UK and EU boost co-operation over new carbon border tax

Britain and the EU are boosting co-ordination of efforts to tackle climate change and respond to a massive US green subsidy programme, in a sign of warming relations between the two sides.

Rishi Sunak, prime minister, said this week that Britain and the EU could co-ordinate moves on a new carbon border tax that would place a levy on imported carbon-intensive goods arriving in Europe.

On Thursday, the government will launch a consultation on whether to introduce a UK “carbon border adjustment mechanism” as part of a broader net zero strategy.

Grant Shapps, energy secretary, said the consultation would address the risk of future “carbon leakage”, where businesses move production to a country with weaker climate regulations in order to avoid paying a carbon levy.

Sunak told MPs this week the government was making progress on a so-called “CBAM”, saying the idea was “reasonable and sensible” and that, while he was UK chancellor, he had discussed the issue with German leader Olaf Scholz.

Sunak told the Commons liaison committee there “may be opportunities for co-operation” with the EU, just as the two sides had been in talks over their emissions trading schemes.

British officials said the aim was to work with like-minded countries and that the UK and EU were giving serious consideration to linking their carbon pricing systems. “It makes sense,” said one.

Meanwhile, Kemi Badenoch, UK trade secretary, on Wednesday held talks with Valdis Dombrovskis, EU trade commissioner, to discuss a co-ordinated response to US president Joe Biden’s controversial Inflation Reduction Act.

Badenoch’s allies said Biden’s $369bn subsidy programme threw up similar challenges for both the EU and UK, along with other allies of Washington, such as Australia and Japan.

Jeremy Hunt, chancellor, told MPs on Thursday he would publish a full response to the IRA later in the year. “That doesn’t necessarily mean matching subsidy for subsidy, but it means that making sure the overall package, which means people choose to invest in the UK, remains attractive,” he said.

Discussions between London and Brussels on climate-related issues are the latest signal of improving EU-UK relations following the resolution last month of a corrosive row over post-Brexit trading relations in Northern Ireland.

The Treasury raised the prospect of a CBAM in its net zero review in October 2021, although warned that the process could be hugely complicated to implement.

The EU’s CBAM, which is close to approval and will start levying charges in 2026, has already proved controversial. China has asked for discussions at the World Trade Organization, saying it could be discriminatory.

The tax seeks to level the playing field for the domestic companies regulated by the EU’s emissions trading system, by imposing a levy on imports of carbon intensive products.

The similar designs of the UK and the EU emissions trading systems leaves open the possibility of formally linking the two.

Sarah Williams of Green Alliance, an environmental organisation, said that linking the UK and EU “carbon pricing systems makes a lot of sense” and that the Northern Ireland deal opened “the opportunity to build a more co-operative relationship with the EU”. 

Jonny Peters, a senior policy adviser at climate change think-tank E3G, said a UK CBAM was likely to look very similar to the EU’s, since both would be covered by WTO rules, and the UK and EU emissions trading systems are “pretty much identical”.