The revenue potential of phasing out the free allowances received by UK CBAM sectors

The UK Government sees the matter in the same light.5 The CBAM is an alternative solution to the problem of carbon leakage for the UK. [...] Although the latter is currently less well defined than the EU’s CBAM, comparing the trade of the UK and the EU suggests that the UK will be unlikely to raise more than 10 percent of the revenue that the EU does – a relatively small amount. [...] The potential revenue is clearly less than the estimated revenue flow from the UK CBAM, and the sum of these two revenue sources is still pretty small compared to the government’s current financial gap for 2022-23, amounting to £131 billion.18 Table 2: Potential revenue from UK ETS free allowances for UK CBAM sectors Estimated revenue of Phased-out free allowances for UK CBAM sectors Year the UK C. [...] These include the definitions of UK CBAM-regulated products; the extent by which the UK CBAM’s scope is extended to include more ETS sectors; the methodology for computing free allowances; the level of UK ETS free allowances; firms’ own efforts to economise on their emissions; the trajectory of the UK carbon price; allocations of free allowances within eligible installations and the treatment of e. [...] The predictions are very different across scenarios.21 However, historical data suggests the UK carbon price is unlikely to exceed the EU’s.22 Moreover, if the UK ETS is linked to the EU’s, as we recommend, the UK carbon price would align with the EU’s.