Backbench MPs re-open the debate on carbon border taxes, but the path ahead remains unclear

Back in November 2021 it seemed as though carbon pricing had the wind beneath its wings. Coverage was coming in thick and fast, with the Government openly floating the idea in a variety of settings to test reactions. We saw George Eustice signal his support for moving “into the realms of things like carbon taxes” or meat taxes to replace EU agricultural incentive schemes.  The Net Zero Review similarly promised an in-depth exploration of carbon pricing, as did Financial Secretary to the Treasury Lucy Frazer at the Zero Carbon Campaign’s petition debate in Parliament. Internationally, COP26 negotiations had finally agreed on an international carbon market, and global institutions like the IMF were vocal in their support.

Since then, carbon pricing in the UK has fallen off the map. Media attention has turned to the cost of living crisis, further exacerbated by the geopolitical and economic shock of Russia’s invasion of Ukraine. Political discussion of carbon pricing has dried up on all sides, and coverage in the UK press (often just trade press) retreated into occasional updates on the EU’s internal negotiations on carbon pricing and decision to go ahead with a carbon border tax. But yesterday the Environmental Audit Committee re-opened the debate with its report on Carbon border adjustment mechanisms (CBAMs): the application at border of a charge or levy on imported goods that matches the domestic price of carbon. This would avoid domestic producers being undercut by imports made in countries with less stringent climate regulation.

The findings

The report sets out clear and positive guidelines for Government work on CBAMs, including:

1.      A carbon price is a crucial tool for decarbonisation, and the UK’s current Emissions Trading Scheme is currently insufficient for this, particularly given the number of free allowances given to industry.

2.      A CBAM is needed to accompany the expansion of carbon pricing, to prevent goods being produced in the UK that pay the tax being undercut by imports that do not.

3.      Nearly half (43%) of the UK’s consumption emissions come from imports, so as things stand a large chunk of our CO2 footprint is unaccounted for.

4.      The UK needs to catch up with the EU, which intends to introduce a CBAM by 2023, and should start work on its own CBAM immediately. Unilateral action should be taken first, to provide a base for multilateral action alter.

5.      Carbon pricing and CBAMs need to be fair. They should reflect the “differentiated responsibilities” rich and poor countries have to tackle climate change and seek not to damage low-income economies without redress.

6.      Similarly, the Government needs to understand and address the consumer impact of these measures and how this will impact low-income households.

It was fantastic to see both current Seahorse client CCm and former client ZeroC feature so prominently in the report, which echoed their concerns on distribution, fairness, and the need for a range of additional decarbonisation policies, to avoid carbon pricing it being a blunt instrument and negatively impacting consumers and businesses. Industry support for the proposals is also notable throughout the report, with Make UK and the Mineral Products Association citing the need to avoid carbon leakage in these traditionally high-emissions sectors.

The reception

While the report has brought UK carbon pricing back into the mainstream press, such as the Guardian, the Evening Standard, and the FT, most of the coverage has been quite neutral, even detached. Outlets that are more circumspect, or even hostile, to the carbon pricing agenda such as the Telegraph, Times, and Daily Mail, did not even look to criticise the recommendations. In some ways, the presentation already feels dated (work began on the report back in September 2020). Ukraine or Russia is not mentioned at all, and “cost of living” comes up just once. It seems clear that a more coordinated effort both from Parliamentarians and civil society is needed to adapt to the events of the last few months to push a fair and implementable carbon pricing policy forward.

The Government’s response was also muted, with the Treasury’s line in the Guardian essentially saying little more than that carbon leakage is bad and that it is being considered. In part, introducing a  CBAM will be a challenge due to the inter-departmental coordination required. Currently, BEIS runs the UK’s Emissions Trading Scheme and sets the carbon price. But if carbon pricing expands to become more like a general tax, the Treasury will have to weigh in. For this to then be applied internationally, DIT will need to be involved too. We have with the upcoming energy strategy how fractious the Cabinet can be over climate, as ministers jostle for position and try to anticipate what voters are willing to accept. Sunak himself took criticism from all sides for being a “high tax Chancellor” and exacerbating the cost of living crisis with his Spring Statement, and is unlikely to broach the issue soon.

All these hurdles will need to be overcome. But as EAC Chair Philip Dunne said, while we must be “under no illusions that this will be a challenging policy to get right”, it is “clear that the pros of a CBAM outweigh the cons. For too long the emissions from our consumption have effectively been ‘offshored’, leaving the problem as out of sight and out of mind. But we must all take greater responsibility for our consumption”. We hope to see the Government tackle this fully when they officially respond to the report’s recommendations.

If you are interested in Seahorse’s work on carbon pricing, please contact clong@seahorseenvironmental.co.uk

Tagged: climate crisis, parliament, Environmental Audit Committee, carbon pricing, trade