Minister of State for Energy Security & Net Department for Energy Security & Net The consultation ‘Addressing carbon leakage risk to support decarbonisation’ ran from 30 March 2023 to 22 June 2023. This exploratory consultation sought views and evidence from a broad range of stakeholders on potential policies to manage future carbon leakage risk. A wide range of sectors responded to the consultation, with more than 160 responses in total The consultation explored a number of domestic policies to mitigate carbon leakage risk in the future and ensure UK industry has the optimal policy environment to decarbonise. This included a Carbon Border Adjustment Mechanism (CBAM) as well as considering what role could be played by product standards, measures to grow the market for low carbon industrial products and emissions reporting. Domestic carbon pricing is the most efficient, market driven way to help UK businesses decarbonise and is playing a key role in helping the UK achieve net zero. To maintain the integrity of the UK’s decarbonisation efforts, including through the UK Emissio ns Trading Scheme (UK ETS), it is vital to mitigate the risk of carbon leakage as not all jurisdictions are moving at the same pace to decarbonise. Otherwise, the objective of decarbonisation efforts – to reduce global emissions – would be undermined. A UK CBAM can mitigate carbon leakage risk and promote the environmental integrity of the UK’s decarbonisation policies. The introduction of a UK CBAM aligns with the recommendation made by the EAC in ‘Greening a UK carbon border approach’ report and reemphasised in the recent report ‘the financial sector and the UK’s transition to net zero’. I am pleased to enclose a copy of the summary of responses and government response, which HM Treasury and the Department for Energy Security and Net Zero have published today. Following an analysis of the responses received, the government will implement a CBAM from 2027 applying a carbon price to imported goods from the following aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel. The CBAM will be applied to Scope 1, Scope 2 and select precursor product emissions embodied in imported products to ensure that coverage is comparable to the UK Emissions Trading Scheme. The

scope of the CBAM will be kept under review, including whether to expand it to other sectors covered by the ETS in future. The carbon price will adjust for free allowances and other reductions to the domestic carbon price and will account for explicit carb on prices in other The delivery of the CBAM and the UK’s approach to voluntary product standards and emissions reporting, will be subject to further consultation in 2024. The government will also engage with trade partners, including developing countries. The UK is committed to understanding the impacts of the introduction of a CBAM on least developed countries, and will continue to explore how their concerns could be mitigated, consistent with our commitment to WTO rules and our determination to reduce global emissions. Alongside a UK CBAM, the government is also announcing its intention to work with industry to establish voluntary product standards that businesses could choose to adopt to help promote their low carbon products to customers; and to develop an embodied emi ssions reporting framework that could serve future carbon leakage and decarbonisation policies. Voluntary product standards would inform consumers’ purchasing decisions by improving transparency around embodied emissions in products, helping consumers to compare products on the basis of their carbon content. In this way, voluntary product standards would support consumer choice and the low carbon product market. Voluntary product standards are optional and would not impose a regulatory burden on businesses. They would be designed to complement any other policies or regulations that apply to specific s ectors or An embodied emissions reporting framework will be essential to develop carbon leakage mitigations. A standardised methodology for monitoring and reporting the embodied emissions of products will enable the collection of robust, consistent data. A reporting system will be designed according to the following maximising the use of existing data, achieving the necessary accuracy to underpin policy, aligning with evolving international consensus, and minimising administrative burdens on industry. Alongside these announcements on carbon leakage, the ETS Authority is also taking steps today to improve the certainty and stability in the UK’s carbon price for domestic power, o confirming the intention to legislate the ETS beyond 2030 until at least 2050, giving participants the certainty that they need to invest in decarbonisation; o consulting on the second phase of our Free Allowance Review to better target free allocations at UK industry most at risk of carbon leakage, ensuring they are supported in the transition to net zero; o publishing a consultation seeking to strengthening the functioning of the market, which seeks views a range of potential market policies, including how a supply adjustment mechanism might help improve the operation of the scheme. I thank the committee again for their engagement on this important element of the UK’s tran- sition to net zero and efforts to drive decarbonisation. Minister of State for Energy Security & Net Zero Exchequer Secretary to the Treasury