PRESS RELEASE: British households to become £2400 poorer from new EU-style tax

• UK households would become £2,400 poorer as a result of Government’s new Carbon Border Adjustment Mechanism (CBAM) tax measures
• Government expected to launch second consultation on the detail of CBAM legislation on Thursday 21st March
• Growth Commission warns of slippery slope of other widely-used consumer products falling under the new tariffs increasing costs to the public
• New Growth Commission research says new UK Carbon Border Tax is counter-productive for long-term and short-term economic growth.According to the Commission’s Growth Model, the increased tariffs would immediately reduce the UK’s ability to push back against economic stagnation.

New Research from the Growth Commission’s Spring Growth Budget says an EU-style Carbon Border Tax to be implemented by 2027, with second round of Government consultations to be launched tomorrow, will further damage UK growth. An EU style carbon border adjustment mechanism (CBAM) will increase the costs of goods including iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors in an attempt to prevent ‘carbon leakage’ from countries where there is no carbon pricing, selling products into the UK.

The Growth Commission has said that this could mean a decrease in overall GDP per capita of 3% over the length of time of its implementation. Assuming five years to fully implement these proposals, this would be 0.6% GDP per capita losses compounding year on year. Modelling* the effects of an EU style CBAM, even without exact Government proposals which are due to be consulted on this year, would show a significant decrease in the UK’s ability to push back against economic stagnation. Current Government proposals are based on the difference between the carbon price paid by EU producers under the EU Emissions Trading System (ETS) and the carbon price (if any) paid by producers in the exporting country. The UK is set to follow suit using the EU’s model, but the consultation on precisely how the UK’s system will work is expected to be launched tomorrow. The final design of the system is not yet set out and the exact impact on the economy cannot yet be calculated. 

The Growth Commission has recommended an alternative in their Spring Growth Budget which the Trade and Agriculture Commission suggested in 2021 of a tariffication mechanism based on the scale of a distortion* where a deviation from a country’s climate obligations for trade advantage, would be a distortion that could be tarifficated. 

The Government has committed to these measures at a time when UK taxation at its highest on record and stagnant economic growth is forecast for the foreseeable future without significant fiscal intervention.

Ends

Comments

Shanker Singham Co-Chairman of the Growth Commission said:
“Replicating the EU CBAM will be costly for the UK economy and is not necessary to achieve the goal of dealing with carbon leakage. While 6 products are currently covered many more are in the pipeline in the European scheme. The Growth Commission’s proposals in general create the possibility of increasing GDP per capita by 28% over twenty years – just over 1% per year.  Losing thirty or so per cent of that through a muddle-headed approach to carbon leakage would damage UK households unnecessarily. Other options such as the mechanism proposed by the original Trade and Agriculture Commission in 2021 which had the approval of the NFU and environmental NGOs involved in the TAC should be investigated. In addition, following EU CBAM will cause significant damage to the UK’s independent trade policy.”“We are concerned this will pile on costs to the UK consumer, on top of historically high energy costs, giving the ordinary person less spending power and disposable income, which in turn, will disincentivise consumers and further sedate and stagnate our economy.”

Christine McDaniel, US-based Growth Commissioner and Trade Expert said:
“Our research on the carbon border adjustment mechanism (CBAM) examines the economic implications of different policy tools to address countries’ different emission intensities. Our preliminary work suggests that a blanket tariff will do more harm than good, and simply increase the costs to businesses and consumers and dampen GDP per capita without targeting the emissions issue. A more targeted mechanism would likely have less damaging economic effects. For instance, a mechanism where a tariff was imposed that focuses on the actual harm caused would do less economic harm and do more to incentivize lower emissions both in the UK and in the UK’s trading partners. 
Since there is no global price on carbon, different countries will be exploring different policy approaches. It will take time to figure this out. But in the meantime it is important that policymakers resist blanket protectionist measures and instead try to target the actual problem.”

Notes to Editors

• *Our assumptions using the AMCD model: A blanket tariff [CBAM] applied to these goods will certainly have an impact on the trade openness pillar [please review the appendix on the models in the Budgets to understand how variables ‘pillars’ are weighted] as well as the competition pillar. Given the importance of these key input products on the market as a whole, it is likely that increased costs will have a serious impact on the UK market as a whole. Assuming a relatively conservative one point reduction on the trade pillar (15%), and a weighting of 29% for trade freedom, we would assume a 2.2% GDP per capita impact over the implementation period which we assume to be five years. Since electricity cost has a weighting of 6.2% of the competition pillar, and a weighting for energy costs, we would assume a further reduction in GDP per capita of 0.4%-0.6% over the same five-year period. We therefore assume a 3% GDP per capita reduction compounding year on year for the implementation period which we assume to be five years.
• The Growth Commission [Link]: The Growth Commission investigates how low-growth economies can be transformed into high-growth economies. We look at impacts on growth of various factors, including demographics, size of government, tax rates, market distortions, trade policy, competition policy, housing policy and other factors.
• Growth Spring Growth Budget [Link]
• *Distortion: Effects from regulatory/government intervention
• Government Fact Sheet on CBAM: [Link]