CCL UK CBM0007
Written evidence submitted by Professor David Waltham
on behalf of the Citizens’ Climate Lobby UK (CCL UK)
1.1 CCL originated in 2007 in the US and is now a worldwide civil-society organisation with about 200 000 volunteer activists. Our focus is on people-friendly carbon pricing, i.e. tackling climate change by making the polluter pay whilst protecting those least able to afford the resulting price rises for high-carbon goods. We therefore advocate, worldwide, for Climate Income: A carbon fee is levied on fossil fuels as they enter the economy, and the revenues raised are then paid out as a universal dividend. This transforms regressive carbon taxes into a progressive carbon fee and dividend scheme with most families financially benefiting overall.
1.2 This policy is supported by the left-leaning Green Party, the right-leaning Centre for Policy Studies and by 28 Nobel prize winning economists. It has also been sympathetically reported in newspapers ranging from the Telegraph to the Guardian.
1.3 Any policy with support this broad must have merit, as recognized by the UK government itself in its 2020 response to the consultation on the future of UK carbon pricing.
1.4 As a grassroots organisation, CCL UK is well placed to help promote the environmental, social and economic benefits of carbon pricing and, hence, to enable politically sustainable introduction of such measures.
1.5 However, carbon leakage is a major problem for any carbon pricing scheme. Additional measures, such as a CBAM, are therefore required.
Our answers to your questions:
2.1. The main risk is that the necessary pricing to support Net Zero will expose the UK to increasingly unfair international competition that undermines the global environmental goal of the Paris accord. Carbon leakage is currently addressed by free allocations of emission permits under the UK ETS. This undermines the price signals of the scheme and is economically inefficient. It is also not scalable to the whole economy (ETS only covers about 40% of emissions). Hence, whilst we support current use of free allocations, we would prefer to see a CBAM replacing them in the medium term. This would smooth later introduction of economy-wide carbon pricing (e.g. by introduction of Climate Income). In other words, we see CBAM as future-proofing carbon leakage avoidance given the rapidly evolving nature of carbon pricing.
3.1 Without a CBAM, economy-wide carbon-pricing would place UK businesses at a severe disadvantage and export our jobs and our emissions to countries with lower, or zero, carbon prices. This is a much more serious issue for economy-wide carbon pricing than it is for an ETS which only applies to large emitters; it is generally much easier for the activities of small and medium sized enterprises to move elsewhere than it is, for example, for electricity generating businesses.
3.2 A CBAM enables carbon pricing to be a more effective influence on the Net Zero goal by enabling consistent pricing across the entire economy. It protects the environmental investments of UK industry in skills, plant and facilities physically in the UK more accurately and precisely. This is because free allowances go to the bottom line of large international companies, which can be moved to other countries with relative ease. In contrast, a CBAM is associated with the physical location from which goods are exported or imported.
3.3 A CBAM has the potential to enhance the UK reputation as a global leader in both environmental ambition and the subsequent export of associated technology and skills.
3.4 A CBAM incentivises carbon pricing in trading partners’ economies and allows for more ambitious domestic carbon pricing.
4.1 The UK should pursue a multi-national CBAM agreement with like- minded countries to increase the chance of success and reduce the risk of challenges under WTO rules. Controlling the impact of CBAMs on trade has been identified as a priority by the new head of WTO. A multilateral approach would enhance the UK’s reputation for international cooperation and thus its influence on global environmental objectives. This approach should align easily with Canada and Switzerland, both of which have established carbon pricing coverage and trajectories that see carbon pricing as a significant policy instrument.
4.2 If multilateral CBAMs prove too difficult then the UK should pursue a unilateral CBAM as an essential step prior to (or at the same time as) introduction of carbon pricing covering more of the economy. This would not only protect UK jobs and prevent leakage, it would also encourage other nations to introduce significant carbon pricing of their own and, hence, lead to emission reductions worldwide and not just in the UK.
4.3 To achieve this outcome of encouraging carbon pricing beyond our shores, the CBAM should only apply to those countries that do not have carbon pricing at a similar level to that of the UK.
4.4 An alternative to CBAM is for worldwide acceptance of an international carbon price floor (ICPF) as recently discussed within the IMF. However, we would see introduction (or the threat of introduction) of a UK CBAM as a way to increase the likelihood of global agreement on ICPF.
5.1 Initially, only those sectors covered by the UK ETS need to be covered. This would offer protection to exporters of products such as steel, cement and fertilizers. However, CCL UK believes that much wider carbon pricing is needed to tackle the 60% of emissions not covered by the ETS and consequently the products covered by the CBAM would need to widen.
