UK exporters face hefty EU carbon tax bill after Sunak weakens climate policies

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Rishi Sunak has weakened UK climate targets, leaving UK exporters facing hundreds of millions of pounds in EU carbon border taxes over the next decade – revenue that would otherwise go to the Treasury.

Britain’s carbon market, which sets the price big manufacturers and energy companies must pay for each tonne of carbon dioxide emitted, has collapsed after the Conservative government weakened a number of green measures.

UK emissions prices have fallen to less than half of EU emissions prices in recent months, with previous deals approaching parity.

The EU’s upcoming carbon border tax system will seek to penalize countries with far lower carbon costs than EU countries. The fall in UK emissions prices therefore means UK exporters to the EU will be liable for EU taxes when they come into effect in 2026.

A lower emissions price also means the UK Treasury will receive less revenue from carbon pricing; in effect, the changes will shift part of companies’ carbon bills from Westminster to Brussels.

Chief analyst Marcus Ferdinand said: “British industry will still pay for emissions exports to the EU, but they will go to Brussels rather than paying taxes to the Treasury, which has earmarked the revenue for further Invest in the renewable energy industry.” Official at carbon consultancy Veyt.

EU exporters must start recording the carbon emissions in their products from Sunday, as an early trial period for the EU’s Carbon Border Adjustment Mechanism (CBAM) begins.

Under CBAM, countries wanting to export to the EU must prove they have set equivalent carbon prices from 2026 or pay fines to make up the difference. The aim is to protect EU industry from countries with less stringent emissions markets.

The mechanism will cover steel, cement, aluminum, fertilizers, hydrogen and power generation. During the pilot period, exporters only need to report their emissions and do not need to pay levies.

Last week, the price of the UK Emissions Trading System (UK ETS) fell to a record low of almost £33 a tonne, a day after Sunak gave a speech weakening climate provisions such as delaying the phase-out of petrol and diesel cars. The UK emissions trading system peaked at nearly £100 per ton last year.

The EU equivalent, known as the EU ETS, is trading at €82 (£71.10) per tonne.

Ferdinand said: “If the carbon price gap persists, the total amount paid by UK exporters to the EU could easily rise to hundreds of millions of pounds by the start of the next decade.”

The UK energy industry has warned that electricity exports from wind farms, solar and nuclear plants will also be subject to a carbon import tax, even though electricity exports themselves have lower emissions.

As more than 40% of the UK’s electricity is still generated by burning natural gas or coal, a similar portion of the CBAM tax will be levied on all UK electricity imports, as the EU cannot easily tell whether imported electricity comes from clean or dirty sources, industry UK energy agency issued Warning.

Adam Berman, deputy director of British Energy, said: “This is a real problem because UK wind farms that were planning to send a lot of their electricity to the EU during windy weather may find themselves being priced out of the market.”

“For manufacturers, UK companies exporting to their largest market will be subject to very high taxes, which will go into the EU budget, whereas previously they would have gone into the Treasury.”

CBAM will be implemented gradually from 2026, reaching full intensity in 2034 when free emissions quotas for EU industry are phased out.

The UK ETS is likely to strengthen relative to the EU ETS over the coming years, and manufacturers are likely to benefit from lower carbon prices in the domestic market and non-EU exports.

But current weakness makes proposals to link the two carbon markets challenging, a solution favored by many heavy industry and energy industries.

The Office for Budget Responsibility predicted in March that UK ETS revenue would total close to £37 billion between 2022 and 2026, or about £6 billion a year, before the UK’s carbon price collapsed. This is up from just £1 billion in 2021-2022.

Line chart of import-embedded emissions share covered by CBAM (%) shows increase in EU CBAM from 2026

But the subsequent halving of UK ETS prices means forecast revenues for that period are likely to be much lower. The UK has yet to use the proceeds from the UK Emissions Trading System for green investments, meaning the Treasury can use them for general spending.

英國能源安全和淨零排放部表示，自1990 年以來，英國已將排放量減少了48%，政府「設定了一條排放軌跡，使我們走上淨零排放之路，為企業提供了長期脫碳signal”.

The government will reduce “the planned emissions cap” from next year, while the price of the UK ETS “will be determined by the market”, the department added.

The reductions announced in July were smaller than many traders expected and came with the release of additional carbon allowances to industry between 2024 and 2027, which accelerated the decline in UK ETS prices.

Additional reporting by Jim Pickard and Chris Giles in London and Alice Hancock in Brussels

This article was revised after publication to include a government response