CBAM!

Another punch in the face for UK manufacturing

The Carbon Border Adjustment Mechanism (CBAM) is not about the environment. It is just another tax. This time, it is an additional import tariff based on the Greenhouse Gas (GHG) emissions per unit weight when the item was produced. And unlike regular tariffs, there are no plans to exempt essential imports.

CBAM is an attempt to reverse the UK’s own goal of unilaterally applying three carbon taxes to its manufacturers decades ago. Well, not quite unilaterally, the EU also applied one of these carbon taxes, the Emissions Trading Scheme, in 2005. But the UK has two others: the Climate Change Levy, introduced in 2001, and the Carbon Price Support tax, introduced in 2013.

These emissions taxes were UK own goals because they drove industry out of the UK to avoid the extra taxes or drove UK industry out of business completely if it could not compete with imported goods made in jurisdictions with no emissions taxes. Some of these jurisdictions also have very few environmental regulations, and most still freely use coal for industrial heat and electricity generation. UK industry could not compete with goods produced using cheap energy and with no carbon taxes or environmental regulations, so it moved its manufacturing out of the UK, effectivly exporting UK emissions. The CBAM is meant to reverse this, but it is 25, 21, and 13 years too late.

The government is introducing an import tariff on the GHG emissions of imported Iron and steel, Aluminium, Cement, Fertiliser, and Hydrogen. This is truly a case of closing the stable door after the horse has bolted, as these goods are generally no longer made in the UK or not made in sufficient quantity to meet UK demand. Worse still, many are key input materials for the UK’s much larger and more important high-end manufacturing industries.

Timing is everything

If there was ever a good time to introduce an emissions tariff on imported goods, it was the same second the emission taxes were introduced on domestic manufacturers. Not 20 plus years afterwards. In today’s world of international trade, open markets and low shipping costs, it was industrially suicidal for the UK to wait until most manufacturers of primary base materials had gone out of business or offshored their production before introducing a similar emission tax on imports.

There are other problems with the current CBAM proposal besides the timing: for a start, it will only equalise the ETS payment that would have been charged if the material had been produced in the UK, but not the CPS and CCL costs, or the cost of the many other environmental regulations that UK industries must follow. There is also the cost of monitoring and recording all imported CBAM materials, even if only to demonstrate to HMRC that their value is below the £50,000 threshold, beyond which CBAM must be paid. Thirdly, many industries and products that must pay ETS, CPS, and CCL taxes are not on the CBAM list. These companies will not receive any CBAM protection from their imported rivals, but they may find that their imported input materials are more expensive due to CBAM.

Complex products are too difficult to tax

The Government is not proposing to apply CBAM to complex products as it is too difficult. Complex products have many components, often produced in multiple countries and by various methods, making it difficult, if not impossible, to calculate the end product’s total emissions and to determine whether those emissions occurred in countries with emissions taxes.

But while it may be easier to apply a CBAM to base materials such as iron and steel, aluminium, and fertiliser, the UK has ceased producing many of the goods in these CBAM categories. In the case of fertiliser, the UK has completely ceased producing fertiliser ingredients such as Ammonia and Nitric Acid, as well as complex 2- and 3-ingredient fertilisers, but both the ingredients and the finished products will have CBAM added to their import price. UK aluminium production has dropped to a mere 5% of UK demand, but imported aluminium sheets, tubes, wires, and components will also have CBAM added to their import prices. And UK primary steel production is now less than 2 million tonnes, but imported steel products will have both CBAM and 50% tariffs added to the import price.

There are few remaining competitive domestic producers.

Although the production of these CBAM commodities can emit substantial greenhouse gases, unless there are competitive domestic producers that are subject to the UK’s ETS, there is little point in applying a CBAM to imported materials. Applying a CBAM just increases the costs borne by downstream users of these materials, who will attempt to pass the costs on to their customers if they can.

Unfortunately, for export industries such as the UK’s car manufacturers and aircraft parts manufacturers, passing on the cost of CBAM will be difficult, as they have to compete in international markets with products made in countries without carbon taxes and with cheap coal. However, producers of goods predominantly for the UK domestic market, such as cereal farmers, will have no choice but to pass on the increased cost of fertilisers to their food manufacturing customers, who will in turn pass it on to consumers.

So a tariff designed to reverse a market distortion created by carbon taxes will itself create another market distortion, further driving up manufacturing costs in the UK and pushing more manufacturers out of the UK or out of business. Maybe it is time to consider a new solution for emissions reduction. Maybe we should encourage companies to make their UK facilities more efficient by using tax-deduction carrots rather than emission-tax sticks.

For more information about CBAM, UK deindustrialisation, and alternative solutions to reduce externalities, read my new paper for the GWPF.