Analytical Report: The Impact of Delayed CBAM Implementation on the UK Steel Industry

The UK government’s plan to introduce a cross-border carbon tax mechanism, similar to the EU's Carbon Border Adjustment Mechanism (CBAM), has faced a significant delay. Originally scheduled for 2026, this postponement has raised concerns within the UK steel industry regarding the potential for market distortions and the dumping of high-emission steel into the country. This report examines the implications of the delay, the potential risks, and the broader economic and environmental context for the UK steel sector.

Background on CBAM and the UK’s Delay

The CBAM is a critical part of the EU’s climate policy, designed to impose tariffs on imports from carbon-intensive industries to protect European producers from unfair competition and to curb emissions leakage. It is set to become fully operational in 2026. In contrast, the UK, after leaving the EU, has decided to introduce its own carbon tax system, but not until 2027.

This one-year gap, though seemingly short, could have serious consequences for the UK steel industry. As highlighted by UK Steel CEO Gareth Stace, the delay creates an opportunity for dumped steel—particularly from high-emission producers in Asia and the Middle East—to be redirected to the UK, avoiding the stricter European mechanism. This influx could hurt domestic producers already struggling with global overcapacity and rising energy costs.

Risks of Dumping and Market Distortions

A primary concern is that the UK Treasury is underestimating the speed at which global trade flows can change. Once the EU’s CBAM is in full effect, steel producers from countries with high emissions will likely look to alternative markets to avoid the additional cost burden. Without a synchronized mechanism, the UK could become a dumping ground for carbon-intensive steel, which would further depress prices in an already low-margin industry.

This situation would exacerbate the existing challenges faced by the UK steel sector, which is already grappling with global overcapacity and increased competition. The Financial Times reports that under the EU’s CBAM regime, importing steel from carbon-intensive producers could cost around €37.50 per tonne. For an industry that operates on thin margins, this is a significant burden, one that UK producers could face without comparable protections.

Economic Implications

The delay in implementing the UK’s CBAM has far-reaching economic implications. According to industry estimates, the UK risks losing up to ￡8 billion ($10.2 billion) in revenue over the next five years if it remains outside the EU’s carbon market. This loss stems from both missed opportunities in carbon trading and the inability to levy taxes on imports of high-emission products like steel.

Additionally, the uncertainty surrounding the UK’s carbon trading scheme has further delayed investment decisions within the steel sector. Companies are reluctant to commit to long-term decarbonization strategies without clear guidance on the cost of carbon emissions and the regulatory framework. This delay could slow the transition to green steel in the UK, undermining the government’s broader climate goals.

Political and Regulatory Hurdles

One of the main reasons for the delayed implementation is the divergence between UK and EU mechanisms. While the UK government is keen to align its carbon tax regime with that of the EU, differences in the scope and timeline of the two systems have complicated negotiations. Sarah Jones, the UK’s Energy and Business Secretary, acknowledged that the UK government is attempting to smooth out these differences but noted that the process is far from straightforward.

The UK’s Labour government had expressed interest in re-linking the UK and EU carbon trading schemes as part of a broader effort to reset relations with Europe. However, given the complexity of negotiations and the fact that the European CBAM will be fully operational by January 2026, it is unlikely that any harmonization between the two systems will take place before then. Additionally, the harmonization process requires ratification by the European Parliament, which could introduce further delays.

Environmental Impact and the Shift to Green Steel

Steel production is one of the largest contributors to global carbon emissions, and the transition to green steel—which relies on hydrogen rather than fossil fuels in the production process—has become a key focus for reducing the industry's environmental impact. However, this transition is costly and requires significant investment in new technologies.

The delay in the UK’s carbon tax system could hinder the domestic steel industry's ability to invest in green steel. Without the financial incentives provided by a robust CBAM, UK producers may find it difficult to compete with their European counterparts, who are better positioned to benefit from the EU’s climate policies and funding mechanisms for decarbonization.

Conclusion and Recommendations

The delay in the UK’s CBAM implementation could expose the UK steel industry to a range of risks, including market distortions, dumping of carbon-intensive steel, and lost revenue from carbon trading. To mitigate these risks, the UK government must accelerate its efforts to harmonize its carbon tax regime with the EU’s CBAM and provide clear guidance to the industry on the timeline and scope of its carbon policy.

In the short term, the government should consider implementing interim measures to prevent the dumping of high-emission steel, such as import tariffs or quotas. In the long term, aligning with the EU’s carbon trading scheme would not only protect the UK steel industry from unfair competition but also accelerate the transition to green steel, helping the UK meet its climate targets.

Key Takeaways

1. Dumping Risk: The delay in CBAM implementation may result in the dumping of carbon-intensive steel into the UK, creating market distortions and harming domestic producers.
2. Economic Losses: The UK risks losing ￡8 billion in revenue over the next five years if it remains outside the EU carbon market.
3. Environmental Setback: Delayed carbon pricing could hinder the UK’s transition to green steel, slowing progress toward decarbonization.
4. Policy Recommendation: The UK government should prioritize harmonizing its carbon tax regime with the EU and consider interim measures to prevent dumping.

By taking proactive measures, the UK can safeguard its steel industry and maintain competitiveness in the global market while contributing to the global effort to reduce carbon emissions.