Call for Evidence

The Environmental Audit Committee is launching an inquiry into carbon border adjustment mechanisms (CBAM). The inquiry will look at the role CBAM could play in addressing potential carbon leakage and meeting the UK’s environmental objectives. The inquiry will also consider the wider impacts, risks and opportunities which might arise if the UK Government were to introduce its own, i.e. unilateral, CBAM.

Background

A ‘carbon border adjustment mechanism’ (CBAM), also called a ‘border carbon tariff’, ‘border carbon adjustment’ and ‘carbon border tax’, is a tax at the border on imported products based on their embedded emissions, or carbon footprint.[1] CBAM aims to ensure importers of energy-intensive goods bear the same carbon costs as domestic producers.[2] CBAM is one measure to address carbon leakage, i.e. the risk that climate policies lead to companies relocating to countries with less ambitious climate measures, thus leaking rather than curtailing emissions.[3]

The UK currently addresses this risk by requiring large manufacturers to pay for emissions allowances from an Emissions Trading Scheme (ETS), with free allowances available to manufacturers at risk of carbon leakage.[4] The Climate Change Committee (CCC) says this alone is unlikely to incentivise long-term UK decarbonisation,[5] and recommends work commence on developing either CBAM or imports standards.[6] The Grantham Research Institute says the UK’s current approach of free ETS allowances neither supports a low-carbon investment framework nor provides ‘robust leakage protection going forward’.[7] The Grantham Research Institute says a ‘robust carbon pricing framework with anti-carbon-leakage measures’ is needed to decarbonise UK industry, as to mobilise low-carbon investments, companies and investors need a guarantee that they can recover the incremental costs of their decarbonisation efforts through full pass-through of carbon costs throughout the value chain.[8]

No country currently applies a CBAM, however the EU has published a proposal to introduce CBAM from 2023,[9] which would apply initially to imports of iron and steel, cement, fertiliser, aluminium and electricity.[10] Under the proposal, importers would purchase CBAM certificates mirroring the EU ETS price, to bring the carbon price on imports in line with the carbon price paid by EU producers.[11] In the US, the Biden administration included consideration of CBAM within its 2021 Trade Policy Agenda,[12] however US climate envoy John Kerry has described CBAM as ‘more of a last resort’ which would not be necessary if all countries adopted net zero targets at COP26.[13]

The UK Government says ETS free allowances will continue to be its preferred method for mitigating carbon leakage risk in the immediate future, with treatment of imports considered within a range of wider measures ‘particularly in the 2030s and 2040s’.[14] COP President Alok Sharma has said CBAM is not part of the COP26 work programme, but may affect the overall context of the conference.[15] HM Treasury’s Net Zero Review: Interim report does not mention CBAM specifically, but notes that carbon leakage risks could increase without domestic and international mitigation, with ‘treatment of imports’ included in its list of potential options for mitigation.[16]

CCC say CBAM would raise the price of high-carbon imported goods,[17] and the Rt Hon Kwasi Kwarteng, then Business Minister, has said unilateral action on CBAM could disadvantage UK consumers.[18] A unilateral CBAM would need to comply with WTO rules, which aim to prevent discrimination between domestic and imported products, and between WTO member imports.[19] The UK Board of Trade says any carbon leakage solution should also take into account commitments under the Paris Agreement to recognise the differing capabilities of countries at different stages of development to reduce their carbon emissions.[20] CCC say introducing a CBAM could prompt other manufacturing countries to decarbonise,[21] and Dieter Helm, Cameron Hepburn and Giovanni Ruta have said that the absence of measures such as CBAM implicitly subsidises more carbon-intensive production in markets with less regulation.[22] There are also practical challenges around determining sector and product coverage and calculating the amount of carbon emitted in the production process of imports,[23] which could place administrative burdens on smaller companies.[24]

Our inquiry

EAC is launching this inquiry following evidence the Committee has heard in recent inquiry work on the role CBAM might play in meeting the UK’s environmental objectives. The Committee’s February 2021 report Growing back better: putting nature and net zero at the heart of the economic recovery recommended that the Government investigate the merits of CBAM, following evidence from steel and motor manufacturing industry representatives about the risks of carbon leakage.[25] Witnesses in EAC’s Green Jobs evidence sessions alerted the Committee to the risks carbon leakage poses to the UK’s ambitions for supporting and creating green UK manufacturing jobs as industries transition to net zero, and the role CBAM might play in addressing these risks.[26]

Through this inquiry, the Committee is seeking to understand the role CBAM could play in addressing carbon leakage and meeting the UK’s environmental objectives, and the impact, risks and opportunities a unilateral CBAM might present, in order to make recommendations to the Government on the possibility of introducing a unilateral CBAM.

