Border Carbon Adjustment Tariffs and Decarbonisation

Bernard Jenkin Excerpts

Wednesday 16th December 2020 Commons Chamber

[Jerome Mayhew]

My hon. Friend has hit the nail on the head, because one of the key benefits of a border carbon adjustment is that it would allow us to decarbonise, and allow our heavy industry to accept the pain of higher energy costs, therefore letting the market work in our domestic market to incentivise the development of lower-carbon technology, while at the same time protecting it from being undercut by countries that are taking a little longer to go on the low-carbon journey.

We are not going to be spending money; we are going to be making money. That money could be used as the Treasury knows best. It does not mean that the money is taken out of the economy, because it could be put straight back in—in productivity-enhancing tax cuts, I hope, but that is up to the Treasury.

Best of all—I have saved the best till last—by freeing up the ability to price domestic carbon emissions at a realistic, behaviour-changing level, we can unleash the magic of the free market to seek out the most efficient solutions to low-carbon production. We do not need the Government to pick winners and subsidise industry once a market is working properly. Give a price to carbon, and that is exactly what we will create: a many-headed monster of innovation, entrepreneurialism, dynamism and efficient, productive capital growing our low-carbon future.

This future, if we are brave enough to embrace it before other nations, rather than just following, and if we are bold enough to allow the reshaping of the economy by demand rather than by direction, will equip our industry as leaders in low-carbon manufacturing. They will be leaders because they will be swimming in their natural element, whereas their international competitors will still be struggling to react to the short-term Government green initiatives and schemes that we all currently suffer from. It is a lead that could generate exports and growth in this country.

What is stopping us from delivering on the Prime Minister’s vision of a low-carbon, dynamic economy? Some worry about a protectionism challenge at the World Trade Organisation, but with a BCA applied in an open and transparent manner, nothing could be further from the truth. This policy is about removing unfair competition, not creating it. In any event, WTO rules expressly allow for tariffs whose purpose is to protect

“human, animal or plant life and health”

or

“to conserve exhaustible natural resources”.

Those are two exceptions tailor-made for this kind of tariff.

More practically, if the UK were to join the United States of America, our friends in the European Union and other countries to establish the principle of BCAs at COP26, that would be a game changer, because that would ensure their practical acceptance. Others worry that putting forward such an ambitious proposal at COP26 runs the risk of failing to achieve the consensus that would allow the PR men to claim a stunning success. It might, but the risk of failure is the price of ambition, so should we give up on our ambition? Of course not.

[Sir Bernard Jenkin (Harwich and North Essex) (Con)]

I have no doubt that my hon. Friend is right about the application of WTO rules, but what happens if a free trade agreement is already in place? Would that free trade agreement have to be renegotiated? Suppose we have a free trade agreement with the EU and we want to put a carbon tariff on German steel, which is very carbon intensive. Are we going to be tied in knots by what we might have already agreed? How does he think that would be resolved?

[Jerome Mayhew]

The example that my hon. Friend gives—that of Germany—would fall neatly into the European Union, which is consulting on this very issue, so in that case, it would be a coalition of the willing to allow us to go forward, I hope, with a form of equality between the European emissions trading scheme, or its successor, and the approach that we would take ourselves. However, I accept that that would be up to country-by-country negotiations.

Is there international support for this approach? Do we have a realistic prospect of bringing the world community together and with us at COP26? I say that there is, because President-elect Biden has already spoken about “carbon adjustment fees” against

“countries that are failing to meet their climate and environmental obligations.”

That is a clear indicator that the incoming Administration in America is taking this seriously. I know that there is many a slip between a statement of intent and action, but it is something that we can potentially get behind at COP26. The European Union, as has been mentioned, just this July launched a formal consultation on the implementation of a border carbon adjustment, and it is worth noting that for the President of the Commission—I think it was part of her manifesto when she was first appointed— this is one of the key objectives for her presidency.

--- Later in debate ---

[The Minister for Business, Energy and Clean Growth (Kwasi Kwarteng)]

My hon. Friend the Member for Broadland (Jerome Mayhew) gave a compelling and fascinating speech. He elucidated many of the technical difficulties associated with imposing unilaterally, as he was arguing, a carbon border tax. My hon. Friend the Member for South Cambridgeshire (Anthony Browne) hit the nail on the head when he asked, “Should we do this unilaterally?” I am going to start by saying that, in my view and in the Government’s view, this is an important subject but it has to be treated as part of a multilateral effort. We are responsible for 1% of carbon emissions globally, and if we impose a tax unilaterally on carbon-emitting products coming into this country, we may well be disadvantaging our own consumers if others around the world are not placing such a tax. The Government feel that multilateral co-operation in this regard is by far the best way to prevent carbon leakage.

Another thing I would say to my hon. Friend is that by focusing on carbon emissions, he is really discussing the thorny issue of carbon accounting. Ultimately, the intellectual difficulty of accounting for carbon is the broader problem of whether the carbon is produced abroad or at home. In that respect, I would like to refer him to what my right hon. Friend the Chancellor of the Exchequer said in his announcement in this Chamber a little more than a month ago. I am proud that he announced that the UK would become the first G20 country to make Taskforce on Climate-related Financial Disclosures-aligned climate-related financial disclosures fully mandatory across the economy.

