British exporters face hefty EU carbon tax bill after Sunak weakens climate policies

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Rishi Sunak’s weakening of UK climate targets has left British exporters facing hundreds of millions of pounds in EU carbon border taxes within the next decade — revenues that otherwise would have flowed to the Treasury.

The UK carbon market, which sets the price large manufacturers and energy companies must pay for every tonne of CO₂ released, has collapsed after the Conservative government weakened a number of green initiatives.

UK emissions prices have fallen to less than half the EU equivalent in recent months, having previously traded near parity.

The EU’s forthcoming carbon border tax regime will seek to penalise countries with substantially lower carbon costs than the bloc’s. As a result, the drop in UK emissions prices means that British exporters to the EU will become liable for the EU tax when it comes into force in 2026.

The lower emissions price also means that the UK Treasury will generate less revenue from carbon pricing; in effect the changes will divert a portion of companies’ carbon bills from Westminster to Brussels.

“UK industry will still be paying for emissions on exports to the EU, but instead of taxes going to the Treasury, they will be heading to Brussels, which has earmarked these revenues for further investment into renewable industries,” said Marcus Ferdinand, chief analytics officer at carbon consultancy Veyt.

From Sunday exporters to the EU will have to start recording carbon emissions embedded in their products as the early trial period for the EU’s carbon border adjustment mechanism, known as CBAM, begins.

Under the CBAM countries that want to export to the EU must from 2026 show that they have an equivalent carbon price in place or pay penalties to make up the difference. The aim is to protect EU industry from countries with less stringent emissions markets.

The mechanism will cover iron, steel, cement, aluminium, fertiliser, hydrogen and electricity generation. During the trial period exporters only have to report emissions without paying the levy.

Prices for the UK Emissions Trading System (UK ETS) fell to an all-time low of nearly £33 a tonne last week, the day after Sunak’s speech setting out weakened climate provisions such as delaying the phaseout of petrol and diesel cars. The UK ETS hit a peak of nearly £100 a tonne last year.

The EU equivalent, known as the EU ETS, is trading at €82 a tonne (£71.10).

“The total UK exporters would pay to the EU could easily rise into the hundreds of millions of pounds by early next decade, if the gap in carbon prices remains,” Ferdinand said.  

The UK energy industry is warning that despite generating low emissions themselves, electricity exports from wind farms, solar and nuclear plants will also be subject to carbon import taxes.

With more than 40 per cent of UK electricity still generated by burning gas or coal, a similar portion of the CBAM levy will be applied to all UK electricity imports, as the EU cannot easily tell whether imported power came from clean or dirty sources, industry body Energy UK warned.

“It’s a really big problem as UK wind farms that had planned to send a lot of what they generate to the EU on very windy days could find themselves priced out of the market,” said Adam Berman, deputy director at Energy UK.

“For manufacturers, UK companies that are exporting to their largest market will have a very significant tax imposed on them that will go into the EU budget when it once would have gone to the exchequer.”

CBAM will be phased in from 2026, reaching full strength by 2034, when free emissions allowances for industry in the EU are phased out.

It is possible the UK ETS will strengthen relative to the EU ETS in the coming years, while manufacturers may benefit from lower carbon prices in domestic markets and non-EU exports.

But the current weakness has made proposals to link the two carbon markets, a solution favoured by much of heavy industry and the energy sector, challenging.

The Office for Budget Responsibility forecast in March, before the UK’s carbon price collapse, that revenues from the UK ETS would total almost £37bn or roughly £6bn a year between 2022 and 2026. That was up from just £1bn in 2021-2022.

But the halving in the UK ETS price since then means the forecast revenues for the period are likely to be far lower. The UK has not ringfenced proceeds from the UK ETS for green investments, meaning they can be used by the Treasury for general expenditure.

The government has been approached for comment.

Additional reporting by Jim Pickard and Chris Giles in London and Alice Hancock in Brussels