UK to introduce new carbon levy

Goods imported into the UK from countries with a lower or no carbon price will have to pay a levy by 2027, the government has said.

The government claimed that the carbon border adjustment mechanism (CBAM) will ensure highly traded, carbon intensive products from overseas in the iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors face a comparable carbon price to those produced here.

The new rules will tackle ‘carbon leakage’, reducing the risk of production and associated emissions being displaced to other countries because they have a lower or no carbon price. Carbon leakage undermines the country’s efforts to decarbonise as the world transitions to net zero.

The charge applied by the CBAM will depend on the amount of carbon emitted in the production of the imported good, and the gap between the carbon price applied in the country of origin – if any – and the carbon price faced by UK producers.

Chancellor of the Exchequer Jeremy Hunt said: “This levy will make sure carbon intensive products from overseas – like steel and ceramics – face a comparable carbon price to those produced in the UK, so that our decarbonisation efforts translate into reductions in global emissions. This should give UK industry the confidence to invest in decarbonisation as the world transitions to net zero.”

He added that the design and delivery of the CBAM will be subject to further consultation in 2024, including the precise list of products in scope. The government will also engage with trade partners, including developing countries, and affected businesses and organisations, to minimise the impact on trade and the necessary compliance steps.

Alongside a CBAM, the government 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 customers; and to develop a framework which measures the carbon content of goods, that could support other decarbonisation policies in future.

Stakeholders including power, aviation and industrial sectors have been invited to offer their views on proposed changes to the UK Emissions Trading Scheme, that will ensure it continues to support the UK’s progress to net zero.

A CBAM will work alongside the UK Emissions Trading Scheme to mitigate the risk of carbon leakage. The ETS Authority is consulting how to better target free allocations of carbon allowances for industries most at risk of carbon leakage, under the ETS. The Authority will also review whether free allocation should be adjusted to reflect any changes to carbon leakage risk for given sectors.

It is also setting out plans to ensure the ETS market continues to offer an effective financial incentive that drives its participants to decarbonise, following a call for evidence last year, with industries being asked for their view a range of potential measures – including on the design of a new Supply Adjustment Mechanism.