I am not saying that my hon. Friend said this, but I do not think it is right to say that we are somehow laggards on the issue of carbon accounting. In fact, I would say that we are taking a leadership role on this subject. He alluded to the fact that the EU is looking at how it can implement a carbon import regime with a tax on carbon-emitting products coming into the EU, and we are absolutely engaged with the EU in discussing that. We feel that that is part of the multilateral approach.

If my hon. Friend takes a broad view of this subject internationally, he will see that 2020 has seen far greater progress than any previous year. Only a couple of months ago the Chinese Government pledged to achieve a net zero carbon target in 2060, and that is incredibly significant. I remember when I was first appointed to this job, someone said to me that what we did in the United Kingdom would make no difference if China continued along its present path. I am pleased to say that China has changed its path and said very clearly that it has set a net zero target for 2060. The Japanese followed suit soon afterwards, adopting our target of 2050, as did the South Koreans. So the auspices for international co-operation on the measure that my hon. Friend has described are actually very good, and there is a chance that if we cannot reach an agreement at COP26 next November, we may well be advancing along the lines that he suggests in the not-too-distant future. I have to stress that multilateral co-operation on how we price carbon and how we account for carbon in the round is far more constructive than placing a unilateral tax in the way that he has described.

One thing I would say about the figures that my hon. Friend very ably quoted in regard to the benefit to the Treasury is that there would obviously be behavioural impacts, so it would be difficult for me to model the consumer demand for products that had been taxed in the way that he has described. I would be interested to have a conversation with him about the assumptions behind the analysis that he very ably referred to in his excellent speech.

[Sir Bernard Jenkin]

My right hon. Friend has said something that I regard as significant. Yes, we are going to try to achieve a multilateral approach at COP26, but if we do not succeed, we will consider a more unilateral approach. I am bound to say at this particular juncture, when the term “level playing field” is so commonly spoken about in respect of a certain negotiation, that it would surely be a distortion of international competition for some countries to be doing their best to deal with climate change and for other countries to be exploiting those efforts. If that is not a distortion of genuine free trade, I do not know what is. I think that the unilateral approach is justified.

[Kwasi Kwarteng]

This is an interesting debate. My hon. Friend suggests that a unilateral approach, punishing other countries for not adopting the climate change agenda—that is effectively what we would be doing—might work. As I have had to say repeatedly, I think that a multilateral approach is the best way forward. There is an open debate about the effectiveness of a unilateral approach when every other country in the world would not be disadvantaging these products.

--- Later in debate ---

[Kwasi Kwarteng]

Sorry—I was just respectfully pointing out to my hon. Friend the Member for South Cambridgeshire that he cannot intervene on an intervention.

I am very happy to take up that point. Of course, I discuss with my right hon. Friend the Chancellor all the time how we can capture carbon accounting more effectively in order to pursue the goal that we all seek, which is a net zero world and certainly a net zero British economy.

[Sir Bernard Jenkin]

Will my right hon. Friend give way?

[Kwasi Kwarteng]

No, I have to make some progress.

Ahead of COP26, obviously, as the hon. Member for Brent North (Barry Gardiner) mentioned, we have to look at carbon accounting in the round, and we have to look at how we reduce incentives for carbon-emitting activity here in the UK and in the context of the imported carbon that we bring in from other countries. All these issues have to be addressed in the round.

What I wanted to say, and have said very clearly, is that we are actual leaders in this subject. We are actually driving ahead mandatory TCFD financial disclosures. There are no other countries in the G20 that have done that. We passed the net zero amendment to the Climate Change Act 2008 last year. Again, even though other countries have made public statements supporting that policy, they have yet to enshrine it in their in their legal codes. We are showing leadership. We intend fully to continue showing leadership and providing that sort of steer at COP26 in Glasgow.

[Kwasi Kwarteng]

It is not in my power to make that commitment to the House. As my hon. Friend knows, I am not the COP26 president, and I suggest that he directs that question to my right hon. Friend the Business, Energy and Industrial Strategy Secretary, who is the president of COP26. However, I can assure my hon. Friend that the issue is absolutely at the centre of the wider debate about climate change and of what I might call international energy diplomacy, and I am sure it will discussed very seriously at COP26 next year.

[Sir Bernard Jenkin]

I just want to put something on the record. The hon. Member for Brent North (Barry Gardiner) quoted a £10 billion subsidy figure for fossil fuels. Will the Minister confirm that the Government do not accept that figure? It is based on things such as the fact that we charge only 5% VAT on domestic fuel instead of 20%. It is typical of the EU to regard a low tax to help poorer households afford their fuel bills as a subsidy. One of the reasons we are leaving the EU is that it puts out rubbish propaganda such as that. We do not subsidise fossil fuels, and I hope the Minister will make that clear.

[Kwasi Kwarteng]

My hon. Friend is right. It is pretty extraordinary to say that we are somehow the laggards on this subject. When a country such as Germany is phasing out its coal dependency only in 2038, it is a bit extraordinary for Opposition Members to make that claim. We are very much the leaders in this arena, and my hon. Friend was quite right to point that out.