Sheena McGuinness

Written by: Sheena McGuinness

Sheena McGuinness

Partner

Is the UK sacrificing global trade relations in the pursuit of net zero?

A carbon border levy (CBT) is a tax on carbon emissions attributed to imported goods that have not been carbon-taxed at source. The purpose of the levy is to protect lower-carbon domestic manufacturers from high-carbon imports from more polluting countries. 

Currently, as part of the government’s efforts to tackle the climate emergency, in the UK carbon-heavy industries are required to buy carbon credits to make up for the carbon emissions they produce in the manufacturing process. The underlying premise is to encourage polluters to find ways to reduce emissions, or to pay for the pollution they create.  

According to a World Bank report released last month the cost of carbon varies greatly in different regions, and the UK has one of the world’s highest carbon prices. In short, the UK is at risk of pricing itself out of the global market due to its high domestic carbon tax, while Britain’s trading partners currently import cheaper goods with much lower or no domestic carbon tax. 

Therein lies the rub: in pushing through policies that result in UK manufacturers relying on environmentally friendlier but more expensive renewable energy to reduce emissions, or paying for their emissions through a carbon tax, the manufacturers are disadvantaged when compared with overseas competitors that still use carbon dioxide-producing but cheaper power sources. 

Against this background, Rishi Sunak has asked for an evaluation of a UK carbon border tax to level the playing field between UK producers and importers of goods that are not carbon taxed at source. The introduction of such a UK CBT would not only reduce emissions but could also help protect UK businesses competing against cheaper imports from countries with less strict climate laws. 

Looked at that way, a CBT seems logical and equitable. However, as with any tax system there will be winners and losers. The losers will rally against the proposals so the government needs to weigh up the impact such a regime would have on international trade and relations. The reaction to the EU proposition of a carbon border levy will no doubt weigh heavy in the mind of Sunak as he is considering the option of a CBT on UK imports. The EU proposition was received unenthusiastically by countries including the US, China, India and Australia. The EU adjustment levy is not expected to be introduced until 2023, so the UK government cannot use the EU’s CBT as a stalking horse to evaluate impact on trade prior to announcing its own scheme. 

There is a risk that UK carbon tax is so high that it makes manufacturers uncompetitive globally, so something must be done. The alternatives are simple: either reduce the domestic carbon price or introduce the carbon border tax to ensure equality among traders to and within the UK. The former may scupper the UK’s legislated net zero target, and the latter may have a negative impact on the UK’s global trade and international relations. There is no easy answer, but there is an obvious inequality in the UK and the EU taking measures to reduce their carbon footprint while high-polluting countries can still sell to their markets without these costs. 

Only a global carbon fiscal regime could truly achieve free trade and carbon reduction but, given the jurisdictional nature of tax, such a system is currently impossible. More countries need to consider the impact of their manufacturing processes on the environment and introduce similar measures to the UK and the EU to achieve the collective goal of reducing harmful emissions.

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