5.2 Note that, so-called ‘emissions-intensive trade-exposed’ (EITE) goods that have high embodied carbon (e.g. due to high energy costs) would need to be protected as soon as they were subject to carbon pricing. While expansion to other goods is desirable, it may not be feasible from an administrative point of view and may not be necessary if risk of associated carbon leakage is low.
6.1 The CBAM is designed to protect industry and employment. Overall we would expect industry and employment to benefit as the UK has low carbon intensity compared with many trading partners. This is supported by the Climate Leadership Council assessment of the US which has a similar carbon intensity.
6.2 Studies confirm that Climate Income with a CBAM can actually boost economies and lead to jobs growth since the revenue recycling leads to increased expenditure by most recipients on goods and services that are more employment intensive than those industries that would decline.
6.3 Consumers would not be adversely affected provided the CBAM was accompanied by economy-wide carbon pricing and a universal dividend since this would protect the majority of families from the impact of resulting price increases on high-carbon goods.
7.1 The CBAM must be compatible with WTO rules and must be globally perceived as levelling the playing field rather than as an attempt to introduce import barriers or export subsidies. Failure to do so would lead to retaliatory tariffs and challenges in the WTO.
8.1 The key wider benefits are: (i) a CBAM encourages other nations to have more ambitious carbon pricing (and hence lower emissions); (ii) it can aid eventual acceptance of an ICPF; (iii) a CBAM enables ambitious domestic carbon pricing.
8.2 There is an additional opportunity for early adopter economies that demonstrate a carbon price pathway with political certainty and localised industrial protection from unfair competition. That opportunity is to attract inward investment for research, development and industrialisation of greener emissions reduced technologies. This is owing to the certainty of a domestic market that will get stronger over a 5 - 20 year period as well as the ability to export from such an economy because of an effective CBAM.
9.1 Implementation of a climate income policy (including a CBAM) should form a key part of the UK’s future Nationally Determined Contributions (NDCs) under the Paris Agreement. This would demonstrate our commitment and demonstrate that we are taking concrete actions. Explicit inclusion of carbon pricing in a UK NDC would raise carbon pricing’s profile as a tool that all parties to the Paris Agreement should include in their NDCs.
9.2 Owing to the imbalance in emissions related trade, a CBAM could reasonably be expected to generate a surplus from the net of import duties and export rebates. Consequently, there should be additional revenue to ensure popular support through increased citizen dividend, popular environmental policies such as free public transport or funding for other countries to decarbonise under the financial commitments made within the UNFCCC process. However, any such use of surpluses must be compatible with WTO rules and will require further investigation.
10.1 Developing countries should receive preferential treatment under the CBAM in order to fulfil our wider obligations towards the UN’s SDGs and in recognition of their relatively small contribution to global warming and their greater exposure to its consequences. This principle is enshrined Article 4, paragraph 15 of the Paris agreement. Preferential treatment could take the form of a lower threshold on the carbon price required to be exempt from the CBAM. It could also take the form of different levels of ICPF as suggested by the IMF.
10.2 Reasonably fast development of appropriate tariffs and export rebates for non-EITI goods would be essential to prevent adverse impacts on non-EITI SMEs. The most rapid and substantial leakage is anticipated to be associated with EITI products but would not be confined to such industries.
11.1 The viability of WTO-compliant export rebates under a CBAM, essential to protect industry and the economy appropriately, are more certain if based on domestic taxation rather than on an ETS. This might explain the EU’s reticence on including export rebates within the current Fit for 55 package. CCL have identified a number of ways of integrating domestic taxation with an ETS with different pros and cons. E.g. a) domestic taxation in addition to ETS; b) domestic taxation establishing an ETS floor price; c) domestic taxation excluding the ETS.
11.2 International support for WTO compliant CBAMs needs to be built through appropriate negotiations. There are a number of smaller economies that could support such policies. Of most interest to the UK might be Canada as a G7 member and Switzerland as a European country operating some form of parallel ETS to the EU and with considerably higher and more ambitious carbon pricing. Both countries operate a highly aligned policy to Climate Income advocated by CCL, both countries are highly motivated to engage with the EU over the progression of WTO compliant CBAM. In addition, CCL’s assessment of current US legislation under consideration as House or Senate bills, as well as the ongoing approach to budget reconciliation, is that the US will not adopt Carbon Pricing without Export Rebates. It remains to be seen if carbon pricing will be included in the current budget reconciliation underway. The CleanTech21 organisation has been producing private reports for the Swiss government on current and future policy options and may have the capacity to do similar for the UK.
11.3 There are challenges around calculating the appropriate tariffs and export rebates. However, methodologies have been developed to tackle these issues.
October 2021