Most Favoured Nation: Does The UK Need A CBAM?

To do or not to do.

This week UK trade secretary, Anne-Marie Trevelyan, delivered a speech at Bloomberg proclaiming the benefits of green trade. You can watch it here.

This is encouraging. People like, well, me and occasional MFN contributor George Riddell, have been softly suggesting that green trade is something the UK government might want to focus on for a little while.

As per my Taxonomy of Green Trade (yes, I’m trying to make this a thing), AMT’s focus was near exclusively on point 1 [liberalising trade in environmental beneficial goods and services] with a spattering of the others:

1. Liberalising trade in environmentally beneficial goods and services. This is classic trade policy stuff, so removing tariffs on wind turbines, making it easier for solar panel engineers to work all over the world. Could also include constraints on fossil fuel subsidies. That kind of thing.

2. Using trade as an incentive to deliver on environmental goals. For example, making access to the benefits of a trade agreement conditional on a country abiding by specific environmental rules. The trade benefits are the carrot.

3. Environmental policies that have a direct or indirect impact on trade. Think renewable energy schemes that include local content requirements, or plans to phase out palm oil-based fuels, or even the EU’s proposed carbon-border adjustment mechanism.

4. The climate impact of trade. Shipping, driving and flying things all over the world requires burning fossil fuels, which is bad. Right?

5. The trade impact of climate change. Climate change will increase the frequency and magnitude of extreme weather events which will in turn disrupt global supply chains.

But one ommision was interesting. Despite a reference to carbon leakage, she did not mention a carbon-border adjustment mechanism (CBAM) in her keynote directly. Yet the other bit of news from this week is that soon (probably the summer) the UK is going to launch a consultation looking at what a UK CBAM could look like.

Lucy Frazer, Financial Secretary to the Treasury, said:

We are announcing that it is our intention to consult later in the year on a range of carbon leakage mitigation options, including on whether measures such as product standards and a carbon border adjustment mechanism (CBAM) could be appropriate tools in the UK’s policy mix.

A CBAM applies a carbon price to specified imports, in order to mitigate differences in carbon pricing between jurisdictions, and therefore reduce the risk of carbon leakage.”

Now this is something the UK government has been kicking round internally ever since the EU announced it was going to be introducing one. (As an aside, the EU’s CBAM came on step closer to ratification when it cleared a vote in the European Parliaments environment committee on Tuesday … although there is still a little way to go yet.)

Despite having some political appeal, it is not clear cut that a UK CBAM is needed.

The hypothetical risk it deals with is clear: if the UK is going to moving faster than other countries on delivering net-zero then it needs to have an answer when people/companies raise the possibility that companies might just move offshore and export to the UK in order to dodge the new taxes/regulation.

But there is no hard evidence that carbon leakage has actually been a big problem for the UK so far.

The chart below – taken from a paper I wrote for the Zero Carbon Campaign in January 2021 – shows both the total tonnage of CO2 contained within UK exports (green) and what this amounts to as a proportion of the total UK carbon footprint (black).

With the caveat the data quality is poor, we can see that while the total tonnage of UK CO2 imports *and* the import share increased from 1990 to 2006, from 2006 onward the import share continued to rise, but the total tonnage plateaued: it is about the same in 2017 as it is in 2006.

My analysis is that yes, we offshored a load of industrial production during the second half of the 20th century, but I’m not sure we can put that down to carbon leakage, rather globalisation, China entering the world market, and, importantly, labour-cost arbitrage. But more recently, when the UK in particular has been tightening environmental regulation, introducing carbon pricing, and the like … I’m not sure there has been a noticeable additional impact. Yes, the import share of CO2 has increased, but this chart suggests this is down to UK domestic emissions decreasing, rather than imported emissions increasing.

So we’re back too the opening question: why should the UK bother with a CBAM?