CBAM to hit UK?

What’s behind the latest export complication for UK firms

In her blog piece for PWB in September 2020 Emily Stewart warned of the fall out from the UK’s potential de-alignment from EU climate provisions and within that the potential for Carbon Border taxes. In this quick explainer Emily discusses how it has come to pass and what it means for UK firms.

Seven months on from the UK’s exit for the EU single market the problems with the agreement signed by UK Prime Minister, Boris Johnson, and negotiated by his now Europe minister, David Frost, become more apparent.

Much of the agreement simple reflects the fact that the UK’s chosen status is that of a ‘third country’ outside of the European Economic Area and thus wider co-operation agreements with the European Union. From that follows that as things stand UK firms will be exposed to the affects of Carbon Border taxes on trade worth around $3.5 billion with the EU. but possibly also with other countries which impose such taxes driven by the same thinking as the EU and where they are not covered by trade deals.  

The Carbon Border Adjustment Mechanism imposes a CO2 charge on products entering the EU so that European industry can play on an equal footing with foreign manufacturers. The objective, according to the European Commission, is to avoid “carbon leakage” whereby industries relocate production or new factories abroad in search of lower production costs. 

The Commission wants the CBAM to cover importers of electricity, iron and steel, cement, aluminium and some fertilisers in the first instance, but it could be extended to cover additional sectors in the future. The initial list of sectors is fairly narrow, though still worth about $3.5 billion mentioned above, and does not include a number of industries already covered by the EU’s ETS such as other chemicals, ceramics and paper. 

Even with the distant relationship chosen by the UK, exemption from CBAM could have been an element of the FTA negotiated by Frost, signed by Johnson and approved by the Westminster Parliament without detailed scrutiny.

Countries exempt from the EU’s carbon border tax include the European Economic Area (EEA) countries Iceland, Liechtenstein and Norway which, along with Switzerland, take part in the EU’s Emissions Trading Scheme (ETS). It is open to other countries become exempt either by fully integrating with the EU ETS, or by arranging a link between their national ETS and that of the EU’s.

But the UK doesn’t want to!

If the probable complications on trading with the EU weren’t enough then the further potential complications of CBAM and how it might work with the Northern Ireland protocol make the UK’s collaboration with the EU by linking the two ETS systems even more logical. Again, however, the UK  doesn’t want to do it.

Long story short – if the UK decides to die on the hill of not linking it’s ETS to EU’s, it’s products will be taxed at the border (and that’s friction on top friction from of all the new customs requirements proving ever so simple for UK exporters).  

It might be a difficult circle to square – and interestingly mentions of the NI protocol were dropped from an earlier leaked version – which might mean that the EU is conscious of further inflaming tensions – though things may already have gone too far on that issue.

Whatever is going on, it could all be sorted immediately by the UK dropping its objection to a linked ETS – Their stubbornness will cost business both in revenue and time spent filling in even more paperwork!

About the author

Emily Iona Stewart is senior researcher for PWB and Climate Advocacy Specialist at Open Society Foundations European Policy Institute’.

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