UK tax: carbon stroppy tariff will be a freezer squeezer

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Trade policies are easy enough to announce, but trickier to implement. That will certainly be true for a UK cross-border carbon tax. The current government has announced plans to introduce the tariff by 2027. 

For years, British makers of high emissions goods such as iron, cement and steel have lobbied ministers to level the playing field with rivals in countries where carbon levies are lower.

In 2021, the Treasury correctly judged that a cross-border levy would be complicated to roll out. The EU’s decision to impose its own border emissions charges in 2026 appears to have forced the hand of chancellor Jeremy Hunt.

Cross-border carbon taxes are meant to stop “carbon leakage”, where businesses shift production to countries with lower costs for pollution. Competitiveness aside, carbon leakage flatters emissions calculations. “Footprint emissions” — which account for all goods consumed in the UK — are naturally higher than the more widely-published territorial numbers. In 2020, the last year of comparable numbers, footprint emissions were 43 per cent higher.

Companies with UK-based production had feared cheap, high emissions goods would flood the market if the government did not follow the EU. That is still a risk if the UK policy comes into force 12 months later.

The bigger danger is that if the policy is poorly designed, it will create a bureaucratic nightmare for companies selling to the UK.

Consider the car industry. Parts are sourced from all over the world. Companies selling to the UK could easily fall foul of the rules unless they have very detailed knowledge of their supply chain emissions, says Adam Bell of the consultancy Stonehaven. Businesses are already lobbying for the UK policy to be closely aligned to that of the EU to avoid creating additional bureaucracy.

Officials will also have to tread carefully to avoid a consumer backlash. A cross-border carbon tax could significantly increase retail prices for such goods as cars, fridges and washing machines.

The tariff will be another big test of consumers’ appetite to shoulder decarbonisation costs.

The Lex team is interested in hearing more from readers. Please tell us what you think of the UK’s plans for a carbon tariff in the comments section below.