Policy win: UK government announces plans to bring in a carbon border adjustment mechanism in 2027
Despite Prime Minister Rishi Sunak’s anti-net zero rhetoric, his government today announces plans to extend carbon pricing to the hundreds of billions of products that the UK imports, in a boost to low-carbon industries of the future.
Set Rishi Sunak’s anti-net zero rhetoric aside for a moment, and remember that as the urgency of addressing climate change becomes increasingly apparent, governments around the world face critical decisions about how to transition to a low-carbon economy without destabilizing their own economic competitiveness. The UK government’s announcement today of its intent to introduce a carbon border adjustment mechanism (CBAM) in 2027 is a significant step in this direction. By aligning with other major economies pursuing similar policies, the UK is positioning itself as part of a broader effort to tackle climate change through market-driven solutions. But why is this approach so important, and how does it align with both economic and environmental priorities?
Why the UK’s Proposed Carbon Border Adjustment Mechanism Matters
You can boil down the routes to avoiding runaway climate change to three: governments blocking the extraction of fossil fuels, governments incentivising alternatives through subsidies, and governments disincentivising fossil fuels through taxes.
The first can be open to the criticism of what Kemi Badenoch MP calls “unilateral economic disarmament”: it is unlikely that Russia or Saudi Arabia would adopt such an approach any time soon. The second, to innovate fossil fuels out of existence through public subsidy of clean energy alternatives, is difficult in a post-COVID-19 fiscal context where public finances are constrained, and in a post-Liz Truss political context where parties don’t want to be seen to increase government spending on debt interest or decrease gilt market confidence. The carbon border adjustment mechanism (CBAM) is a policy to pursue the third route: governments increase taxes on fossil fuels to make their extraction or use uneconomic.
The Global North buys $10trn worth of products from the Global South, many from the export-orientated economies of China and India. The CBAM is a big chance to incentivise those economies to decarbonise. It aims to create a “Climate Club” in which major economies collectively agree to impose a carbon price across its economy, including imports, with the punitive measure of green tariffs at the border on other countries being negated as soon as they price carbon in their economies, providing a positive incentive for countries around the world to join the Club.
The UK announcing its CBAM plans at this moment is particularly important. The EU passed its CBAM in December last year and Canada and Japan announced this year they are exploring following suit. In other words, the EU set up its Climate Club, and the UK – despite the fall-out from Brexit – is the first to join.
There are technical challenges to making the CBAM an effective climate policy, which is why implementation is slated for 2027. But the policy is appealing to the conservative political tradition. Just 2% of GDP needs to be shifted to green technologies and infrastructure every year to prevent runaway climate change. The government already re-routes 34% of the economy annually via the tax system. To hit net zero we don’t need to increase tax by 2% of GDP, we just need policies like the CBAM to shift the 2% around to make sure it is flowing away from fossil fuels and into low-carbon industry.
Carbon pricing, of which the CBAM is a key pillar, sends a clear long-term market signal to unlock private sector innovation to tackle climate change. It can simplify a myriad of sector-specific regulations and avoid the need for the public sector to pick green winners.
In summary
In taking this step, the UK has continued its tradition of leadership on climate change, becoming the first country to join the EU in establishing plans for a carbon border adjustment mechanism. Policies like the CBAM are not just about reducing emissions—they are about reshaping global markets to drive innovation, growth, and equity in a sustainable future. By laying the groundwork for a robust and coordinated carbon pricing mechanism, the UK is aligning its climate strategy with its economic ambitions, showing that meaningful climate action is not only necessary but achievable.