UK Carbon Pricing Framework Must Align With EU

LSE report warns UK exports will be penalised by EU CBAM without policy collaboration.

The UK government needs to adopt a robust carbon pricing framework that will both support the decarbonisation of industry and keep pace with the EU’s Carbon Border Adjustment Mechanism (CBAM). Otherwise, there’s a heightened risk of UK exports being penalised, as exports currently emit more carbon than permitted under the proposed new EU framework.

A research paper published by the Grantham Research Institute on Climate Change and the Environment at the London School of Economics (LSE) explored the potential UK impacts of the EU CBAM, which is due to come into force by the end of 2022.

As the EU is the UK’s main trading partner in carbon-intensive goods, such as steel, the report warned that a weaker UK carbon pricing framework could cost UK exporters around one-third of the total value of all UK goods exported to the EU.

Where possible, the EU and UK should aim for a “joint implementation” of their respective carbon pricing policies, the report said, while noting that this could disadvantage raw material exporters with strong non-EU trading ties. For example, aluminium exporters might struggle to pass on carbon costs in non-EU markets.

The LSE report calls for the UK government to build an EU-complementary policy framework that includes a high carbon price – suggesting £75 per m/t by 2030 – as well as complementary leakage measures allowing for varying levels of impact across sectors.

“Leakage provisions that are tailored to steel and aluminium would be needed if the UK has a broad, import-only CBAM in conjunction with the EU CBAM. This could include different boundaries for product coverage,” LSE said.

Uncertainty around the UK’s post-Brexit climate policy and anti-carbon-leakage measures is detrimental to long-term investment in carbon-neutral production processes by UK industry, the report warned.

“To reduce investment uncertainty, the UK should consider close multilateral cooperation with the EU on a robust policy package to support industrial decarbonisation, including linking of ETSs, equitable CBAM design, the gradual phase-out of free allocation of permits, support for innovation, and carbon contracts for difference,” LSE recommended.

The UK government’s post-Brexit emissions trading scheme (ETS) will launch its first auctions in May, hosted by the Intercontinental Exchange (ICE), and is expected to closely align with the EU ETS.

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