Why CBAM is a punch to the face of British business

THE CURRENT UK Government is divided in its attitude to emissions trading and carbon tariffs on imported goods: one side of the government wants the UK to join the EU’s Emissions Trading System (ETS) and its Carbon Border Adjustment Mechanism (CBAM), while the UK’s revenue and customs department (HMRC) is still publishing policy papers about the UK’s own CBAM proposal that is meant to start in January 2026, just 3 months away.

My latest paper for the Great British Business Council (in full here) reviews the UK’s current CBAM proposal, the previous government’s proposals, and the EU’s CBAM, comparing how the schemes are calculated, how they would affect the essential import materials of the UK’s most important industries and whether the UK needs to join the EU’s scheme to protect its exports to the EU.

The paper also analyses the industries covered by both the EU’s and the UK’s proposed CBAM; in most cases, UK carbon taxes have already led these industries to close or offshore their production. The result of introducing a CBAM now will only increase costs for downstream commodity users, generally much larger industries and important exporters, whose products will be made less price-competitive internationally by the CBAM’s impact on their input materials.

Finally, the paper also discusses more effective free-market solutions to reduce industrial GHG emissions while improving productivity through innovation and lower CAPEX costs. 

Encouraging innovation and investment in new, more efficient plant and equipment is an effective way to lower emissions and is likely to yield better results than protecting inefficient equipment and production methods with carbon tariffs on imported materials. This is especially true for carbon taxes on imported materials that are necessary inputs for the UK’s larger and more valuable downstream industries.

This paper does not question whether CO₂ is beneficial or detrimental to the environment, but rather whether paying for externalities, such as CO₂ emissions, through domestic carbon taxes, an Emissions Trading Scheme (ETS) – or adding a Carbon Border Adjustment Mechanism (CBAM) to imported goods – achieves its intended aims of reducing emissions. Or do these measures become just another tax that is detrimental to UK industry and the UK economy?

In summary

• It appears the UK is getting a Carbon Border Adjustment Mechanism (CBAM), whether it needs one or not, even though neither the current EU CBAM nor the proposed UK CBAM will protect UK industry. In fact, both will increase costs for downstream users of imported steel, aluminium, and fertilisers. But they will not protect the UK’s valuable chemical, ceramic, or glass industries.

• Both the UK and EU have Emissions Trading Systems (ETSs) and CBAMs, but they differ significantly in price and operation. The UK Prime Minister still wants the UK to join the EU’s ETS and CBAM, even though this would increase import prices for UK industry. Meanwhile, the UK’s HMRC is still planning to start the UK’s CBAM program from January 2027.

• The UK CBAM is based on imported value and has a single product default value for all import suppliers, while the EU CBAM is based on weight and has a different emission default value for every major exporting country and each CBAM product at the 10-digit HS code level.
• The UK’s ETS price is around 20 per cent cheaper than the EU’s ETS price. Joining the EU’s ETS will , as a direct consequence, push up carbon prices for all UK manufacturing and construction industries.

• The UK has largely stopped producing the products covered by both the UK and EU CBAMs. Imposing a CBAM now will only harm upstream manufacturers that rely on these imports to make higher-value goods.

• Both the UK and EU CBAMs are designed to equalise the carbon cost of domestically produced goods with the carbon costs of imported goods, but this only works if the goods are still produced domestically at a competitive price.

• Neither the UK nor the EU CBAMs compensate for the other existing environmental taxes and levies applied to UK manufactured products.

• A CBAM will not compensate manufacturers for the UK’s higher commercial gas prices, which include the Climate Change Levy and Carbon Price Support. In September 2026, UK gas prices are 8.5 times higher than US natural gas prices. This differential has doubled since the closure of the Strait of Hormuz.

• The UK’s Jackdaw gas well was ready to start production in 2026, but the Labour government withdrew its approval and has delayed re-approving it to help prevent the Green Party winning a parliamentary by-election.

• UK carbon taxes have only increased domestic production costs, making UK companies less competitive internationally and forcing many to close or relocate their manufacturing plants out of the UK. The UK has replaced domestic production with imported goods, many of which are made in countries that, ironically rely primarily on coal for energy.

• Of the five proposed CBAM commodities, only the UK’s cement industry and budding hydrogen industry could possibly benefit from CBAM protection now, as the majority of cement and hydrogen used in the UK is still produced domestically.

• A CBAM will not, however, make UK production of either cement or hydrogen more efficient as long as the UK continues to have expensive industrial electricity and imposes high emissions taxes on these industries. Instead, a CBAM could provoke a trade war with the UK’s most important import suppliers.

• Glass and ceramics, two commodities previously proposed for CBAM protection by the former Conservative government, could have benefited from CBAM protection. But lower energy costs would benefit glass and ceramic producers far more. The Labour government is offering £120 billion in support to prevent these industries from closing, but another glass manufacturer went into liquidation as I was writing this paper. The Government compensation scheme cannot make up for the UK’s gas prices, which are now over 8 times the US natural gas price.

• Neither the UK’s nor the EU’s CBAM will cover chemicals other than those used to make fertiliser, even though the UK no longer makes these products. Meanwhile, INEOS has announced that it is closing its Acetyl plants in Hull because of the high gas and carbon taxes in Europe, making it impossible to compete with imported chemicals from the US and China.

• Increasing taxes on activities that produce externalities is the least effective way to reduce the externality, if that is the aim. Taxes rarely stop the externality, and governments have a vested interest in keeping the externality going while collecting revenue from the supposed virtuous intention of reducing it.

• Emissions Trading Schemes are not ‘market solutions’ to CO₂ emissions, as only the government can issue allowances: effectively mandatory licences to emit Greenhouse Gases (GHG)_, but sequestration companies that are genuinely reducing CO₂ cannot monetise their emission reductions on the ETS market.

• Most UK manufacturing industries must buy ETS allowances; many receive some free allowances from the government, while service industries are exempt. This is effectively the government ‘picking losers’ – industries whose products will be replaced by imports.

• Any emissions trading system should include a product’s expected lifespan in its emissions calculations. Currently, aluminium used to make a plane wing that could last 30 years is taxed at the same rate as aluminium used in a drink can that will last for about 30 days.

• Scrap both the ETS and CBAM entirely, and instead, accelerate innovation using tax deductions for more efficient plant and equipment. Much of the UK’s low industrial competitiveness stems from its outdated factories, blast furnaces, smelters, refineries, and power plants. Taxing their emissions has left companies with insufficient cash flow to invest in plant and equipment upgrades.

• If low-emission technologies become cheaper, more productive, and more reliable than existing technologies, businesses and consumers will adopt them voluntarily. The principal policy objective should therefore be to reduce the cost of innovation and investment in order to reduce emissions.

• Reducing CAPEX costs is key to both improving competitiveness and accelerating innovation. Competitive markets make it easier, cheaper, and faster for competitors to deploy innovations leading to lower emissions.

• It will always be in a manufacturer’s interest to operate as efficiently as possible. It will always be in a country’s interest to have efficient industries by accelerating innovation, efficiency, and technological transition, simply by reducing costs and burdens.

To read or download the full paper on CBAM please go to this link.