Deloitte LLP                            CBM0021

Written evidence submitted by Deloitte LLP


About Deloitte

  1. Deloitte is pleased to respond to the House of Commons Environmental Audit Committee’s call for evidence in connection with its inquiry on Carbon Border Adjustment Mechanisms (CBAMs). We are responding and submitting observations as a major professional services provider with around 20,000 employees and partners in the UK working across tax and legal, audit and risk advisory, consulting, and financial advisory. Our clients predominantly comprise large businesses, smaller businesses, and individuals, together with trusts, the public sector, charities, and others, and include UK residents, non-UK residents and international organisations.
  2. Deloitte has launched WorldClimate – our global plan to become net zero across our operations by 2030 and drive responsible climate choices within our organisation and beyond. Backed by the Science-Based Targets Initiative (SBTI), our reductions commitments are in line with the Paris Agreement ambition to keep the world within a 1.5°C temperature increase. We’ve also joined the UN’s Race to Zero campaign, the largest ever alliance committed to achieve net zero emissions. Our WorldClimate programme is changing our workplaces, our supply chain and our people through the use of new technology, new ways of working and enhanced ESG training for our colleagues.

What role could a carbon border adjustment mechanism (CBAM) play in addressing carbon leakage and meeting the UK’s environmental objectives?

  1. Currently the UK government’s net zero taxation, incentive and reporting strategy, is focussed on UK territorial emissions and does not consider emissions embedded in imports, which is in line with current international practice. A CBAM is an entirely new proposal being considered by some countries and the European Union (EU), which would impose a carbon price on certain imports with high levels of carbon emissions, balancing the cost of carbon in a way that includes imports, giving a more comprehensive measure of the carbon cost of consumption as opposed to production.
  2. A CBAM could be a potential solution to level the competitive environment for business between those based in highly regulated and highly taxed emissions countries and those that are based in countries that are not.
  3. A CBAM could help address the risk of carbon leakage by discouraging businesses from shifting their production or sourcing away from the UK to lower carbon cost locations or countries with less ambitious climate change policies. Regardless of whether the UK itself introduces a CBAM, UK businesses that trade with countries which do introduce a CBAM that applies to their exports, could face higher costs of sale. This could actually help meet the UK’s environmental objectives by encouraging the adoption of low carbon solutions by exporters which may otherwise have not been cost effective or competitive. 

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?

  1. There is currently no unilateral CBAM in place in the world. The new EU CBAM proposal published on 14 July 2021 is the most advanced policy available. It is intended to include a transitional phase between 2023-2025 used as a “review and revise” period. The proposal papers include intentions to extend its scope to more basic products and to semi-finished goods. It is described as a temporary measure, until foreign jurisdictions “catch-up” with their own net zero strategies. The EU Commission explicitly noted that the EU CBAM is an environmental measure, not a tax or a tariff, and is compliant with the World Trade Organisation (WTO). However, countries such as China and India have opposed this proposal and argued that it violates trade principles and may result in tariff retaliation.
  2. In our view a UK unilateral CBAM should only be considered after conducting extensive research including ex-post evaluations, stakeholder consultations and independent impact assessments because it is a new and untested option with many interdependencies. It would need to take into consideration the interactions with other CBAM or regulatory proposals (from the EU, and potentially Canada, the US and others) holistically e.g. in terms of timings, scope, and compliance burden on businesses. It may also need to be incorporated into future UK trade negotiations.
  3. Various supra-national institutions have lately called for a global approach on carbon pricing, including the G7, G20, the Organisation for Economic Co-operation and Development (OECD), the International Monetary Fund (IMF) or the World Bank Group. We note that the UK continues to engage in those discussions, and we are of the view that a globally co-ordinated set of principles for the combination of Emissions Trading Systems, Regulation and a CBAM would be the most desired outcome to enhance global co-operation and give certainty and consistency for business. We note, however, that the timescale required for fully co-ordinated and agreed international proposals may prove difficult to achieve in the context of climate change where time is of the essence. Indeed, the recent ground-breaking international tax reforms agreement includes alignment of 136 jurisdictions on taxing the digitalised economy and a global minimum tax rate but took many years.

How might a CBAM interact with the UK’s international obligations, including on trade and the environment?

  1. It is important to recognise that the implementation of a CBAM-style policy in the UK could provoke disputes with trading partners, some of which have been highly sceptical of introducing models which price carbon at the border. A CBAM is a new policy and it is still the subject of debate and emerging legal opinions as to whether the mechanism to adjust the price at the border is/could be classified as a tariff, and/or whether it is exempt by reference to WTO rules. As referenced above, a CBAM may therefore need to be referenced and incorporated in the UK’s future free trade agreement negotiations. 
  2. The UK also has a broader obligation to conform to WTO rules and has placed great emphasis in recent years on strengthening the rules-based international system. It is therefore imperative that any such future mechanism is carefully crafted to fall within the scope of General Agreement on Tariffs and Trade (GATT) exceptions on states’ rights to determine environmental objectives and does not constitute (or give the perception of constituting) a disguised restriction on international trade.


October 2021