New CleanTrade research finds that a UK carbon border adjustment mechanism could boost construction industry orders of UK-made steel by more than £500 million annually
By stalling on extending carbon pricing to imports, known as a carbon border adjustment mechanism (CBAM), the government is scoring an economic and climate own-goal.
A UK CBAM could:
Increase demand for lower-carbon UK steel to the tune of at least £500m annually from the construction industry alone. This is because the industry imports £870m of long steel annually from places with more carbon-intense steel production.
For just one industrial property developer, Segro, a UK CBAM could shift an estimated £10m from higher-carbon imported steel to lower-carbon UK-produced steel.
This represents a missed opportunity for the government to upgrade the long-term investment outlook of UK low-carbon industry.
A fundamental shift in climate policy occurred last year, led by the European Union and the United States. The EU agreed to implement a CBAM from 2026 (1). The mechanism will extend the carbon pricing already in place for domestic industries (through its Emissions Trading Scheme) to imported iron, steel, cement, aluminium, fertilisers, hydrogen and electricity - with pricing ramping up year-by-year to 2034. The U.S. has also boosted domestic low-carbon industry, but through a different approach. With no existing carbon pricing system in place, it decided to subsidise green technologies through tax credits as part of the Inflation Reduction Act (2).
This re-frames the low-carbon industrial transition as a race in which getting - and staying - ahead is key. This could be a boost for the climate and help the world move towards the 45% emissions cut needed by 2030 to stay on track to limit global warming to 1.5 degrees. But it could also lead to a future reorientation of low-carbon industries to the EU and U.S.
The UK must react, even though EU and U.S. policies continue to evolve. If the UK waits for the music to stop before making its move, it may find that all chairs are covered. Without government help - either to protect fledgling low-carbon industries being undercut by cheaper high-carbon imports, or to subsidise green technologies so they can compete with high-carbon imports - the industries won’t grow, let alone export their goods.
Whichever route the UK chooses, low-carbon industries need to know they won’t be undercut by cheaper imported high-carbon products in order to invest. The EU’s CBAM timeline is not fast, and its lack of consultation with both businesses and developing countries (3) could become lessons from which a UK CBAM can learn.
Analysis of the latest data by research and campaign non-profit CleanTrade looked at the effect of a potential UK CBAM on the construction industry (4). The research focused on steel - one of the bulky products that can be easily be charged at the border, and an important component of the build out of a low-carbon economy in the decades to come, not least for wind turbines, electric vehicles, railways - and the construction industry, which is one of the sectors importing the most high-carbon products.
The analysis found that the construction industry imports £1.4bn of long steel every year, including £870m from countries with more carbon-intense steel production; more than £500m of that would likely change if the UK introduced a CBAM alongside phasing out free ETS allowances to bolster carbon pricing. This represents a big opportunity that low-carbon UK steel producers could capture - 25% of the UK steel industry’s gross value added in 2020 (5).
CleanTrade, 2023, UK carbon border adjustment mechanism - explainer
For example, £140m of long steel is imported from Turkey and £56m from the Czech Republic, where producers have a higher carbon-intensity of production compared to the UK. £350m is imported from Spain, where producers have lower-emissions intensities than the UK on average (6).
One example is Segro, one of the leading developers of industrial warehouses, which has grown rapidly with the growth of online retail. Segro does not provide a breakdown of what steel it buys and from where (7). By applying industry-wide numbers to the UK portion of the 1.3 million m2 of warehouses Segro says it will build (7), we estimate that a UK CBAM could represent a £10m opportunity for low-carbon UK steel from that one company’s pipeline alone.
“Extracting and burning fossil fuels simply has to become too expensive or illegal. Carbon border adjustments are an important crack in the wall of fossil fuel producers’ ability to freely sell their product into all manner of global supply chains.”
“This is not to single out Segro as a bad apple. It takes sustainability seriously, with a CDP A rating (9) and a Science-Based Target (10). Rather, if a company like Segro is only able to commit to a 20% reduction in Scope 3 emissions by 2030 (11), what chance is there for the construction industry to achieve bigger reductions without measures like a CBAM to bolster the investment case for decarbonising our own steel production?”
“The steel industry has a long investment cycle because plants operate for decades. Producers in the UK need certainty now, in order to deliver low-carbon steel by 2035. A carbon border adjustment mechanism is the preferred policy instrument to achieve this, since 60% of the UK’s demand for steel is currently imported (13). It’s not just important to help achieve climate targets, but it will help secure the livelihoods of UK steel workers in a carbon-constrained future.”
“This is a major opportunity to introduce a pragmatic, business-friendly climate policy that supports UK economic growth.” He added: “British science, engineering and entrepreneurship shaped the first industrial revolution. Will it - despite being well placed thanks to geological, innovation and skills strengths - miss the chance to manufacture the world’s green industrial revolution?”
Carbon border adjustment mechanisms are also called for by pro-climate business groups like Aldersgate Group (14), the UK Government’s independent climate policy advisor the Climate Change Committee (15) and parliament’s cross-party Environmental Audit Committee (16).
References
(1) European Council, 2022, EU climate action: provisional agreement reached on Carbon Border Adjustment Mechanism (CBAM), link
(2) McKinsey & Co., 2022, The Inflation Reduction Act: Here’s what’s in it, link
(3) Centre for Global Development, 2023, An EU Tax on African Carbon – Assessing the Impact and Ways Forward, link, The EU’s CBAM was criticised by the likes of Mozambique who will see its aluminium exports hit
(4) CleanTrade, 2023, A UK carbon border adjustment mechanism: The construction industry and steel, link. We focused on CBAM because while the U.S. model of subsidies might be possible in the UK, the delicate state of public finances, and foreign ownership of many industries - for example British Steel and Tata - makes the subsidies approach unlikely.
(5) House of Commons, 2021, UK Steel Industry: Statistics and policy, link
(6) Intensities vary in electric-arc furnaces because of the emissions intensity of electricity. Whereas basic oxygen furnaces’ intensity will mostly depend on how modern and therefore efficient the furnaces are
(7) Nor should it - since it could compromise commercial confidentiality.
(8) Segro, 2022, 2022 Half Year Results, link
(9) CDP Score is awarded by CDP, a charity which runs the emissions disclosure system for investors and companies to report their environmental impacts, which around 60% of global market capitalisation reports through. Segro’s CDP Score was an “A” on its 2022 Climate Change response. Assessed from CDP, 2023, link
(10) A Science Based Target is a medium-term (usually 2030) emission reduction target approved by The Science-Based Targets initiative, created in 2015 by CDP, UN Global Compact, World Resources Institute (WRI) and WWF.
(11) Science Based Targets initiative, 2023, Companies Taking Action, link, accessed 2023
(12) Climate Change Committee, 2020, The Sixth Carbon Budget, The UK’s path to Net Zero, link
(13) UK Steel, 2022, Net Zero Steel - A Vision for the Future of UK Steel Production, link
(14) Aldersgate Group, 2022, Move to net zero emissions creates an opportunity to grow UK industrial supply chains – but a comprehensive plan is needed, link
(15) Climate Change Committee, 2021, Progress in reducing emissions 2021: Report to Parliament, link and Climate Change Committee, 2022, Progress in reducing emissions 2022 Report to Parliament, link
(16) Environmental Audit Committee, 2022, Inquiry into carbon border adjustment mechanisms, link, It concluded “A policy response in the form of a UK carbon border approach is needed. This should include a carbon border adjustment mechanism”