Out-Law News 3 min. read

UK carbon pricing plans may cause implications for infrastructure

A planned import carbon pricing mechanism in the UK could increase costs for existing and future infrastructure projects, an expert has said.

The UK government has indicated that it will seek to implement a carbon border adjustment mechanism (CBAM) in 2027, as a decarbonisation measure.  Once implemented, it will mean that goods imported to the UK from countries with a lower or no carbon price will have to pay a levy, ensuring that products from overseas face a comparable carbon price to those produced in the UK. A carbon price is a cost related to the carbon generated by commercial activity to encourage companies to reduce the carbon their processes generate.

Although the Government has yet to publish any proposals as to how it intends to implement CBAM, the intention behind these rules would be to tackle ‘carbon leakage’, ensuring that countries with low or no carbon prices do not gain a competitive advantage. Without such a mechanism there is a risk that highly traded carbon-intensive products - such as iron, steel, aluminium, fertilisers, glass, and cement – would be cheaper when bought from places where there are fewer carbon mitigation measures.

Ultimately, CBAM rules would seek to ensure production and associated emissions are not displaced, with carbon leakage having the potential to undermine UK decarbonisation efforts.

Although any CBAM legislation would be subject to public consultation, it is expected that the rules will apply to most components used in construction and infrastructure projects. Often the contracts governing the supply and importation of these goods are signed years in advance.

Dr Totis Kotsonis, trade and subsidy control expert at Pinsent Masons also noted that, “the government’s announcement that it intends to implement legislation on CBAM comes as no surprise.  The EU has already implemented its own CBAM, with reporting obligations already in place for EU imports of products that will be subject to the new levy, when the EU CBAM legislation comes fully into effect in 2026.   There have been concerns for some time, that unless the UK also implements its own CBAM which is consistent in scope and effect with the rules that apply in the EU, the UK might become a ‘dumping ground’ for imports that would otherwise have been subject to the new EU import levy.” 

Under current UK plans, the sectors to be covered would differ to those that are covered under EU rules.  In this regard, Kotsonis added “It would be interesting to see the extent to which a future UK Government might in fact seek to ensure that UK CBAM is always in step with the EU equivalent, to avoid the risk that products that are subject to the EU CBAM find their way into the UK domestic market instead.  It is also worth mentioning that a number of stakeholders in the UK have expressed concerns that the current intention of introducing a UK CBAM a year after the EU potentially creates greater exposure for the UK market.  It is possible that the Government’s intention in this regard is related to the fact that certain WTO members, not least India, have criticised the EU CBAM and indicated their intention of challenging it as incompatible with WTO rules.  Perhaps the UK Government is minded to wait and see whether such challenge will materialise before it implements a similar measure in the UK.”

Bryn Reynolds, tax expert at Pinsent Masons said: “Understanding where the liability for any additional sum payable on import under the UK CBAM will be essential and should be considered now by suppliers and customers. Financial planning and analysis professionals will also need to consider how this may impact the financial viability of long-term projects.”

Reynolds said “it will also be important for guidance to be issued as soon as possible. Currently companies are relying on an assumption that that charge will, broadly, be calculated in a similar way to the EU CBAM – however, without guidance it is unclear whether this will be the case.

There are also potential practical implications for tax, commercial and legal teams across the UK. For example, as with the plastic packaging tax, this is likely to require tax teams to use reporting data outside the usual financial metrics included on ERP (enterprise resource planning) systems.

“Reporting requirements are likely to arise well in advance of any tax being due,” said Reynolds. “These reporting requirements should be being tracked by businesses. Given the nature of this additional charge, it is unlikely that a ‘soft landing’ approach will be adopted but we await further guidance”.

Penny Simmons, tax expert at Pinsent Masons, said “although the CBAM is welcome from a decarbonisation perspective, it remains disappointing that that the government has made no progress in reviewing how the UK tax system can be used more widely to support the transition to net zero - particularly as a way of encouraging businesses to decarbonise their supply chains and incentivising the development of green technology.”

Recommendations for a wide-ranging review of UK tax policy to support the transition to net zero were made in last year’s Skidmore review and have featured in several reports published by the Climate Change Committee.

Co-written by Penny Simmons of Pinsent Masons

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