An advantage in the industries of the future belongs to countries that are leaders on decarbonising. That is why so many advanced economies have implemented domestic carbon pricing – a tax on the amount of carbon manufacturers produce – to encourage their industries to change with the times.
But simply having a carbon price is no longer enough. It leaves the door open for high-carbon imports to undercut domestic firms, risking industries moving elsewhere to countries that don’t see the long-term economic opportunity of decarbonisation. The EU has been the first to try to close this loophole and is phasing in a Carbon Border Adjustment Mechanism (CBAM). It works by applying the same carbon price to imports as domestic suppliers.
We must take our own steps towards a CBAM at the Autumn Statement, show how a CBAM is compatible with free trade, and ensure the UK’s manufacturing industries remain competitive by levelling the playing field for the sector.
Our manufacturing industry continues to be a critical part of our economy. From April to June 2023, the manufacturing sector accounted for 9.4 per cent of total UK economic output and currently employs 2.5 million people. The manufacturing sector is the cornerstone of many communities across the North of England and Wales; manufacturing currently makes up 16 per cent of Wales’ total economic output.
In recent years, our manufacturing industries have taken impressive steps to decarbonise. Emissions from the UK steel industry have fallen from an average of 2.3 tonnes of carbon dioxide per tonne of steel in 2011, to an average of 1.58 tonnes of carbon dioxide in 2023, predominantly due to greater energy efficiency.
But, the industry still has a long way to go on its road to decarbonisation. Manufacturing has proven to be one of the hardest to decarbonise as it requires huge amounts of energy to generate very high temperatures, and, consequently, still makes up for 11 per cent of our carbon emissions.
We must, therefore continue to make strides to decarbonise. If we fail to act quickly and future-proof these industries, we risk damaging left-behind communities even further who will lose one of their most important sources of employment as the world demands lower emissions products. Simultaneously, if we continue to foster new clean manufacturing technologies, we can become world leaders and export both our goods and ideas. The risks and opportunities for this sector are too grave to ignore.
That is why successive Conservative governments have done their part in helping the transition. In 2021, we introduced our own carbon pricing regime, the UK Emissions Trading Scheme, which requires industry to buy permits for their emissions.
At the 2018 budget, the Chancellor announced the Industrial Energy Transformation Fund, providing grants to help industry invest in decarbonisation. And the ETS provides free carbon allowances to energy-intensive industries at risk of offshoring. These measures have played a huge role in mitigating against carbon leakage whilst encouraging our industries to decarbonise.
However, if we don’t respond to the EU’s announcement with our own plans for a CBAM, we will be preventing our manufacturing sector from being internationally competitive, whilst undermining their efforts to decarbonise.
As carbon-intensive products will no longer be welcome in the EU, they will flood into the UK market, offering UK companies now cheaper, but still dirtier, manufactured goods. Although it might be tempting to consider this a good thing, it is a wolf in sheep’s clothing, as we will be wasting the economic opportunity from green manufacturing, whilst doing nothing to tackle global emissions.
As Conservatives, we are strong champions of free trade as it improves economic efficiency. But, there are no efficiency gains if imported goods are cheaper than domestically produced ones solely due to differences in environmental regulation.
And we must continue to champion these market-based solutions internationally. We don’t just want to copy the EU’s CBAM design, but do it better, with a pro-free trade spirit that has been a staple of our country’s economic success for generations. We should champion the liberalisation of trade in clean goods and help developing countries to go green so they aren’t disadvantaged.
Furthermore, CBAM will take further financial burdens off the taxpayer and put them on the polluter. The CBAM revenue can be recycled for domestic net zero projects or support households with energy bills, while we can also start to phase out free allowances – which are becoming increasingly expensive – for the industrial sector as a complementary policy to a CBAM.
The decarbonisation of the world economy is coming faster than we think. For years, the UK has been a global leader in the net zero transition. The next big change coming down the track is CBAM, and the Chancellor cannot miss this opportunity to ensure we remain ahead of the curve.