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As the European Union flips the switch on its new Carbon Border Adjustment Mechanism (CBAM), there's growing concern over the United Kingdom's faltering carbon pricing approach, leaving British businesses potentially on the hook for substantial EU levies.
Analysts and industry insiders are raising red flags about the widening chasm between EU and UK carbon prices. They argue that UK companies are at increasing risk of significant new carbon levies when exporting goods to EU nations. Why? The UK Emissions Trading Scheme (UK ETS), created to replace the EU version post-Brexit, determines the carbon pricing for big hitters in manufacturing, aviation, and power generation sectors within the UK.
It was designed as an intelligent mechanism. The idea? The carbon price climbs progressively as governments trim the aggregate emissions cap. In theory, this approach would drive companies to reduce their carbon footprint and invest heavily in clean technology and energy-saving methods. Initially, the UK's carbon pricing moved more or less in sync with the EU's. But then the landscape shifted.
Here's the twist: A few months back, the UK government surprised everyone by upping the number of complimentary carbon allowances for polluters from 2024 to 2027. This, part of a series of policy adjustments, reportedly rattled investor confidence in clean tech sectors. As a result, the cost of carbon allowances in the UK now lags behind EU prices—less than half, to be exact.
Once seen as a competitive edge, the lower carbon prices in the UK are now a double-edged sword, thanks to the EU's newly minted CBAM. The EU introduced this mechanism as a countermeasure against potential undercutting by companies operating in regions with lax carbon pricing. CBAM went live just yesterday and will start hitting specific sectors by 2026.
"UK industry will still be paying for emissions on exports to the EU, but instead of taxes going to the Treasury, they will be heading to Brussels, which has earmarked these revenues for further investment into renewable industries," said Marcus Ferdinand, chief analytics officer at carbon consultancy Veyt, told the Financial Times.
Trade body Energy UK warned the CBAM could also impact clean energy developers planning to export power to the EU, as the levy would be based on average grid emissions, meaning companies looking to export surplus wind power could still face additional charges. Writing on X, Energy UK chief executive Emma Pinchbeck warned the situation risked further damaging an "investment climate in the UK [that] is bleak for anyone trying to build energy infrastructure right now".
She added that she hoped the Treasury would "announce a package of measures in Autumn Statement to respond".
In response, a spokesperson from the Department for Energy Security and Net Zero said: "The price of carbon allowances in the UK ETS is set by the market, but in July, we announced a 30 per cent reduction in the scheme's emissions cap, to ensure it remains at the heart of the UK's effort to deliver on net zero by 2050 in the most cost-effective way."
Julia Michalak, EU policy director of the International Emissions Trading Association, welcomed the launch of the transitional phase, noting the EU CBAM would "usher in a new era of climate policy".
"By gradually replacing free allocation of allowances, CBAM is an indispensable tool protecting the competitiveness of European industries on the EU's journey to net zero," she said. "It is also instrumental in encouraging countries to introduce domestic carbon pricing, the most effective measure to combat climate change."
In the international arena, several countries like India, Brazil, and Indonesia are also jumping on the carbon market bandwagon, adding pressure on the UK to consider its own CBAM. However, the UK's proposed carbon import levy system is causing a rift among ministers, reigniting debates on protectionism.