UK to introduce carbon tax on imported hydrogen, fertiliser and steel from 2027
The Carbon Border Adjustment Mechanism will be similar to the one being implemented in the EU
The UK government has announced it will implement a Carbon Border Adjustment Mechanism (CBAM) from 2027 to add extra charges on imports of emissions-intensive products, including hydrogen.
While the exact design of this scheme is subject to further consultation over the coming year, the UK’s CBAM is similar to the EU’s, in that it will place a tariff on imports to reflect the price difference between CO2 on the national emissions trading system and what, if anything, the exporter has already paid in carbon taxes in its home country.
Like in the EU, the UK’s CBAM aims to mitigate “carbon leakage” — the phenomenon whereby domestic industrial emitters charged for their CO2 emissions will be undercut by imports from regions with no carbon pricing, effectively shifting high emissions to other parts of the world, rather than eliminating them, at the expense of local industry.
However, the government notes in its announcement that its Emissions Trading System authority is currently reviewing whether to adjust free allocations of carbon allowances to industries that are at high risk of carbon leakage.
A full list of what products will be included in the UK’s CBAM will be determined at the end of the consultation, but the government has already highlighted hydrogen, fertilisers, iron, steel, ceramics, glass and cement as sectors that will be covered by the scheme.
Beyond a direct charge on hydrogen and its ammonia-based fertiliser derivatives, this could also drive iron and steel exporters to use hydrogen-based direct iron reduction, rather than standard coal-based methods, to reduce emissions and prices. H2 can also be fired for industrial heat in glassmaking, ceramics and cement.
“This levy will make sure carbon intensive products from overseas — like steel and ceramics — face a comparable carbon price to those produced in the UK, so that our decarbonisation efforts translate into reductions in global emissions,” said the UK’s chancellor of the exchequer, Jeremy Hunt.
“This should give UK industry the confidence to invest in decarbonisation as the world transitions to net zero.”
However, when it comes to hydrogen imports, it is unclear to what extent this move will incentivise a switch to cleaner production methods.
Unlike the EU, which has openly announced its intent to import ten million tonnes of renewable H2 a year by 2030, the UK aims to build out 10GW of production capacity for its own market and potential exports.
Derivatives such as fertiliser may be a different story. One of the largest ammonia-based fertiliser manufacturing sites in the UK, run by CF Industries, currently only uses imported grey NH3 derived from natural gas after shutting down production this summer due to high local gas and carbon prices.
As such, a CBAM could drive companies like CF to switch away from grey ammonia to blue or green NH3, as long as the premium is lower than the carbon charge.