8 March 2021

How Britain can take a global lead on carbon pricing

By Jerome Mayhew MP

2021 is set to be a year for the history books. Right now all we can see is Covid-19. But looking back, it may be that other events will seem even more important.

World leaders are considering how economic recovery plans can help to address our other great need: reducing carbon emissions. Let’s not kid ourselves: if we fail to bring the international community along the road to net carbon neutrality then the consequences will put Covid-19 in the shade.

As the hosts of the COP26 and G7 Summits this year, the UK has the opportunity to set the course of international debate and shape the carbon reduction agenda. The Prime Minister recognises this in the UK with his 10-point plan for a green industrial revolution. But there is a wider ambition, with international implications, to lead a cohort of leading economies on the rollout of carbon border taxes.

If we want to reduce the amount of carbon that we consume in the UK then we are going to have to get the free market to help us. Normally, if something costs more, consumers vote with their feet, choosing a cheaper alternative. Apply this approach to carbon and you can see how the market could help incentivise the development of new, lower-carbon alternatives to what we currently buy.

The problem is that if we increase the cost of carbon so that the market can start to work, all we will do is harm UK manufacturing, which will be undercut by cheaper high-carbon imports, an effect called Carbon Leakage. That means the world economy is held back by the highest carbon emitters.

Carbon border adjustment (CBA) is the policy idea that can fix this. Assess the carbon embedded in imports and apply a tariff that equates to the domestic cost of carbon so that the playing field is level. Do the same for exports, but in reverse, providing a rebate for our manufacturers when trading into high carbon economies. Apply a CBA and you can free your domestic market to respond to the real cost of carbon, whilst allowing your manufacturing base to adapt and thrive.

Arguments for a CBA are growing around the world. The EU started a feasibility study into the design and introduction of a CBA last year and President Biden has also expressed support for the policy. For the UK the fear is that without international coordination, implementation of CBAs could degenerate into ‘green’ protectionism, with us on the outside.

Now is the time for the UK to take the heaven-sent opportunity that hosting both the G7 and COP 26 provides. We can use our leadership role to rally an alliance of ambitious countries to create multilateral agreement on global carbon pricing. We need to be the ones framing the argument, not being left behind by bigger trading blocs.

The size of the prize is enormous. This single policy could reduce carbon leakage, leading to a renaissance of lower carbon manufacturing in our industrial heartlands as production is re-shored to take advantage of shorter supply chains and international competition pays the same price for its carbon content.

But most importantly, by allowing the actual cost of carbon emissions to be reflected in prices, it would release the amazing power of the free market to find new, low carbon, solutions to our needs, both in the UK and internationally – and it will do so in ways that no government planner can even guess at, harnessing the combined ingenuity of all our inventors and entrepreneurs.

The Prime Minister has a vision for Global Britain. The UK is a global force that can lead the charge against climate change, through acknowledging our climate impacts abroad, and through supporting other countries, particularly those in the global South, in their development of low-carbon economies. We should start at the G7 this June.

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Jerome Mayhew is Conservative MP for Broadland.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.