Out-Law News 3 min. read
01 Nov 2024, 11:18 am
The introduction of a new UK carbon border adjustment mechanism (CBAM) can protect British businesses from unfair overseas competition arising from a lack of climate-related tax and regulation in those jurisdictions but is nevertheless likely to result in some “trade friction”, a trade and subsidy control expert has said.
Dr. Totis Kotsonis of Pinsent Masons was commenting after the UK government confirmed on Wednesday (60-page / 503KB PDF) that a UK CBAM will be introduced from 1 January 2027 – one year after the separate EU CBAM is due to become fully operational.
Under the UK’s Emission Trading Scheme (ETS), domestic manufacturers in certain carbon emissions intensive sectors are effectively required to pay a price, and in certain cases fines, for the carbon emissions which they produce above certain levels. This ‘carbon price’ is meant to encourage companies to reduce the carbon emissions which their manufacturing processes generate. When the UK CBAM begins to apply, certain industrial goods imported to the UK from countries with a lower or no carbon price will be subject to a levy, ensuring that products from overseas face a comparable carbon price to those produced in the UK.
In the absence of a CBAM, the government is concerned there would be ‘carbon leakage’ – whereby businesses shift production and associated emissions to countries that apply no or low carbon pricing and little climate-related regulation, which would undermine efforts to decarbonise the global economy in light of the climate emergency. It also means that domestic producers face unfair competition from cheaper imports from countries with no or low carbon pricing and lower environmental regulatory standards.
The previous government opened a consultation on the design, implementation, and administration of a new CBAM in the spring. In light of that consultation, the new government has now confirmed that, in a change from what had originally been envisaged, the new mechanism will apply, initially at least, to the most emissions intensive industrial goods imported to the UK, namely the aluminium, cement, fertiliser, hydrogen, iron and steel sectors. The government said that while other products from the glass and ceramic sectors “also give rise to a risk of carbon leakage” they will “not be in scope of the UK CBAM from 2027” but rather “be considered for future inclusion” instead.
Dr. Totis Kotsonis
Partner, Head of Subsidies, Procurement, Trade Agreements and Trade Remedies
The UK should be prepared to defend the measure not only in a WTO context but also within the context of bilateral trade negotiations with important trading partners
“No doubt businesses will welcome the government's latest proposals that align the sectoral scope of the UK CBAM more closely with that of the EU's,” Kotsonis said. “At the same time, in the absence of perfect alignment between the two systems, including as regards the question of how the CBAM ‘levy’ is calculated and paid, it would not be possible to avoid completely trade friction between the two trade partners.”
“Ultimately, the introduction of a UK CBAM, one year after the full introduction of the EU CBAM, would nonetheless have the benefit in due course of mitigating the risk of products that are subject to the EU CBAM finding their way into the UK market instead, and giving rise to concerns about unfair competition with domestic producers,” he said.
According to Kotsonis, there are mixed views globally about the introduction of CBAM schemes, with some critics and opponents believing that they serve as anti-competitive protectionist measures – and that the UK government could find itself having to defend the compliance of the UK CBAM regime within the context of World Trade Organization (WTO) rules and international trade treaties.
“Questions over the compliance of CBAM with WTO rules have not subsided, so like the EU, the UK should be prepared to defend the measure not only in a WTO context but also within the context of bilateral trade negotiations with important trading partners such as India which views CBAM as a protectionist measure that is likely to put its own domestic producers at a disadvantage,” Kotsonis said.
Penny Simmons
Legal Director
Whilst the government has finally confirmed its intention to introduce a UK CBAM, this should form part of a much wider package of ‘climate focused’ tax measures
Tax expert Bryn Reynolds, also of Pinsent Masons, said businesses will welcome the clarification provided on when the new UK CBAM will become operational.
“Contracts for construction projects spanning 1 January 2027 are already being entered into and the uncertainty regarding the application date has been unhelpful for business,” Reynolds said. “HMRC will face significant challenges in being operationally ready by this date to administer the tax.”
The government’s plans for the UK CBAM were announced on Wednesday, coinciding with the UK Budget. Penny Simmons, a tax specialist at Pinsent Masons, said it was “disappointing” that there were no new significant environmental tax policy announcements in the Budget to support the UK’s green transition
“The government should be prioritising how the tax system can be used to support and incentivise decarbonisation and the development of green technology,” Simmons said. “Whilst the government has finally confirmed its intention to introduce a UK CBAM, this should form part of a much wider package of ‘climate focused’ tax measures.”