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Weekly Short
17 November, 2023
This week there was a specific but important piece of news about UK trade policy: the UK is likely to introduce a tax, called a carbon border adjustment mechanism (CBAM), on imports of carbon-intensive goods from countries with weaker climate legislation than ours. This will come into action in 2026 and mirrors EU plans to address emissions associated with international trade.
But to understand why this measure is important, it’s useful to start with the economics of climate change. Climate change is considered a market failure, where the negative impacts of GHG emissions are felt broadly, but the costs are not borne by the emitters. This is the issue that carbon taxation seeks to solve: by adding a cost per unit of emissions.
Despite its long history and popularity among economists, one of the reasons carbon taxation hasn’t yet taken off in a big way is the need for coordination globally. Without this, goods from countries without carbon taxes or with lower carbon prices would be cheaper, which could result in shifts in manufacturing and hence emissions to these countries, without any overall reduction in emissions – an effect called ‘carbon leakage’.
This is where a CBAM comes in, by adding taxes on imports of emissions intensive products (steel, for example) that haven’t already had a carbon tax applied in their country of manufacture. This means manufacturers in countries with higher standards are not penalised. It’s therefore unsurprising this has good support from UK manufacturers.
With coordination and cooperation being central to the effective implementation of a very powerful tool for reducing emissions, it’s reassuring to see the UK following in the footsteps of the EU on this measure, despite our ever weakening ties.
By Patrick Bapty