Greening Imports: UK Government to consult on a unilateral CBAM

It's been an interesting month so far in the world of climate taxes. 

For a brief moment it looked as though pens were down on the European Carbon Border Adjustment Mechanism (CBAM), Social Climate Fund and Greenhouse Gas trading proposals, pending political agreement on the future of the Emissions Trading System - shortly followed by confirmation that agreement has now been reached on all of those proposals.

The example of the EU neatly illustrates the ebb and flow of international negotiations and difficulties in reaching agreement. Yet, the UK Government remains "firmly of the view" that multilateral measures are the best way forward. However, while those are being developed, it reiterated last week plans to consult this year on a range of domestic options to mitigate against carbon leakage, including proposals for a unilateral CBAM.

The announcement does not commit the Government to any course of action down the line, and makes clear that it continues to be in what the Environmental Audit Committee called "listening mode" on CBAMs. It's a justifiable approach. As I've previously mentioned, there are numerous and highly complex political, behavioural and economic implications not only of deciding whether to introduce a CBAM but also of the way that it is structured and the way that it interacts with other climate mitigation measures, CBAMs and otherwise, both domestic and overseas.

As the statement notes, "The Government is clear that any policy or suite of policies we may pursue would need to carefully balance a range of priorities for the UK, both domestically and internationally, including compliance with WTO rules and our staunch commitment to free and open trade, alongside carefully considering the needs of developing countries."

Not only does that balancing act necessitate a great deal of data collection and modelling - there are reports that work has not yet begun to assess the environmental impacts of existing free trade agreements - but even comprehensive data cannot inform the design of a CBAM (or any other measure) until there is a "defined hierarchy of objectives" to help resolve conflicting needs and priorities.

What that hierarchy would be for the UK is not yet clear. However, the announcement does identify certain principles:

• Upholding trade openness remains a priority. The UK agrees with the importance of aligning its approach to carbon leakage with wider environmental, trade, development and fiscal policy, and will continue to engage at the G20, WTO and OECD to explore trade-related solutions to carbon leakage.
• The chosen approach needs to work for a broad range of countries, and pressures differ between low-, middle- and high-income trading partners. The UK will continue to work closely with developing countries to support their commitments on climate change, including carbon pricing.
• Different approaches may be necessary, depending on sector, type of firm and geographical location. The UK will also work to align any future approach with existing policies, including in regard to Freeports.

There is a delicate balance to be struck here, even setting aside the shifting legal and political landscape. Move too slowly and our chances of reaching the targets required diminish, but moving too quickly risks unintentional consequences, especially where regimes interact. We await the consultation with interest.

This post has been re-posted from the European Tax Blog.