Carbon border tax an important part of tax framework for net zero

A proposed carbon border tax could play a crucial role in achieving net zero emissions but will only be effective if it complements effective carbon pricing within the UK, the Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) have warned.

The Government has today launched a consultation on a range of measures designed to protect UK manufacturers from being undercut by countries with softer environmental rules, including a carbon border adjustment mechanism (CBAM), which would effectively impose a charge on some imports from those countries.

The proposed tax is likely to target energy-intensive products such as iron and steel, cement, aluminium and fertilisers, at first, and echoes a similar policy in the EU.

The CIOT/ATT’s Climate Change Working Group said the policy should be implemented in such a way that it does not restrict international trade purely to benefit domestic producers, while providing certainty for the future so businesses can plan accordingly.

Jason Collins, chair of the working group, said:

“A carbon border tax can play an important part in a ‘tax system to deliver net zero’, although we will need to ensure the tax does not become protectionism by the back door.

“The Government is taking a sensible approach by proposing a scheme that mirrors the European Union’s efforts to reduce carbon emissions. Beginning by targeting energy intensive sectors is a pragmatic and practical approach – but it is just a beginning.

“For too long we have reduced the carbon emissions from UK production, only to find ourselves importing from carbon intensive producers abroad. But it will not help save the planet to simply switch back now to UK production instead. We actually need to incentivise low carbon-emitting production at home and abroad. The carbon border adjustment will only be effective if it complements effective carbon pricing in the UK.”

ATT and CIOT added that, when developing a new tax, its administration must be considered from the outset. Simplification of the systems and processes for importing in-scope products needs to be considered by HM Treasury and HMRC, who are now responsible for embedding tax simplification into the UK’s tax code, as well as engaging with the Border 2025 project, which seeks to make the UK’s border one of the most efficient globally.

The consultation states that the Government will continue to support international cooperation on decarbonisation, including attempting to reach agreement on methodological issues. In 2021 the International Monetary Fund (IMF) published a proposal for an international carbon price floor arrangement, though this has achieved little traction so far.

Jason Collins continued:

“The IMF’s proposal for an international carbon price floor is a worthy aspiration, and if implemented globally could eliminate the need for border carbon adjustment. But it is not likely to be achieved globally any time soon. In the meantime, adoption of national and EU border carbon taxes incentivises the right behaviours by producers and exporting countries’ governments.”

In October 2021, the CIOT published a Climate Change Tax Policy Roadmap, in which it called on the government to deliver a long-term approach to taxation and climate change.

Jason Collins added:

“A longer-term approach to taxation and climate change would send a signal to businesses and taxpayers that they can plan ahead with confidence and certainty. Otherwise, government interventions will seem piecemeal, rather than strategic”.