Labour to forge closer EU ties on carbon tax

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Labour is exploring how to realign the UK’s carbon regime with the EU if it wins the general election next month, senior party figures have said, a move that would be welcomed by the country’s heavy industries but could anger some Brexiters.

Since Brexit, the UK and EU have had separate markets — each called an “emissions trading scheme” or ETS — where large polluters such as gas-fired power plants can trade “allowances” that permit them to emit a certain amount of carbon dioxide.

British exporters have warned that they could end up paying hundreds of millions of pounds extra in future because the UK’s carbon price is at present lower than the EU’s under their respective ETS schemes.

Separately, both the UK and EU also plan to tax imported goods such as steel to account for the relative cost of carbon emitted during production, through a “carbon border adjustment mechanism”, or CBAM.

This is designed to prevent UK or EU-based manufacturers being undercut by global rivals that can make their products more cheaply because they do not have to comply with stricter local environmental laws.

Because the UK’s CBAM is due to come into force in 2027 — a year after the EU’s version — the industry is also concerned that the UK risks becoming a temporary dumping ground for goods such as iron, steel, cement and fertiliser as global rivals seek to avoid paying the EU’s CBAM.

One representative of British industry said they had already received recent private assurances from three shadow ministers’ teams that Labour intends, if elected, to align both the ETS carbon market and the CBAM tax scheme with that of the EU. 

Jonathan Reynolds, shadow business secretary, said the CBAM was “an issue that’s very concerning to British industry. A lot of them are worried about carbon dumping before the [UK tax] comes in, so we are looking very closely at it.” He said the party was keen to align on the timing of the UK and the EU carbon tax regimes but could face practical challenges in doing so. 

A Labour official said the party was “exploring how to align” both the CBAM and ETS schemes with the EU, adding that it was still considering the trade-offs in terms of the UK losing some autonomy.

Industry figures have said combining the ETS schemes would ensure a bigger and less volatile market.

Labour — which has a commanding poll lead ahead of the election — has been open about its intention, if elected, to forge closer trading ties with Europe and to undo some of the regulatory divergence that opened up following Britain’s departure from the EU.

Party leader Sir Keir Starmer will not seek to rejoin the single market or customs union, but rather wants to improve the existing Brexit deal with new agreements on security, veterinary standards and recognition of professional qualifications.

The UK and the EU have agreed to consider linking their respective carbon pricing schemes in future under the terms of their post-Brexit free trade agreement. 

The schemes are broadly similar, although some important differences would probably need to be resolved before they could be linked, say industry experts.

For instance, the EU already includes emissions from shipping in its carbon market and says at least half of the revenues from the sale of allowances should be spent by governments on climate- and energy-related purposes.

Gareth Stace, director-general of trade body UK Steel, warned that current government plans would mean “knowingly and wilfully exposing our steel industry to significant damage at a time when our market is already being attacked from many sides”.

The next government should bring forward the planned border levy to 2026 and link the UK and EU carbon markets to “eliminate any trade hurdles between the EU and UK steel markets”, he added.