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UK Sets Sights on Carbon Neutrality with Groundbreaking Legislation

  • CBAM is designed to reduce carbon emissions by charging a carbon price on imports, similar to the emissions trading scheme for domestic products.
  • Concerns have been raised about discrepancies between the EU's and UK's CBAM, with potential risks of higher costs for UK producers and misalignment with global carbon pricing efforts.
  • Calls for synchronizing the UK's emissions trading scheme with the EU's are growing, to prevent economic losses and ensure effective carbon reduction strategies.
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“The biggest climate law ever in Europe, and some say in the world,” Peter Liese, lead negotiator for the European Parliament said. In reference to the Paris Agreement? Europe’s New Green Deal? Biden’s IRA? Nope – Liese was describing the carbon border adjustment mechanism, known to nerds by the catchy acronym CBAM. 

This wonkish-sounding legislation means imports from overseas will now be charged a carbon price in the same way as domestically-produced products are in the UK, the government announced on Monday.

It is a win for UK steel manufacturers, for example, who have been at an unfair disadvantage as 90 per cent of the world’s steel is not subject to carbon pricing (unlike steel produced in the UK under the emissions trading scheme or ETS). A CBAM is also a win for environmentalists. The mechanism will prevent countries outsourcing their carbon emissions to less green nations without a carbon levy.

Eurosceptic MPs have slammed the proposal as being too similar to the EU’s flagship CBAM. Jacob Rees-Mogg told Politico: “Typically, the Treasury aims slavishly to follow the EU’s approach forgetting that the country voted for Brexit so we could do things differently and better.” He even said the UK’s ETS should be scrapped.

However, wonks and industrialists – who in equal measure campaigned for a CBAM, as previously documented by City A.M. – have pointed out that the discrepancies between the EU’s CBAM and the UK’s are deeply unhelpful and could cost the UK millions of pounds.

A carbon levy doesn’t in itself reduce emissions; all it does is create conditions that are conducive to companies reducing the amount of carbon they emit. But it’s a vital step in the right direction – and if you think it’s protectionist just read this.

A ‘missed opportunity’ to align with the EU

The UK’s border tax proposition would have it apply later than the EU’s and with a different pricing mechanism. “There has been a missed opportunity to align the timing and design of the UK’s carbon pricing regime with that of the EU, risking higher near-term costs for domestic producers,” Whitwham explained.

The trial stage of Europe’s border tax has begun and the full implementation date set at 2026. The UK’s will be introduced “by 2027”. This is despite the very aim of a CBAM being to align carbon pricing globally with an international level playing field. 

This has alarmed the steel industry, for one, which claims it will be left exposed in the intervening year. UK Steel warned that high-emission steel currently exported to the EU will be diverted to the UK and depress prices when facing the EU CBAM in 2026. 

UK Steel director general Gareth Stace said “implementing the UK scheme one year after the EU CBAM starts is hugely concerning. Despite the steel sector repeatedly warning officials how exposed the UK would be if it did not mirror the EU implementation timetable, government today seems to be actively planning for just that scenario.”

Another concern is the actual price of carbon. Currently the UK has an emissions trading scheme (ETS) which places a charge on carbon emissions within the UK. An ETS creates a cap on the amount of greenhouses gases that can be emitted per sector – and then allows participants to buy and sell emission allowances at auction or on the secondary market. The cap is reduced over time, so that total emissions must fall.

But the price of carbon in the UK has been rapidly diminishing. Between January 2023 and January 2024 the price will have dropped by £20. It is now around £60 whereas the EU’s is around 80 euros. It is essentially a market price, with the government pulling some levers. As the UK has looked less certain and committed to its net zero goals, the price of carbon has diminished due to lower demand for permits.

The disparity in pricing between the UK and EU’s ETS could mean over £500m of UK money a year is sucked up by the EU in carbon taxes, according to a recent report by Energy UK. A clear solution would be to link the UK’s ETS to the EU’s (and in fact historically they were linked until Brexit allowed the UK to cut ties in 2021). The result of this would be parallel pricing and the UK would end up immune to the effects of the EU’s CBAM.

That would be highly worthwhile. The EU’s set-up means all energy imports from a country are taxed based on the average carbon intensity of that nation’s grid. In the UK’s case, 40 per cent of our electricity comes from fossil fuels, meaning even solar energy exported from the UK would be subject to a 40 per cent carbon tax.

“Unresolved EU trade issues are limiting the UK’s climate ambitions on CBAM – particularly on electricity trading, where the UK continues to trade with the EU on costly, inefficient post-Brexit terms, and has therefore decided not to include electricity in scope, unlike the EU. Future UK ambition on CBAM will remain bound up in EU trade relations.” Jonny Peters, senior policy advisor at E3G said.

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Switzerland has already linked its scheme to the EU’s and Turkey recently announced it would implement an EU-mirrored version.

There is clearly a compelling case for the government to tie the UK’s ETS to the EU’s. One can only hope that the new review decides to align the two as a matter of urgency – or that a new government, if it is elected, opts for a more synchronised approach.

By CityAM

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