UK trade politics

UK ‘net zero’ report makes case against carbon border tax, for conditional tariffs

The United Kingdom believes it can lead the world in a push towards achieving net-zero carbon emissions by 2050. But that global leadership may not involve imposing the kinds of carbon border mechanisms that the European Union and other countries are considering.

These are among the key trade policy lessons to be gleaned from a Net Zero Strategy paper  published by the government on Tuesday (19 October).

The substantial 368-page document is intended to give some heft to the UK’s position on climate change as it prepares to host the COP26 climate summit to be held in Glasgow next month.

And it is accompanied by a Net Zero Review paper, authored by the UK Treasury, the country’s finance ministry, which sets out some of the rationale for the UK’s policy positions on climate change.

The main report takes an upbeat view on climate change, claiming that the challenge of achieving net zero carbon emissions also represents an opportunity for UK economic growth, not least in the area of trade.

“Estimates suggest the UK’s low carbon economy could deliver up to £170 billion of export sales of goods and services by 2030,” the report says, citing a government report dating from 2017.

As evidence of the UK’s pro-climate approach to trade policy, the report notes that the UK “unilaterally removed tariffs on over 100 additional products used in renewable energy generation, energy efficiency, carbon capture, and the circular economy” when it set up its post-Brexit tariffs at the start of this year.

Carbon border measures: ‘intuitive appeal’ – but not straightforward

The report acknowledges the risk of ‘carbon leakage’ in cases where carbon-emitting industries relocate to territories where legislation is more lax, or where carbon prices are lower.

But unlike the Brussels – which put forward plans for a Carbon Border Adjustment Mechanism in July – the London is not a fan of border measures.

“While CBAMs can have an intuitive appeal, they are not straightforward,” warns the Treasury in its Net Zero Review paper.

“The fundamental driver of carbon leakage is international trading partners moving at different speeds on emissions mitigation and carbon pricing,” it says. “This means that the starting point is to work with other countries to agree and implement ambitious emissions mitigation goals.”

The Treasury identifies a number of problems in proceeding with carbon border mechanisms, including difficulties in measuring carbon emissions, and impacts on businesses.

It also raises concerns about “substitution effects” – whereby the application of CBAM may simply incentivise producers of carbon intensive products to redirect their products to other countries where the tax burden is less acute.

UK ‘seeking to reaffirm commitment’ to Paris Agreement in FTAs

More generally, the government is keen to position itself as a promoter of good practice on climate policy through its nascent network of free trade agreements with other countries.

But the language used in the Net Zero strategy paper is not particularly assertive on this point.

According to the report, the government will “seek to reaffirm our commitment to the Paris Agreement in all UK trade agreements”. But rather more emphasis is placed on ensuring that such deals have the effect of “preserving our regulatory autonomy to pursue our climate targets”.

This is a controversial domestic issue at the moment, amid widespread allegations that the government had backed away from insisting on strong provisions on the Paris Agreement in its FTA negotiations with Australia earlier this year, in the interests of getting a deal over the line.

Conditional market access ‘should be considered’

However, the option of linking FTA tariff concessions on individual goods with the carbon status of those goods is reviewed more positively.

“Decisions on the liberalisation of partners’ goods must account for their environmental and climate impact”, says the report.

“Where there is evidence that liberalisation could lead to significant carbon leakage the case for maintaining tariffs or pursuing conditional market access, through clauses on standards or eco/carbon intensity, should be carefully considered.”

Notably absent from the UK document is any reference to ‘strategic autonomy’ – the concept of avoiding over-reliance on external suppliers which is a key strand of EU thought at present.

There is a recognition that low carbon technologies are dependent on “critical raw materials” such as cobalt, lithium and nickel, which are not readily available within the UK.

But the report states simply that the risks associated with procurement of these materials “will be assessed [subsequently] in relevant policy delivery analysis”.

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