The Committee is inviting written submissions to the following questions:

• What are the risks to the UK posed by carbon leakage? How effective is the Government’s current approach to tackling carbon leakage?
• What role could a carbon border adjustment mechanism (CBAM) play in addressing carbon leakage and meeting the UK’s environmental objectives?
• Should the Government pursue a unilateral CBAM? If so, why and what form should this take? If not, are there alternative approaches to addressing carbon leakage which the Government should be considering?
• If the Government were to introduce a CBAM, which products or sectors should be included and why?
• What impact might a CBAM have on UK (i) industry, (ii) employment and (iii) consumers?
• What risks would need to be managed when designing and implementing a CBAM?
• What wider opportunities and benefits might arise from introducing a CBAM?
• How might a CBAM interact with the UK’s international obligations, including on trade and the environment?
• Should the CBAM design include any special regard, e.g. for developing countries or small and medium-sized enterprises? If so, which circumstances should be given special regard, and what impact might this have? If not, why not?
• What practical and administrative challenges might arise when designing and implementing a CBAM? How might these be addressed?

Supporting figures and data are welcomed in submissions. Written evidence should be submitted through the Committee’s web portal by 25 October 2021. Respondents need not answer all the questions and evidence need not be limited to these questions. Submissions should not exceed 3,000 words, but shorter submissions are welcomed and encouraged.

We encourage members of underrepresented groups to submit written evidence. We aim to have diverse panels of Select Committee witnesses and ask organisations to bear this in mind when we ask them to choose a representative. We are currently monitoring the diversity of our witnesses.

It is recommended that all submitters familiarise themselves with the Guidance on giving evidence to a Select Committee of the House of Commons which outlines word count, format, document size, and content restrictions.

[1] Climate Change Committee, The Sixth Carbon Budget (December 2020), p. 34

[2] Institute for Public Policy Research, Towards a progressive US-UK trade partnership (June 2021), p. 13

[3] Environmental Audit Committee, Third Report of Session 2019–21, Growing back better:  putting nature and net zero at the heart of the economic recovery, HC 347, Box 4: Carbon leakage

[4] Climate Change Committee, Policies for the Sixth Carbon Budget (December 2020), p. 101

[5] Ibid., p. 102

[6] Ibid., p. 104

[7] Grantham Research Institute on Climate Change and the Environment, What does an EU Carbon Border Adjustment Mechanism mean for the UK? (April 2021), p. 6, 7

[8] Ibid., p. 2, 6, 7

[9] European Union, European Green Deal: Commission proposes transformation of EU economy and society to meet climate ambitions, accessed 16 September 2021

[10] European Union, Carbon Border Adjustment Mechanism: Questions and Answers, accessed 16 September 2021

[11] Ibid.

[12] United States Trade Representative, 2021 Trade Policy Agenda and 2020 Annual Report of the President of the United States on the Trade Agreements Programme, accessed 16 September 2021

[13] John Kerry warns EU against carbon border tax, Financial Times, 12 March 2021

[14] GOV.UK, Industrial Decarbonisation Strategy (March 2021), p. 35, 36

[15] Business, Energy and Industrial Strategy Committee, Oral evidence: Net zero and UN climate summits, 19 January 2021, Q190

[16] HM Treasury, Net Zero Review Interim report (December 2020), p. 62, 67

[17] Climate Change Committee, The Sixth Carbon Budget (December 2020), p. 293

[18] HC Deb, 16 December 2020, col 360 [Commons Chamber]

[19] Institute for Public Policy Research, Towards a progressive US-UK trade partnership (June 2021), p. 12

[20] UK Board of Trade, Green Trade, (July 2021) p. 42

[21] Climate Change Committee, The Sixth Carbon Budget (December 2020), p. 293

[22] Dieter Helm, Cameron Hepburn, and Giovanni Ruta, “Trade, climate change, and the political game theory of border carbon adjustments”, Oxford Review of Economic Policy, vol 28 (2012), pp 368–394

[23] Institute for Public Policy Research, Towards a progressive US-UK trade partnership (June 2021), p. 13

[24] UK Trade Policy Observatory, The Carbon Border Adjustment trilemma, accessed 13 September 2020

[25] Environmental Audit Committee, Third Report of Session 2019–21, Growing back better:  putting nature and net zero at the heart of the economic recovery, HC 347, paras 134-135, 229

[26] Environmental Audit Committee: Green jobs, Q21, Q154