Consultation outcome

Factsheet: Consultation on measures to mitigate future carbon leakage risk

Updated 18 December 2023

• “Addressing carbon leakage risk to support decarbonisation: A consultation on strategic goals, policy options, and implementation considerations” was launched on 30 March 2023 and will be open for 12 weeks.
• Carbon leakage is the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation. As a result of carbon leakage, the objective of decarbonisation efforts – to reduce global emissions – would be undermined.
• The consultation explores a range of potential policy measures to mitigate carbon leakage risk in the future and ensure UK industry has the optimal policy environment to decarbonise. Potential policies include a carbon border adjustment mechanism (CBAM), mandatory product standards (MPS), and other policy measures to help grow the market for low carbon products, as well as emissions reporting that could support the implementation of these policies.

Why is the government consulting?

• Decarbonising UK industry is central to achieving net zero and is a key element of our collaboration with global partners to tackle climate change.
• Working with international partners to address carbon leakage is our priority, but not all countries will move at the same speed on decarbonisation. We need to consider domestic policies to ensure UK efforts – including the efforts of UK industry – lead to a true reduction in global emissions.
• The government is therefore exploring a package of potential measures to mitigate carbon leakage risk at all stages of the UK’s net zero transition, providing industry with a strong signal that they can invest in decarbonisation in the UK without fear that their environmental efforts will be undermined.
• We want views and evidence across stakeholders on the best possible mix of policies to manage carbon leakage risk. Measures need to be fair, transparent and contribute to a global green economic transition to net zero.

What does the consultation cover?

• The consultation explores potential domestic policies to mitigate carbon leakage risk in the future and ensure UK industry has the optimal policy environment to decarbonise.
• Potential policies include:
  • a carbon border adjustment mechanism (CBAM) applied on imports would reflect both the carbon emitted in their production together with any gap between the carbon price already applied in the country of origin and the carbon price that would have been incurred had they been produced in the UK.
  • mandatory product standards (MPS) would set an upper limit on the embodied emissions of specific industrial products and could be designed to increase in stringency over time.
  • demand side policies to help grow the market for low carbon goods, such as product labelling (based on voluntary product standards) and public procurement initiatives.
  • an embodied emissions reporting system which could support the implementation of carbon leakage mitigation policies.
• Publishing the consultation addresses recommendations made in the Environmental Audit Committee’s Report on a UK carbon border approach (April 2022). It also addresses recommendations in Chris Skidmore MP’s Net Zero Review (September 2022), and the UK Climate Change Committee’s Progress Report (October 2022) for government to consult on domestic carbon leakage mitigations.

What is carbon leakage and why is it a risk?

• Carbon leakage is the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation.
• As a result of carbon leakage, the objective of decarbonisation efforts – to reduce global emissions – would be undermined.
• Carbon leakage risk could curtail private investment in decarbonisation to reduce industrial emissions, compromising efforts to avoid global warming.

How does this consultation relate to consultations on the UK Emissions Trading Scheme (UK ETS)?

• The UK ETS places a price on the carbon emitted by domestic producers in the sectors covered. Total carbon emissions under the Scheme are capped, reducing over time to incentivise decarbonisation. The UK ETS Authority has recently consulted to align the cap on total carbon emissions with net zero targets.
• Carbon leakage risk is currently managed by at-risk sectors receiving a proportion of carbon allowances free of charge (free allocation). The UK ETS Authority has committed to maintain current levels of free allocation for industrial sectors until 2026.
• There is a further consultation at the end of 2023 to better target the remaining free allocations toward sectors considered to be at risk of carbon leakage, due to be implemented in 2026.

In response to the UK ETS Authority’s recent consultation on developing the UK ETS, there have been calls from industry to explore new proposals for mitigating the risk of carbon leakage alongside free allocation, including calls that action to tackle carbon leakage should be closely aligned with future changes to the ETS.