UK exporters will be hit with a hefty EU Carbon Tax Bill after Sunak’s weakening of climate policies

The UK’s climate targets have been weakened by Rishi Sunak, leaving British exporters to face hundreds of millions in EU border taxes on carbon within the next 10 years — revenue that would otherwise have gone to the Treasury.

After the Conservative government weakened a number green initiatives, the UK carbon market collapsed. This is because the market sets the price that large manufacturers and energy firms must pay per tonne CO2 they release.

UK emission prices have droppedto half of the EU equivalent over the past few months after trading near parity previously.

The EU will introduce a carbon tax at the border to punish countries that have lower carbon prices than its own. The drop in UK emission prices will mean that British exporters into the EU in 2026 will be liable for the EU’s tax.

The UK Treasury will also generate less revenue through carbon pricing. In effect, the changes will redirect a portion from Westminster’s carbon bills to Brussels.

“UK industry will continue to pay for emissions on exports into the EU but instead of tax going to Treasury, these revenues will go to Brussels which has earmarked them for further investments in renewable industries,” Marcus Ferdinand, Chief Analytics Officer at Veyt, a carbon consultancy.

Beginning Sundayexporters of products to the EU must begin recording the carbon emissions in their products, as the early-trial period for the EU’s carbon border adjustment mechanisms, also known as CBAM begins.

CBAM requires that countries who want to export into the EU by 2026 must either have a carbon price equivalent in place, or pay penalties for the difference. The goal is to protect EU industries from countries that have less strict emissions markets.

The mechanism will include iron, steel and aluminium. It will also cover fertilisers, hydrogen, and electricity production. During the test period, exporters are only required to report their emissions and not pay the levy.

Last week, prices for the UK Emissions Trading System fell to a record low of almost £33 per tonne. This was the day following Sunak’s speech in which he outlined weakened climate provisions like delaying the phaseout petrol and diesel vehicles. Last year, the UK ETS reached a high of almost £100 per tonne.

The EU ETS is currently trading at €82 per tonne.

If the carbon price gap persists, the total UK exporters’ payment to the EU may easily reach hundreds of millions by the beginning of the next decade.

The UK energy sector warns that even though they produce low levels of emissions, the electricity exported from solar, wind and nuclear power plants will be subject to import taxes on carbon.

Energy UK, the industry group, warned that the EU could not easily determine whether the imported electricity came from clean sources or dirty ones.

Adam Berman is the deputy director of Energy UK. He said: “It could be a big problem for UK wind farms who had planned to export a large amount of their production to the EU during very windy conditions. They may find themselves priced off the market.”

“UK companies exporting to their biggest market will be subject to a significant tax that will go to the EU budget instead of the exchequer.

CBAM will gradually be introduced from 2026 and reach full strength by 2034 when the free emission allowances for industries in the EU is phased out.

In the future, it is possible that the UK ETS could become stronger than the EU ETS. Manufacturers may also benefit from a lower carbon price in domestic markets as well as non-EU exports.

The current weakening of the carbon markets has made it difficult to propose a linkage, which is favored by heavy industry and energy.

In March, the Office for Budget Responsibility predicted that the UK ETS revenues would reach almost £37bn, or approximately £6bn per year, between 2022-2026. This was an increase from only £1bn between 2021-2022. But the halving in the UK ETS price since then means the forecast revenues for the period are likely to be far lower. The UK has not ringfenced proceeds from the UK ETS for green investments, meaning they can be used by the Treasury for general expenditure.

The Department for Energy Security and Net Zero stated that the UK has cut emissions by 48% since 1990 and “set an emission path that puts us on the path to net zero and provides a long-term signal for decarbonisation for business.”

The department said that the government would reduce the “scheme’s emissions cap” starting next year, and the price for the UK ETS is “determined by the market”.

The reduction in price announced in July was less than what many traders expected. It was also accompanied by an increase in carbon allowances for industry between 2024-2027. This accelerated the decline in the UK ETS prices.