Another punch in the face for UK manufacturing
CATHERINE MCBRIDE
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.
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.
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.
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.
See Related Article Below
Soaring energy bills ‘risk factory closures’
Fuel costs threaten job losses and £85bn hit to the economy, say manufacturers
JONATHAN LEAKE, EIR NOLSOE
Ed Miliband’s net zero push is adding to soaring energy bills that risk triggering factory shutdowns and job losses, warns a new industry report.
Make UK, which represents 20,000 manufacturing firms, says that the cost of energy is destroying profits, sending many companies to the wall and risking an £85bn hit to the economy.
Stephen Phipson, the Make UK chief executive, said: “High energy costs are one of the biggest threats to the future of manufacturing in the UK.”
He added: “UK companies want to invest, innovate and decarbonise, but they cannot do so while electricity prices remain internationally uncompetitive.
“We are not asking for subsidy. We are asking for an energy system that allows them to compete … Without urgent action, we risk losing industrial capacity that will be extremely difficult to rebuild.”
According to the study, 90pc of manufacturers have seen sharp rises in energy bills since 2022 – and that 13pc of manufacturers fear further increases will destroy their business.
Since UK manufacturing adds about £650bn to the UK economy annually, the loss of that 13pc would cut that wealth generation by £85bn.
This would be a devastating blow, given that the share of GDP coming from manufacturing has shrunk from 17pc of GDP in 1990 to just 8pc now.
[…]
Make UK says a key cause of the UK’s high energy costs is the way Mr Miliband and his predecessors have loaded the cost of subsidies for renewables on to energy bills – known as policy costs.
These are used to give wind, solar and nuclear plants a guaranteed minimum price for the power they produce.
It says manufacturers support the UK’s move to low-carbon energy but calls for policy costs to be removed from energy bills and moved on to general taxation.
It also criticises Mr Miliband’s failure to revise the way UK electricity is priced.
Electricity produced by burning gas has lower running costs than most other forms of generation, but the final price is much higher because of government carbon levies.
Those levies, the UK emissions trading scheme and the carbon price support system, typically account for 40pc of the final cost of electricity made from gas – turning it from among the cheapest to the most expensive form of generation.
This means gas sets the prices paid to all other generators too, raising them to a level far higher than in rival countries.
Data published last month by the Government showed that in 2024 – the latest year for which figures are available – UK industry was paying about 27p per kilowatt hour, compared to 16p in France, 21p in Germany and 6p in the US.
Overall, UK industrial power prices were 63pc above the median for members of the International Energy Agency.
The Telegraph: continue reading
