The economic significance of the EU CBAM in the UK

Key points

• The introduction of the EU CBAM is likely to reduce demand for UK exports to the EU, due to differences in ETS prices, and therefore UK jobs in related industries might be impacted too.
• The vulnerability of employment to shocks emanating from the EU CBAM differs across UK regions, the largest being in Wales, which has a share more than double the average value.
• Employment in Yorkshire and The Humber, North East, West Midlands, East Midlands and Scotland, with shares greater than over the average value, might also face larger impacts. Except for Scotland, all these regions are those with the lowest labour productivity in 2021. Therefore, the EU CBAM could further exacerbate geographical inequality and weaken the effectiveness of the UK’s levelling-up programme.
• Vulnerability to the EU CBAM also falls disproportionately on older workers and men.
• Industries supplying those directly impacted by the EU CBAM may also be affected, especially within the services sector with potentially some £2.3 billion services and 20,000 people impacted.
• Linking the UK’s ETS with the EU ETS would mitigate these possible export impacts and protect vulnerable employment.

The UK will introduce and implement a Carbon Border Adjustment Mechanism (CBAM) by 2027. Meanwhile, the European Union (EU) started the transitional period of its CBAM on 1 October 2023. If the UK does not link its Emissions Trading Scheme (ETS) closely to the EU’s, UK firms are likely to suffer additional costs on their exports to the EU: the EU CBAM regulations state that firms in covered sectors will pay the administrative costs of calculating their emissions and reporting them to any EU importer that takes their goods. If the price of UK emissions permits - under its ETS - matches the EU's price, there will be no further charges, but if, as has happened since April 2023, the UK price falls materially below the EU’s, importers will have to buy EU permits to make up the difference. Whether they pass this cost back to UK exporters or not, demand for UK exports is most likely to fall and, with it, employment in the affected sectors.

This Briefing Paper offers a quantitative estimate of the extent of the possible economic impact of the EU CBAM for the UK. We cannot at present predict how much the effect will be because it is related in complicated ways to various uncertainties, like the carbon price divergence between the UK and EU and the effects of the phasing out of free allowances in both the UK and EU ETSs. In this paper, therefore, we focus more on understanding the extent of vulnerability to an impact of some sort in terms of specific regions, groups of people and industries. We point out that exports of CBAM-regulated products account for a not insignificant share of UK exports and related employment, and that, while some UK regions and specific groups of UK workers are potentially more exposed than others1, even sectors that do not pay the CBAM would be impacted via inter-industry linkages. This includes services sectors. Linking the UK ETS with the EU’s would be the best option to mitigate these impacts. With full linkage, UK exporters would face neither administrative nor top-up costs.2, 3

We first show the value of UK exports of products regulated in the EU’s CBAM to the EU and countries adhering to the EU ETS. We use ‘EU+’ as shorthand for the set of countries to which the EU CBAM applies: all EU countries plus Iceland, Liechtenstein, Norway and Switzerland. We then show employment in the UK in the industries that produce these products and break this down by region and group of workers defined by age and sex. We further estimate the amount of that employment that actually derives from exports to the EU+. Finally, we explore the CBAM’s indirect impacts across UK industries. It is important to note from the outset that there is a fair amount of approximation in this process, but we believe that nonetheless, it contains useful information.

If the EU CBAM impacts UK exports, jobs in related industries might be impacted. Thus, it would be informative to estimate the number of jobs that could be vulnerable. First, we roughly map the regulated products to the UK Standard Industrial Classification (SIC) by matching the product definitions in the CN code and the UK SIC codes. Note, however, that the mapping is only approximate because there are fundamental differences between the two classifications. For example, SIC code 241 refers to the group of manufactures of basic iron and steel and ferro-alloys, but the EU CBAM includes only ferro-chromium and ferro-nickel for ferro-alloys.

Based on the data from the Office for National Statistics (ONS) and the Northern Ireland Statistics and Research Agency (NISRA), Table 2 shows the numbers employed directly in the industries that produce regulated products (excluding hydrogen, because it should be in the class SIC code 2011 referring to the manufacture of industrial gases where hydrogen is just one of 20 gases, and we don’t know how much it accounts for in this class5). Employment data for each class is available only for Great Britain (GB) while the data for Northern Ireland provided by NISRA refers only to employees. We convert the latter to employment by multiplying the ratio between employment to employees in the same sector in the GB data.6 Overall, 156,169 people were directly employed in the industries producing regulated products in the UK in 2021, accounting for 0.47% of total employment in the UK. In terms of direct jobs, these figures are the upper bound of the number of jobs vulnerable.

