Policy Explainer Carbon Border Adjustment Mechanism

In September 2023, the UK government revealed it had agreed to write a £500m cheque to help Tata Steel, the Indian steel giant, shut down Britain’s last blast furnace in Port Talbot, South Wales, and fund the installation of new ‘greener’ electric arc furnaces for steelmaking.

Steel Scrap 

The move to the new less labour-intensive furnaces, which melt down and recycle scrap metal, is expected to “reduce the UK’s entire carbon emissions by around 1.5%”.

The Port Talbot deal has recently taken centre stage, as the government develops plans for a green levy on imports to the UK, known as the Carbon Border Adjustment Mechanism (CBAM).

Policymakers are currently consulting on the levy, which it hopes to introduce from 2027. Under the system, overseas companies that want to export goods to the UK will have to show they are paying for their carbon emissions, or face a levy equivalent to the price paid for carbon by UK manufacturers. The charge would ensure British manufacturers, which are obliged to reduce their greenhouse gas emissions under the net zero target, are not undercut by products from countries with less stringent climate rules – so called ‘carbon leakage’.

Leakage Loophole 

Executives in countries like China, India, Turkey and Brazil fear that CBAM will create a two-tier system, with products made using clean energy sent to the EU and those produced with ‘dirty’ coal power being exported to poorer countries with fewer climate obligations.

The Guardian recently reported that India is seeking exemptions from the UK’s CBAM as part of a potential trade deal.

Laith Whitwham, a senior policy adviser at the E3G think tank, noted: “Exempting India from the UK CBAM now would allow Tata to import steel from its higher carbon blast furnaces in India, without paying a carbon price – which UK producers must do. The UK would in effect be closing its own blast furnaces only to import more steel from blast furnaces abroad.”

A CBAM will impose a tax on the importation of certain carbon intensive products, such as cement and steel, to the UK. Britain is ramping up efforts to decarbonise, with the aim of reducing carbon emissions by at least 68% by 2030 and achieving net zero by 2050.

In 2023, the EU introduced its own CBAM, which is being phased in by 2026. Britain’s CBAM is likely to closely follow the EU’s approach.

The government is proposing that, under the CBAM, the cost for importers will be calculated by multiplying the total emissions emitted per type of good by the UK carbon price, minus any carbon price paid overseas.

Business Approval

An IoD survey of more than 1000 business leaders, conducted in May 2023, revealed that almost half (48%) agreed with the concept of a CBAM, compared with 28% that disagreed.

While business largely supports a CBAM, there are concerns about the level of bureaucracy involved, especially in the context of mounting Brexit-related red-tape at the border. Similarly, some firms are worried about how the extra import levy imposed by the CBAM would impact UK competitiveness on the global stage.

IoD research also suggests there is a need to combine measures to mitigate carbon leakage with additional support for businesses to decarbonise. Our proposal, in The Green Incentive: how to put net zero at the heart of business planning, is that companies that have achieved net zero in all their operations should pay a lower corporation tax rate than those that have not. Polling found that two thirds of business leaders were in favour of this approach, 18 percentage points higher than support for a CBAM.

About the author

image of Alex Hall-Chen

Alex Hall-Chen

Principal Policy Advisor for Sustainability, Employment, and Skills at the IoD

Alex Hall-Chen is Principal Policy Advisor for Sustainability, Employment, and Skills at the IoD. She previously worked in education research and as a Policy Advisor at the CBI. She holds a BA in Politics and Sociology from the University of Cambridge and an MSc in Comparative and International Education from the University of Oxford, and is a school governor for the Thinking Schools Academy Trust.

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