MPs Seek to Create UK CBAM and Finalise Green Taxonomy in 2023

British lawmakers put the creation of a UK carbon border adjustment mechanism on their to-do list, as they look to prioritise sustainable finance policy. 

In the last the 24 months, two political special interest groups, focused on the topic of ESG and sustainable finance have been launched by UK MPs, reflecting the huge rise in interest in the area.   

There’s the All-party Parliamentary Group (APPG) on ESG chaired by Tory MP Alexander Stafford, and the APPG on Sustainable Finance, chaired by fellow Conservative Jerome Mayhew MP.  

APPGs convene cross-party MPs and peers on particular policy areas. Controversially for some, they do not have official status within the UK’s Parliament, so are broadly unregulated and are often funded by outside interests. The APPG on ESG counts weapons manufacturer BAE Systems as a sponsor. 

UK carbon border adjustment mechanism

One policy area that the APPG on Sustainable Finance will have a strong focus on this year is carbon border adjustment mechanisms (CBAM), says Mayhew, who was taking part in a webinar on the issue, after speaking with ESG Investor.  

CBAMs are designed to try and even the global playing field between companies operating in countries with weak regulation on carbon emissions and those operating in countries with stronger regulation by placing a carbon tax on high-emitting imports.  

Europe has been the first jurisdiction to introduce a CBAM to prevent carbon-intensive producers moving operations outside of the EU to avoid carbon regulation and make sure the bloc remains competitive with its neighbours, as it strengthens its Emissions Trading System (ETS).  

The move by Europe, says Mayhew, has focused Westminster on the issue and will make it harder for them to “kick it [introducing a CBAM] down the track because it’s going to happen to us [EU’s CBAM] and we need to get with the programme”.

Mayhew is already in conversations with UK ministers on the issue and says it is fast rising up the political agenda. Today, the FT has reported that the UK is considering introducing a carbon tax on imported steel to protect domestic steelmaking. 

Mayhew says a UK CBAM will allow it to unlock the power of the free market and solve some of the carbon-related emissions problems that a blind market has.

“A competitive large market that takes a myriad of decisions every single day needs to automatically take account of the price of carbon,” he says.  

He concedes that the UK has “done a little bit” with the UK Emissions Trading Scheme, but adds that this only applies to domestic manufacturing. Moves to extend this after Brexit appear to have stalled – though today’s reports on steel suggests movement may happen this year. Mayhew wants to get cross-party consensus on CBAMs; and is planning roundtables in this respect.

Green taxonomy delay

Another piece of sustainable finance-related policy that has been stalled by the UK government has been its green taxonomy, to the ire of many.

Stephanie Dawoud, Communications Manager at the UK’s Impact Investing Institute, warns there are serious reputational risks for not following through with the commitment.

“The longer its implementation is delayed, the higher the risk of adding to the confusion in the investment market,” she says.  

Stafford, chair of the APPG on ESG, also has concerns about the delay, saying the UK risks losing its “second mover advantage” where it can learn from mistakes of other countries. But he adds that it shouldn’t be rushed so the UK “can get it right”. 

“The government has committed to getting the taxonomy out and following through with it. But we just need to make sure it happens as soon as they can.” 

He says the EU’s issues with its sustainable finance taxonomy demonstrate the effects of rushed policy making and immature policy assumptions – referring to the controversial decision to includes gas and nuclear in the EU taxonomy.  

Stafford says the inclusion of gas and nuclear in the UK’s green taxonomy would “create a whole can of worms where people don’t know where they stand with it”, suggesting that this should form part of a “transition taxonomy” instead. 

Mayhew is also against gas being included in the UK’s green taxonomy. He suggests Europe was driven to include it following the energy supply difficulties of Germany which has recently reopened coal mines while shunning nuclear.

However, nuclear should be part of the UK’s green taxonomy, says Mayhew, adding that a formal position on this from the APPG on Sustainable Finance is still to be decided.

Other areas that the APPG on ESG will be analysing this year, says Stafford, are the ‘social’ in ESG and biodiversity.  

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