Age/sex heterogeneity

Would employment vulnerability be more apparent for specific groups of working people? To answer this, we estimate employment in each age/sex group based on the ONS data recorded for SIC at two-digit major group or three-digit industry group level.12 Table 4 gives the distribution of all workers across age/sex groups in England and Wales and of workers in the industries making regulated products in 2021.[13 According to Table 3, England and Wales account for 89% of UK employment in those industries, so the data is likely to be a reliable indicator for the UK’s position.

Table 4 shows that compared to the overall labour force’s age distribution, fewer young people (aged between 16 and 34) work in the industries making regulated products: 29% of employment in these industries, yet this age group constitutes 34% of total employment. Possibly more importantly, the group aged 50-64 years accounts for 33% of employment in these industries but only 28% overall. That is, vulnerability to the EU CBAM falls disproportionately on older workers. Setting aside any judgements about the worthiness of different age groups, policymakers may wish to pay more attention to older workers because they are less likely to secure a new job or switch industries if they are made redundant.

A much stronger difference shows up across sex groups. In England and Wales in 2021, there were 16,885 thousand male workers and 15,601 thousand female workers, a sex ratio of 1.08. However, this ratio turns to 3.75 in terms of the industries that produce the EU CBAM’s regulated products.14 Males are potentially substantially more vulnerable to employment disruption caused by the EU CBAM.

Identifying vulnerable jobs

In the employment of industries producing the EU CBAM-regulated products shown in Table 2, the jobs actually driven by exports to the EU+ would be more vulnerable, and hence more likely to be directly affected by the EU CBAM. Unfortunately, because the data is so scarce, this has to be done indirectly and approximately. First, we convert the gross value added (GVA) in each SIC 2-digit division in the UK to gross output using the corresponding ratio from the 2019 UK input-output tables.15,16 Table 5 records the ratio and estimated gross output of each of the UK’s related divisions in 2021. The GVA data is reported for divisions 19-20 together while our target is division 20 alone. To be consistent, we compute the UK ratio for the two divisions combined to compute the estimated gross output.

We then map our numbers of regulated products exported to the EU+ to each SIC division and compute the ratio of exports of regulated products to the EU+ to UK gross output of each product. We exclude re-exports from the export data; these are imports that are imported into the UK from other countries and then sent out again without any material processing in the UK. 17 Finally, we estimate the employment involved in regulated product exports to the EU+ by using the shares of exports in gross output and total employment in each division. Table 6 estimates that between 233 and 32,006 people working in each division are involved in regulated product exports to the EU+.

Table 7 displays the comparison between employment related to regulated product production and how much of it is driven by exports to the EU+. Overall, 32,864 people, 21% of the total employment in industries that produce regulated products in the UK, are linked to exports to the EU+ in 2021, and hence more vulnerable to disruption by the EU CBAM. This figure is entirely dominated by the metal industries of iron, steel and aluminium. Calculated in terms of direct jobs only, these figures are the (approximate) lower bound of the number of vulnerable jobs.

The EU CBAM will not only impact the industries producing products regulated in the CBAM in the UK, but also those industries (including the regulated industries themselves) providing inputs to those products. To estimate the indirect impacts of the EU CBAM on the UK economy, we need to identify how much domestic production of inputs will be affected by any possible export declines caused by the EU CBAM, considering that inputs could still be produced by further using other inputs. Thus, we use Leontief input-output analysis based on the input-output tables.18

Table 8 reports the possible total impact of the EU CBAM on the UK with direct impact (possible export drops) in 2021. Only Classification of Products by Activity (CPA) groups with a total impact of more than £100 million are listed. The possible impact in total would be around £11 billion with 57,178 people in vulnerable employment in 2021, given the possible export shocks of £6,7 billion potentially impacting 32,864 working people. These numbers include the services sectors, which account for 21% of the vulnerable gross production (more than £2 billion). It’s worth noting that 19,828 working people in the services sector could be impacted, which accounts for 35% of total vulnerable employment. The highest value of impacts on production and employment is wholesale trade services, excluding motor vehicles and motorcycles with CPA code G46, where the services are estimated at £627 million and 4,116 working people might be affected by the EU CBAM. Additionally, the industries producing CBAM-regulated products also use inputs from themselves. However, the majority of the possible total impact of the EU CBAM on these industries in the UK is the possible decline in exports.19

