Should the UK introduce a border carbon adjustment mechanism?

A stronger carbon price is a pre-requisite for the UK achieving a 68 per cent drop in emissions by 2030, and net-zero emissions by 2050. 

The UK will also need to extend carbon pricing to sectors beyond those currently covered by the existing emissions trading system (UK ETS), such as heating and agriculture. Following Brexit, the UK has announced it will introduce its own replacement for the EU ETS, and intends to include stricter requirements and greater fines But the Zero Carbon Commission has recommended it go further still, and levy a carbon charge of £75/tCO2 on all upstream producers by 2030.

However, a significant increase in the domestic carbon price, alongside other measures necessary to achieve the UK’s climate goals, risks provoking a political backlash – particularly from those who fear the policies will damage the competitiveness of British companies.

In theory, a high carbon charge could lead to UK producers being undercut in the domestic market by competitors selling from countries that do not levy an equivalent charge. It could also reduce the competitiveness of UK exporters selling abroad and lead to British companies shifting operations to countries more tolerant of pollution. And while British public opinion is broadly in favour of a carbon charge - and the Government’s target of net zero emissions by 2050 - over half of those who oppose ‘net zero’ do so because they fear measures to combat climate change will damage the economy.

If a high carbon charge led to British companies moving operations abroad, or British consumers consuming more carbon-intensive imported goods, it would also fail to contribute to a reduction in global emissions. Rather, the high carbon charge would just lead to the emissions being shifted to another jurisdiction.

In an ideal world, all countries would work together to address climate change, and agree on a global minimum carbon price. However, it would be naïve to rely on this happening, especially as some countries might attempt to eke out a competitive advantage for themselves by dragging their heels. 

As such, the UK should consider introducing a border carbon adjustment mechanism (BCA) which would see a charge or levy proportionate to the carbon content of imported goods applied at the UK’s border. If successfully implemented, a BCA could ensure the effectiveness of the UK’s climate policy; guard UK companies against unfair foreign competition; and placate those at home who view climate change mitigation as a threat to their economic wellbeing.

The UK would not be alone in considering the introduction of a BCA. The EU intends to introduce a BCA and the European Commission will table specific proposals in the second quarter of 2021. In the US, the incoming Biden administration has said it will “impose carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations.”

With both the European and American BCA discussions at an early stage, the UK should engage with, and attempt to shape the international BCA debate now, rather than sit it out and risk being bounced into adopting a mechanism designed by others at a later date. If the EU and US do end up adopting a BCA, and the UK does not, there is an additional risk that carbon-intensive products that would otherwise have been sold on the European and American markets end up being dumped onto the UK’s.

However, the adoption of a BCA is not without its challenges. These include questions about its design, legality, cost and complexity, and political impact on an already fractious international rules-based trading system. There are also specific questions the UK Government would need to answer.

These include:

• What approach should the UK take to setting a domestic carbon price?

• Does the UK want to introduce a BCA?

• What products should a BCA apply to?

• How precise should the BCA be when setting the import carbon price?

• Should a BCA replace existing free allowances, or work alongside?

• Should UK exporters receive a rebate?

• Should the BCA apply to imports from developing countries?

• What should BCA revenue be used for?

This paper will attempt to assess the merits of a UK BCA, address some of the challenges, and explore the questions posed above.

Read full paper here.