Blog post

Gritty problems in setting up the UK CBAM

Published 27 June 2024

In December 2023, the UK Government committed to introduce a Carbon Border Adjustment Mechanism (CBAM) in 2027. The EU has already started its CBAM, although, until 2026, this just involves the submission of information not the consequent payment of a fee by importers.

The CBAM aims to ensure that, in certain sectors, importers of goods have to pay the same price for the emissions of Greenhouse Gases created in producing their goods as do domestic producers. The latter already pay for emissions through the Emissions Trading Scheme and the CBAM aims to level the playing field to imports, with a view to preventing ‘carbon leakage’ whereby imports displace domestic sales because they do not have to pay the cost of carbon emissions.

The UK Government undertook a consultation on the basic structure of CBAM last year – see our response. In March this year, it opened another consultation on more detailed issues in the design of the CBAM. In several cases, it usefully laid out its current thinking in terms of things it was “minded” to do. The consultation posed specific questions and invited no response outside that set, hence this blog deals with only (a subset of) the questions the Government posed, not the full range of our ideas about designing a CBAM. We summarise our response in terms of a number of concrete recommendations.

1. Default values

The CBAM aims to charge a fee for emissions embodied in imports for which firms would have to present detailed information on their emissions and have it verified. Quite often this will not be possible, and for these cases, the UK will need to define default values of emission intensities (emissions per tonne of the good). The Government sought views on using ‘product level default emissions values calculated in line with global average emissions weighted by the production volumes of the UK’s key trading partners’.

The application of any default value inevitably encourages firms whose emissions are greater than the default level to adopt the default rather than reveal their own data. Thus, setting it at the right level is important. However, one needs to accept that if the UK assumes in its default values that imported goods have very high emissions, it will be open to accusations of discrimination against imports.

Our recommendation: For major trading partners and global producers, the UK adopt a country-specific default per CBAM-good. Based on these national values, a global average weighted by their production can be established and applied only to the countries where national data are not available. The Government states that it does not have resources to calculate country-specific values, but we feel that this is important. We note that the EU has already provided quite a lot of country-specific data and will have to publish its default values once its CBAM starts to levy charges from 1st January 2026. This can help the UK overcome the problem of constrained resources. We also recommend that default values are updated regularly to ensure that they are accurate. For more detail on this, see our paper on ‘Default values in the UK’s CBAM could hinder its climate ambitions’.

2. Verifying exporters’ emissions data

The Government asked whether sufficient verification services will be available to ensure that exporters can provide the verified data necessary to serve the UK market easily and efficiently.

We observed that this is a concern, especially since the UK market for CBAM goods is much smaller than the EU’s so producers abroad will prioritise obtaining EU verification and may even feel that the cost of obtaining UK verification makes it unprofitable to do so.

Our recommendation: The UK must ensure that its information requirements on emissions are identical to the EU’s and urgently seek agreement that the UK and EU recognise each other’s verification results.

3. Monitoring compliance with the CBAM

The Government expressed no proposals in this area but sought advice. We noted that border inspections are poorly adapted to identifying the emissions content of goods and whether the goods correspond to the paperwork submitted. This throws the burden back onto monitoring firms effectively.

Our recommendation: The UK should upgrade its monitoring and enforcement at the firm level, recognising that this is likely to be more important than physical checks at the border.

4. What to do about free allowances

The CBAM is explicitly designed to prevent ‘carbon leakage’ if production moves away from the UK to locations which do not charge for Greenhouse Gases emissions. The EU proposes to phase out its free allowances over 2026-34, at the same rate as it phases in the CBAM. The UK Government, on the other hand, apparently wishes to continue to issue some free allowances – potentially offering double-compensation for domestic emissions charges and thus, among other things, incurring accusations of subsidisation and discrimination. It also proposes to manage free allowances separately from the CBAM.

Our recommendation: Free allowances should be gradually abolished as the CBAM is gradually introduced.

5. How to price emissions embodied in imports

The UK proposes charging emissions embodied in imports of CBAM goods at the average price of domestic ETS permits over the preceding quarter and to levy this as goods enter the country. The EU plans to sell emission permits for imports at the average ETS price of the previous week. Both approaches mean that the price of emissions is determined solely by the cap fixed in the ETS and domestic demand, and that overseas producers can sell as much as they like into the UK and EU markets at the given price. That is, there is no cap on emissions embodied in imports and hence no cap on the emissions caused by consumption of CBAM goods in the UK and EU.

This has the perverse consequence that if technical progress in the UK reduced the demand for emissions, this would reduce the price of imports and the resulting increase in the volume of imports (i.e. production abroad) would probably increase foreign, and hence global, emissions. That is, despite emission-saving innovation, global emissions would increase!

Our recommendation: To avoid this perversity and allow the government to manage emissions from UK consumption of CBAM goods, we recommend that the UK adopt a system of certification for the CBAM and that the markets for ETS and CBAM certificates be combined.

6. Fixing the threshold for liability to the CBAM

The CBAM involves administrative costs for exporters and importers and so the Government, correctly, seeks a threshold below which an importer’s trade is sufficiently small to ignore. It proposes this be £10,000 over a rolling period of one year, excluding, they say, about 60% of importers but only about 5% of emissions. We observe that without such statistics for other possible thresholds we cannot answer the question of whether this threshold is appropriate.

In addition, we argue that it would be better to determine the threshold in terms of emissions, calculating the latter by applying a standard product-specific default emission level to each import. In our paper, we show that, depending on product, £10,000 of imports could embody anywhere between 0.001 and 520.81 tonnes of carbon dioxide equivalent!

Our recommendation: The threshold for liability to the CBAM ought to be defined in terms of emissions, not value.

7. How long do importers need to gear up for the CBAM?

The Government proposes a five-month period. The EU has a period of over two years (ongoing) to submit their data before any charges are actually to be paid. Traders are finding it difficult to cope.

Our recommendation: The UK should provide a one-year information-submission stage before going live, or better, align its ETS and CBAM with the EU’s so that it can benefit from the EU’s existing information phase.

Great questions, but you really need not have bothered

We are delighted by the seriousness of the civil service work that has gone into thinking about the CBAM and the quality of the consultation. However, political instructions have clearly directed some of the substantial expenditure of resources to differentiate the UK from the EU CBAM, sometimes creating distinction without difference and sometimes getting second-best answers, as our answers above show. Moreover, aligning the UK CBAM with the EU’s, alongside linking the UK ETS with the EU ETS could have saved these resources, and it would save costs for firms and consumers. Furthermore, by placing UK producers inside the EU CBAM boundary it would have saved huge complications in Northern Ireland and potential shocks to older workers and disadvantaged regions in the UK. Some of the saved resources could even have been used to try to improve the EU scheme.

Our full response to the ‘Introduction of a UK carbon border adjustment mechanism from January 2027 Consultation’.

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