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Addressing carbon leakage risk to support decarbonisation: A consultation on strategic goals, policy options and implementation considerations
The UK has ambitious climate change goals, including a target of net zero UK emissions by 2050, and is adopting a range of policies to support these objectives. However, these efforts risk being undermined by the import of products from jurisdictions with fewer restrictions on carbon-emitting activities: ‘carbon leakage’.
The Department for Energy Security and Net Zero and HM Treasury concluded a public consultation in June 2023 on a number of proposals that aim to minimise risk of carbon leakage, including in particular a Carbon Border Adjustment Mechanism (CBAM), similar to the mechanism adopted by the EU in May 2023, and mandatory product standards (MPS). These measures build on proposals by the Climate Change Committee (CCC) in its Sixth Carbon Budget.
CBAM
Some elements of the proposal should be welcomed in principle, and it represents the beginning of a significant policy intervention by the UK government in line with its climate change ambitions. However, this is a vastly complex undertaking, with many moving parts. Freshfields’ response to the consultation highlighted key issues from an international law perspective in particular, urging careful consideration be given to the CBAMs interaction with other policies including the UK’s overall carbon budgeting, economic considerations and international trade obligations in particular:
- The Emissions Trading System (ETS): The phased withdrawal of free allowances must be coordinated with the introduction of appropriate CBAM charges in a predictable and clear way, so businesses can plan investments effectively.
- Carbon pricing and metrics: The consultation document recognised the challenges associated with calculating the CBAM charge. This will require developing carbon accounting methodologies and standards that are fair, practical and internationally accepted, and that accurately capture emissions along the value chain. Careful consideration will need to be given to the interaction between CBAM methodologies and those used in adjacent carbon regimes, including for example, mandatory and voluntary carbon offsetting, and Carbon Capture, Usage and Storage (CCUS) activities. At a time when many global businesses are planning investments to implement their net zero transition plans, there are clear benefits in the UK developing a cohesive and predictable approach as a priority.
- Default values in emissions measurement: Building on the challenges regarding carbon methodologies, and recognising the difficulties associated with inspection and verification, the consultation document contemplated resorting to default values. These default values should aim to estimate the carbon content of products as accurately as practicable, including through the use of product- and country-level values, datasets and/or values derived from UK emissions data. Care must be taken to ensure that the measures are not unjustifiably discriminatory under the UK’s international trade obligations. At a minimum, a UK CBAM should contain clear legal rules that (i) detail under which circumstances default values can be adopted and (ii) how these default values are calculated.
Mandatory product standards
The consultation document sets out a proposal on Mandatory Product Standards (MPS), which in addition to (and separate from) any CBAM, would “set an upper limit on the embodied emissions for individual products placed on the UK market, or produced in the UK, prohibiting products which are more emissions intensive than a defined limit.” These rules would apply to domestically produced and imported products, with a potential exemption for exports. The Consultation Document acknowledges that there are significant decisions to be made in the development of any MPS – the products, the scope of emissions, where in the value chain emissions are assessed, which may require sector-specific regulations.
We consider that to comply with the UK’s international trade obligations, the government would need to ensure that any such product standards do not constitute unjustified discrimination against products produced in different countries, and are the least trade restrictive measures reasonably available for the UK to achieve its climate objectives. This is not a straightforward exercise.
Policy implications
The implementation of the policy suite set out in the consultation document will likely have a range of impacts on, and interaction with, other climate-related policies and regulatory regimes. In our response, we have commented on a number of these:
- Government procurement: Any new carbon leakage measures will need to align with existing carbon reporting obligations in public procurement processes. These include the Industrial Deep Decarbonisation Initiative pledge levels and the Procurement Policy Notes, including on Carbon Reduction Plans, Social Value and Modern Slavery.
- Developing countries: The consultation document suggested that the UK government should support ‘countries at differing stages of development to the UK’. In this respect, it is relevant to note the relevance of the principle of Common but Differentiated Responsibilities (CBDR). This principle, which emerged from the United Nations Framework Convention on Climate Change (UNFCCC), recognises that countries have different historical responsibilities and varying capabilities to address climate change. The policy mechanisms proposed in the Consultation Document do not appear to have considered how they will accommodate this principle, which will likely be of much interest to developing countries going forward. On the other hand, it is not entirely clear how far the UK’s international trade obligations provide flexibility to lessen the CBAM burden for developing or least developed countries. We expect to see further analysis on these issues, from both a policy and a legal perspective.
- Carbon credit frameworks: Any regimes implementing the Consultation Document policies will invariably require manufacturers and producers to evaluate their greenhouse gas emissions and provide greater incentives to identify and invest in industrial decarbonisation measures. Depending on the terms of any such regimes, it may be possible for businesses to voluntarily purchase or invest in carbon credits or carbon offsets to ‘green’ products (although the majority of respondents to the consultation did not support this approach). Procurement of carbon credits and offsets is still in a nascent stage, and there is no formal, government-regulated market for carbon credits and offsets.
