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UK Emissions Trading Scheme and Carbon Leakage

Volume 742: debated on Monday 18 December 2023

The UK is taking rapid action on industrial decarbonisation to meet net zero. This includes the use of carbon pricing through the UK emissions trading scheme (UK ETS). This action creates risk of carbon leakage as not all jurisdictions are moving at the same pace. Carbon leakage is the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation. It can undermine efforts to reduce global emissions and curtail private investment in decarbonisation—compromising efforts to limit global warming to 1.5°C.

The best solution to carbon leakage is an international one. The UK and many others around the world are working to reduce carbon leakage risk by pushing for ambitious climate action. But progress on international solutions takes time.

The Government therefore consulted on a range of potential domestic carbon leakage mitigation measures. The consultation “Addressing carbon leakage risk to support decarbonisation” ran from 30 March 2023 to 22 June 2023. It covered potential policies including a carbon border adjustment mechanism (CBAM), product standards, and other policy measures to help grow the market for low-emission products, as well as emissions reporting that could support the implementation of carbon leakage policy more broadly.

After careful review and giving thorough consideration to the potential implications, the Government have today published a summary of responses and Government response to the consultation, and confirm that:

The Government will implement a CBAM by January 2027. The UK CBAM will place a carbon price on some of the most emissions-intensive industrial goods imported to the UK from the aluminium, cement, ceramics, fertilizer, glass, hydrogen, iron and steel sectors.

A CBAM will ensure that UK decarbonisation efforts lead to a true reduction in global emissions rather than displacing carbon emissions overseas. It will give UK industry confidence to invest in the knowledge that its decarbonisation efforts will not be undermined.

The UK CBAM will work cohesively with the UK ETS to ensure imported products are subject to a carbon price comparable to that incurred by UK production.

The UK ETS Authority has today also published a consultation on the approach to UK ETS free allocation. The UK Government will work with the UK ETS Authority on interactions between a CBAM and provision of free allowances under the UK ETS.

The CBAM will be designed so that other countries which also have a carbon price will see the CBAM liability on their goods adjusted accordingly.

The scope of the CBAM will be kept under review, and delivery will be subject to further consultation in 2024.

The UK CBAM will be designed in compliance with the UK’s international obligations.

Alongside a CBAM, Government will work with industry to establish voluntary product standards that businesses could choose to adopt to help promote their low carbon products to consumers.

The Government will also seek to develop an embodied emissions reporting framework that could serve future carbon leakage and decarbonisation policies.

Voluntary standards and the embodied emissions reporting framework will be subject to further technical consultation in 2024.

The summary of responses and Government response to the consultation are available here: A copy of the document will be deposited in the Libraries of both Houses.