The UK’s impending carbon border adjustment mechanism (CBAM) policy is more than a carbon tax system on imported goods; it’s a strategic move to level the playing field for domestic industries. By introducing this system, the UK Government could incentivise global adoption of carbon pricing and industrial decarbonisation, ensuring fair competition where the cost of carbon is appropriately reflected in the price of all goods and where energy transition and decarbonisation investment is rewarded.
Environmental Goals Driving Economic Benefits
The UK’s CBAM, rooted in environmental objectives, spurs economic advantages domestically, which, in turn, encourages global environmental action. Other Governments are unlikely to accept UK-imposed carbon ‘import’ taxes without leveraging the opportunity to develop their own carbon tax schemes, benefiting their exchequer at no detriment to their industries. In other words, this environmental policy at home drives an equivalent policy abroad, inducing an overall global environmental benefit.
Addressing Carbon Leakage
Current free allowances under the EU or UK Emissions Trading Scheme (ETS) fall short in terms of fully mitigating carbon leakage, which can place an additional and undue operating cost on UK/EU industries compared to international competitors. The UK's Department for Energy Security and Net Zero (DESNZ) recognises this and, through its second public consultation in March 2024, is shaping a CBAM scheme set for a 2027 launch.
Strategic Sector Selection
DESNZ’s criteria for initial CBAM inclusion are:
● Products derived from sectors under the UK ETS, aligning imported goods with domestic products in carbon pricing.
● Imported goods with significant carbon leakage risks.
● Goods in which carbon intensity (mainly scope 1/direct, and 2/indirect emissions) can be quantified using methodologies that are feasible, effective, and circumvention-proof.
The UK government’s current stance is to cover only seven sectors meeting the above criteria. As expected, this approach is aligned with the EU’s CBAM framework, given the EU’s status as a primary UK trading partner. DESNZ is also open to revising this scope as new evidence on carbon leakage risks and methodological advancements emerge.
Beyond the Seven Sectors
While the seven sectors (cement, fertiliser, ceramics, glass, hydrogen, aluminium, and iron/steel) are significant carbon leakage sources, they are neither the sole, nor the most material contributors. Fossil fuels and chemicals derived from oil refineries cause approximately five to six million tons per annum (MTPA) of carbon leakage, surpassing that of most of the seven initially proposed sectors mentioned, including fertilisers and cement.
"Striving for perfection should not preclude the inclusion of sectors that drive higher environmental standards globally."
The Case for Oil Refining Products
Despite the downsizing of the industry during the last decades and the shift towards renewable energy, the UK’s oil refining sector remains crucial to the UK economy. Alongside vital road fuels, it supplies a range of olefins and aromatic chemicals, which currently have no renewable substitutes. It also supports sectors like aviation, shipping and off-road vehicles that will continue relying on liquid fuels for many years to come as the industry continues its transformation journey to supply an ever-increasing amount of low-carbon fuels. Domestic refining mitigates supply chain and geopolitical risks now and well beyond 2050.
Decarbonisation and Energy Security
By 2050, the UK's demand for fossil-based chemicals and fuels is projected to halve, a demand that could be met by decarbonised domestic refineries. Even if all refineries were to close, the UK would still face a carbon leakage of five to six MTPA from imports. Maintaining a robust refining sector with CBAM ensures energy security and drives global decarbonisation.
Advocacy for Inclusion
The oil refining sector advocates for the inclusion of its products in the initial CBAM phase, citing the significant carbon leakage they cause. While measuring direct and indirect emissions from imports poses challenges, they are not insurmountable. The EU’s guidance on CBAM implementation offers a precedent for using proxy figures, a practice that can be adapted for oil refining products.
Conclusion: Embracing Complexity for Environmental Progress
The UK’s CBAM should encompass all industrial ETS sectors with material trade deficits and significant carbon leakage. Determining the right factors and formulas is complex but necessary. Striving for perfection should not preclude the inclusion of sectors that drive higher environmental standards globally. The inclusion of refining is an important first step in ensuring that the UK’s CBAM scheme achieves the ambition of addressing carbon leakage domestically while driving environmental action abroad.
