The Impact of Carbon Leakage Mechanisms on Growth

Original new research from the Growth Commission published today highlights the potential hit to economic growth in the UK if we were to adopt a carbon leakage mechanism akin to that being pioneered by the European Union and under active consideration by the UK government.

The EU’s Carbon Border Tax Adjustment Mechanism (or CBAM) aims to incentivise non-EU countries to adopt stricter climate policies by imposing a tariff on the import of carbon-intensive products – like cement, steel, aluminium, fertilisers and electricity – which are cheaper to produce in jurisdictions with less stringent environmental regulations.

The Growth Commission paper, The Impact of Carbon Leakage Mechanisms on Growth, finds that the GDP per capita impacts of the UK adopting the EU CBAM would be significant. The report finds:

“UK adoption of the CBAM could lead to GDP per capita losses of between roughly £150 and £300 even if supply chains stay as they are. Implicit within the UK’s independent trade policy is the possibility for supply chains to realign around the lowest cost producers, and so we have modelled the impact of CBAM if supply chains were able to realign. Given that low-cost producers tend to be developing countries, the economic impacts in this case are much higher, between £210 and £650 of losses for each UK person.”

The report goes on to conclude:

“At a time when the UK is struggling to grow economically, and both the ruling Labour government and the opposition Conservative Party have expressed the need for economic growth, adoption of EU CBAM would move the UK in the wrong growth direction.”

The research does however also investigate alternative meaningful solutions to addressing carbon leakage, including that proposed by the Climate and Freedom Accord (CFA) which, far from lowering GDP per capita, has the capacity to increase GDP per capita by over £1,000.

The CFA approach emphasises technology-neutral, positive incentive policies that expand freedom and remove the barriers, burdens and costs that governments impose on citizens, innovators and economies.

Shanker Singham, Chairman of the Growth Commission and author of the report, said:

“It is essential that policymakers have at their disposal as much information as possible to better evaluate in any area a variety of policy options and their impact on the all-important prospects for economic growth.

“This research, using robust economic modelling and taking into account the dynamic effects of options on the table, demonstrates that copying and pasting the EU CBAM into UK law would be extremely costly to British households.

“Politicians and policymakers should pay heed to these findings as they seek to address the issue of carbon leakage because there are options available which would boost economic growth rather than diminish it.”