This paper examines the possible impact of the EU CBAM on the UK, in terms of exports and employment, if the UK does align its ETS fully with the EU’s. In 2021, around 3.7% of the UK’s goods exports to the EU+, £6.7 billion in total, are of EU CBAM regulated products, which is not an insignificant portion. More than 32 thousand people are directly employed in producing these exports to the EU+, out of a total of 156 thousand employed in the industries producing these regulated products. Even more noteworthy is that workers in Wales, Yorkshire and The Humber, North East, West Midlands, East Midlands and Scotland are disproportionately vulnerable to the EU CBAM, which could further exacerbate the UK’s geographical inequality. In addition, the most vulnerable sections of the workforce are males and workers aged 50-64 years. Given the increased unemployment rate for the UK, at 4.2% for August to October 202321, policymakers should pay attention to the potential damage to employment in the UK, and some regions and specific groups of people who are more vulnerable. Finally, other industries might be impacted as well, especially within the services sector. About £2.3 billion services and 20 thousand people might be impacted, given the total possible impact is estimated at around £11 billion with 57 thousand vulnerable employment. Linking the UK’s ETS with the EU ETS would mitigate these possible export drops and protect vulnerable employment.

1. The impact of EU CBAM on Northern Ireland was discussed in the CITP working paper, Zhao, X and Zhang, D (2023) Where Technical Meets Political: The Complexity of the EU CBAM in Northern Ireland, CITP Working Paper 4.
2.  The EU has been clear that linking ETSs is a necessary condition for avoiding the CBAM burden.
3. A forthcoming CITP working paper ‘Addressing UK consumption emissions through trade policy’ addresses these issues in depth.
4. To keep data consistency throughout the paper, we used export data in 2021 from HMRC which is recorded in the Harmonized System (HS) codes at 8-digit level. We can map products precisely from CN to HS Codes.
5. The export-related employment of hydrogen is surely small-scale, given the low export numbers.
6. In most classes, there is no difference between the employment (the number of employees and owners) and the number of employees for GB. In others, the employees account for more than 99% of the employment.
7. The employment numbers in the rest of the paper refer to the SIC groups (3-digit) and classes (4-digit) in Table 2.
8. Electricity with CN code 27160000, electrical energy, is listed in the EU CBAM. We map it to SIC code 3511, production of electricity. Only employment in GB is considered.
9. We estimate the numbers of employment for Northern Ireland by using the same method used before - namely assuming the same ratio between employment to employees across the UK.
10. We provide more details about the employment numbers or estimated employment numbers at each group (3-digit) or class (4-digit) level for regions in the Appendix.
11. More details can be found in Regional labour productivity in 2021.
12. In the SIC, two-digit major group is called division, three-digit industry group is called group and four-digit industry group is called classes. We used these classification names in the following analysis. Data for 24 division, 201, 235 and 351 groups are used to estimate employment. More details about the calculation can be found in the Appendix.
13. We can only acquire detailed employment data by groups for England and Wales from the census 2021, which is a different source from the employment data used so far in this paper. The Appendix discusses the differences in more detail.
14. This ratio is 6.82 for Northern Ireland based on the data from NISRA (BRES Publication and Tables 2021 | NISRA)
15. Gross value added refers to the value generated by any unit engaged in the production of goods and services.
16. Input-output tables are provided by the ONS describing the sale and purchase relationships between different economic sectors or industries.
17. We compute the re-export shares based on the UK input-output table. We assume that re-exported products would have no impact on UK’s employment. The re-export accounts for around 7% of the UK’s exports of CBAM-regulated products to the EU+ in 2021.
18. Leontief input-output analysis divides the economy into sectors and considers the interdependencies between sectors. More details can be found in the Appendix.
19. The indirect impact is the difference between direct and total impact which equals to the sum of related CPA groups including the regulated sectors themselves. Not all production in these groups are the regulated products.
20. For the indirect impacts in regulated CPA sectors, only part is related to the regulated products. As we can only compute indirect impacts at more aggregated levels of CPA code which is not perfectly matched with the CN codes of regulated products in the EU CBAM, we can only say which part is more related to the regulated products rather than which part is about the regulated products. For example, £512 million with 600 employment comes from subgroup D351 denoted by electricity supply and almost all impacts in sectors C24-25 come from the CPA groups related to the regulated products.
21. Labour market overview, UK: December 2023 (Employment overview UK).

Read the Appendix