Source · Select Committees · Environmental Audit Committee
Recommendation 27
27
Accepted
Develop a UK Carbon Border Adjustment Mechanism to prevent carbon leakage
Recommendation
Having been a long-standing leader in climate finance, the UK now risks falling behind by failing to install mechanisms to mitigate carbon leakage. The EU has already launched its carbon border adjustment mechanism (CBAM). It is now over a year and a half since we called on the Government to begin work immediately to develop a UK CBAM. We welcome the Government’s consultation on addressing carbon leakage risk, but are concerned to note the Minister’s view that it is better to encourage other countries to develop their own carbon pricing than to introduce our own CBAM. As we have argued before, the UK should be doing both. The Government must get on with it and plug the leaks that the UK’s emissions trading scheme risks causing, by developing a carbon border adjustment mechanism. (Paragraph 142) The effect of UK government policy on global and local investment
Government Response Summary
The government accepts the recommendation, stating it will implement a carbon border adjustment mechanism (CBAM) by 2027 to mitigate carbon leakage. A further consultation on the delivery of the CBAM will be conducted in 2024.
Government Response
Accepted
HM Government
Accepted
The UK is committed to provide certainty to industry around the steps it will continue to take to protect against carbon leakage at all stages of the Net Zero transition. That is why in July the UK ETS Authority set out the overall level of free allocations that will be provided from 2026. In December the Authority published a consultation on the second phase of the free allocation review, focusing on distribution of allowances during the second allocation period (2026 – 2030) to ensure they are better targeted at sectors most at risk of carbon leakage and tailored to a UK context. The UK is committed to reaching net zero while mitigating carbon leakage, as businesses transition in the context of high global energy prices. We are committed to taking action to manage carbon leakage risk domestically, at the same time as working towards international solutions and encouraging others to join the UK on a pathway to net zero. The consultation ‘Addressing carbon leakage risk to support decarbonisation’ ran from 30 March 2023 to 22 June 2023, and received over 160 responses. This exploratory consultation sought views and evidence from a broad range of stakeholders on potential policies to manage future carbon leakage risk. On 18 December 2023, the Government published its response to the consultation. After carefully considering all responses, the Government will implement a carbon border adjustment mechanism (CBAM) by 2027, applying a charge on the carbon emissions embodied in imports from the following sectors: aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel. The CBAM will mean that imported goods in these sectors will pay a comparable carbon price to domestic goods. The CBAM will ensure the environmental integrity of our decarbonisation policies. It will also give UK businesses the confidence that when they invest in decarbonisation it will result in a true net reduction in global emissions. The delivery of a UK CBAM will be subject to consultation in 2024. The Government has also announced its intention to work with industry to establish voluntary product standards that businesses could choose to adopt to help promote their low carbon products to consumers; and to develop an embodied emissions reporting framework that could serve future carbon leakage and decarbonisation policies. These measures will also be subject to further technical consultation in 2024. The UK CBAM will work cohesively with the UK ETS to ensure imported products are subject to a carbon price comparable to that incurred by UK production, mitigating the risk of carbon leakage. The UK ETS Authority will review whether free allocation should be adjusted to reflect any changes to carbon leakage risk for given sectors. The UK Government will continue to engage with the UK ETS Authority as both develop carbon leakage policies.