The EU’s Carbon Border Adjustment Mechanism (CBAM) came into force over the weekend. It is part of the EU’s strategy to tackle climate change and carbon leakage by imposing a charge on the embedded carbon content of certain imports such as cement, iron, and steel that is equal to the charge imposed on domestic goods under the EU’s Emission Trading System, with adjustments being made to this charge to take into account of any mandatory carbon prices in the exporting country.
The UK steel industry put out a dire warning that steel normally bound for the EU would be diverted to the UK and at a much lower cost, thereby decimating the domestic steel sector. There were quite a few bad takes among my fellow free marketeers, who accused UK Steel of being protectionist and were relishing the prospect of cheap steel arriving on our shores. I would normally agree with them. The government should not attempt to protect businesses or industries from foreign competition. If firms in other countries can produce certain goods more efficiently than in the UK then this leads to cheaper products for consumers, forces UK businesses to up their game, and ultimately spurs economic growth. The government should be on the side of ordinary people who benefit from free trade and not industries with powerful lobby groups.
However, on this occasion the government should listen to UK Steel and not just emulate the EU’s CBAM, but be even more ambitious in order to keep the country on board with both free trade and protecting the environment.
The steel industry is right to be concerned. If this high-emission steel enters the UK market it will lead to a glut of steel which will drive down prices, adversely affecting profits for UK steel producers. What is more, if the UK doesn’t implement a scheme similar to the EU’s CBAM it will raise the price of UK steel in the EU, thereby making it less competitive in the EU market. The end result would be the UK steel sector being destroyed or being propped up with massive subsidies at taxpayers’ expense.
It is only free trade when all sides are playing by the rules. The UK steel industry going under would therefore not be the result of free trade but it would be weaponised by those who would rather the UK pursue protectionism. Given the importance of free trade and the role it plays in creating jobs, increasing wages, and boosting growth this cannot be allowed to happen.
Moreover, it also risks the public becoming disenchanted with environmentalism. We have already seen the government water down its stance on Net Zero and if people see jobs being lost and entire industries disappearing then they may decide that tackling climate change is not worth it. Again, given the risk posed to our planet by climate change we cannot risk abandoning the push to Net Zero or leaving environmentalism in the hands of the degrowth cranks.
We have found ourselves in this situation due to the government failing to take action earlier. When I joined the Department for International Trade all the way back in 2020 I warned that something like this would happen. It is encouraging that the government has carried out a consultation on introducing a CBAM but this comes after successive prime ministers and trade secretaries have dragged their feet and kicked the proverbial emission-heavy can down the road. Why should hard working people lose their jobs due to the failures of politicians?
As such, the government needs to introduce its own scheme. However, rather than simply copying the EU’s CBAM it should go further and faster by introducing a border-adjusted carbon tax levied on all products form the UK and overseas based on the carbon emissions associated with their production.
Such a move would be more ambitious and bolder than the EU’s CBAM which will only initially apply to the most carbon-intensive products. This should hasten the shift towards more environmentally friendly methods of production and allow the UK to start leading the way rather than playing catch up and simply following the US or EU.
Finally, a border-adjusted carbon tax would be a significant revenue raiser for HM Treasury. This raises the question of what the government should do with it. An obvious answer would be to provide a rebate to industries most adversely affected by the introduction of a tax such as those in energy-intensive industries such as steel. However, this is likely to be looked on unfavourably by the EU and US who probably would not welcome the UK going further and faster and may claim that such a move would be unfair as it is essentially a subsidy to domestic producers.
Another possibility would be to use the revenue to invest in the green technology sector. This would help to speed up the UK’s transition to a green economy and help the country to meet its Net Zero target. However, again the government would have to be careful to avoid this being challenged at the WTO.
Alternatively, the revenue could be used to create room for cutting more economically damaging taxes. Not only would this bring economic benefits but would also allow the Chancellor to be seen as a tax cutter while also being prudent with the public finances.
Perhaps the best use of the money would be to redistribute it to low income households. These are the people who are already struggling with the cost of living and so would be most adversely impacted by any increase in prices. Such a move would mean they might possibly be better off than before and encourage them to stay on board with the push towards Net Zero.
Free trade and environmentalism are too important to be abandoned due to the failings of successive politicians. However, if the government does not take appropriate action in response to the EU’s CBAM then there is a very real danger of this happening. Our economy and environment are at risk and the UK government must respond.
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