment mechanism” (CBAM) to safeguard industries from unfair competition in regions with lower carbon costs.

EU’s Carbon Border Adjustment Mechanism (CBAM) and Its Implications

The EU initiated its CBAM program in September to address “carbon leakage,” a situation where companies relocate production to areas with weaker or non-existent carbon costs while retaining unrestricted access to markets where heavy industry incurs emissions-related expenses.

It is anticipated that Hunt will declare the launch of the UK’s own Carbon Border Adjustment Mechanism (CBAM) program in 2026, coinciding with the implementation of the EU mechanism. This move aims to prevent the UK from becoming a destination for carbon-intensive products facing levies from the EU.

The confirmation of the government’s commitment to this plan would be positively received by UK industries, although officials advise that ongoing negotiations across Whitehall are in progress, and any formal announcement may be delayed until the spring Budget.

Gareth Stace, the Director-General of the trade body UK Steel, emphasized the importance of ensuring that the UK steel industry, transitioning to green steel production, is not consistently outperformed by high-emission, imported steel.

“The implementation of its own Carbon Border Adjustment Mechanism (CBAM) by Europe poses a risk of creating a detrimental trade barrier between the UK and its largest trade partner if swift measures are not developed and implemented,” warns the source.

Challenges in Identifying Renewable Electricity Sources for Exports

The government is confronted with the challenge of aligning its carbon market with the EU’s to prevent British manufacturers from facing levies on exports under CBAM. This is crucial as carbon prices in the UK market are considerably lower than those in the EU market.

The notion of a CBAM was raised by the Treasury in its net zero review in October 2021, acknowledging the complexity of its implementation. Prime Minister Rishi Sunak expressed support for the idea earlier this year, deeming it “reasonable and sensible,” and suggested potential cooperation between Britain and Brussels on their respective plans.

The EU’s Carbon Border Adjustment Mechanism (CBAM), which initially mandates importers to gather information without imposing the levy, is deemed “the most significant climate law ever in Europe, and some argue globally,” according to Peter Liese, the lead negotiator for the European Parliament, as stated last year.

According to a recent survey involving 400 senior managers in the UK manufacturing industry, spanning sectors such as construction, machinery, automotive, and food, three-quarters expressed support for the implementation of a UK Carbon Border Adjustment Mechanism (CBAM), while only 8 percent opposed it.

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Revenue Loss and Border Tax Concerns Amidst Weak Carbon Prices

Companies selling goods like iron, cement, fertilizer, and power supplies to Europe from non-member states, and not subject to comparable carbon costs, will encounter new levies tied to the carbon price within the EU Emissions Trading System.

Whether or not the UK establishes a CBAM, if it fails to legally align its carbon pricing with the EU’s, British exports may still be subject to levies if UK carbon prices remain lower.

Even the export of renewable electricity may encounter levies due to the challenge of distinguishing whether power supplies originate from green sources or fossil fuels when exporting across grids.

“Aligning our carbon pricing regime with the EU’s would shield UK companies from these expenses,” affirmed Adam Berman, deputy director of the industry body Energy UK.

While the UK’s post-Brexit carbon market closely mirrors the EU Emissions Trading System (ETS), this year, British carbon prices experienced a significant decline as the government, led by Chancellor Sunak, issued more carbon allowances than initially anticipated. Presently, the UK carbon price stands at approximately £41 per tonne, contrasting with the EU’s £66 (€76) per tonne.

Energy UK has estimated that the Treasury is missing out on nearly £3 billion in annual revenue due to low carbon prices. The organization has cautioned that if prices continue to trade at a discount, approximately £500 million per year in border taxes could effectively be collected by the EU rather than the UK.

Beth Malcolm

Beth Malcolm is Scottish based Journalist at Heriot-Watt University studying French and British Sign Language. She is originally from the north west of England but is living in Edinburgh to complete her studies.