UK's 2027 Carbon Tax: Impact On Legal Practice & ESG

UK’s Newly Proposed Carbon Tax Plans

Chancellor Jeremy Hunt has revealed a plan to introduce a carbon tax on UK imports by 2027. Imports of a set list of products (including a number of common metals and building materials) will fall under these new rules. Hunt stated, in an official press release:

‘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. This should give UK industry the confidence to invest in decarbonisation as the world transitions to net zero.’

The UK has relatively stringent environmental regulations around many of its production processes compared to many other international manufacturing powerhouses (for example China or India). As a result there is often a higher cost associated with meeting these ESG regulations. Businesses operating in the UK face this increased expense due to compliance requirements, leading to a dilemma: either incur these elevated costs of production on British soil or opt to pay an additional carbon tax for failing to meet these standards, thereby raising production costs regardless.

Coupled with the fact that low wage costs and cheap, polluting shipping systems already made producing abroad far cheaper, British manufacturers have been extremely concerned that they will simply not be competitive anymore when trying to compete with foreign businesses.

The new rules would essentially introduce a levy on imports from countries with weaker regulations in these areas than Britain in order to make them slightly more expensive and level out the playing field more.  This also incentivises British consumers to perhaps choose locally sourced, more eco-friendly products in the process by way of comparison.

Environmental Context For Carbon Tax Reforms

The first point worth noting here is that this is not an entirely original idea. In fact, the EU has already introduced what is essentially the same system, and they plan to roll theirs out a year before the UK’s comes into force. The delay present here has already been a source of some criticism by market experts and business leaders, with some suggesting that the one-year delay would likely be seen as a window in which high-carbon products will simply flood the UK markets (which obviously has the opposite effect to the intended move).

Of course, this story has also grown out of a growing recognition of ESG’s increasing dominance in the commercial sector. Stories ranging from Pepsi’s pollution lawsuit to investment fund greenwashing have plastered the front pages in recent months, and this all culminated in the historic (albeit certainly flawed in places) agreement reached at the COP28 summit. Aspiring lawyers can develop their knowledge of environmental law and related issues further through our quiz on this topic.

This narrative acknowledges the increasing recognition that substantial businesses require either financial incentives or penalties, provided by the government, to drive nations closer to achieving their climate objectives. For instance, achieving net-zero emissions constituted a significant aspect of the press release regarding the introduction of these new carbon taxes in the UK

This hands-on approach has been criticised by many in the past, but it seems that a growing portion of the population now support the idea that regulation is needed in this area. In this context, the government are clearly attempting to use the tax regime in order to level out the playing field in terms of competition (and reducing emissions on a global scale in the process).

What Should Aspiring Lawyers Know?

The combination of financial topics (the dominant kind of work at many top law firms and chambers in the City) with ESG makes this story an excellent talking point. It could be used as part of an application form or discussed at interviews during the application process for vacation schemes, training contracts, pupillages, or any other relevant legal opportunities.

There are many specific issues that could be discussed here. For example, if your target law firm maintains a client relationship with a private equity firm who are known to invest heavily in Chinese manufacturing companies, lawyers would need to be knowledgeable enough about these stories (staying on top of their commercial awareness, which can be a difficult process) to advise them on how this might impact their business model.

If that client was previously reliant on their acquired businesses doing well as a result of cheap imports to the UK market, they would have to seriously reconsider their forecasts long-term now – and while that kind of number crunching is often carried out largely by those in directly financial sectors, City lawyers are expected to be in the loop too. Many law firms are now noting that they are no longer expected to just know the law – they are also, to some extent, business advisors (closer to the consulting industry at times) during the process of dispensing legal advice.

This is particularly important to be aware of if your target firms or chambers are heavily rooted in this area of law – for example Magic Circle and elite US firms make up a large portion of the names on the Chambers rankings for tax law (both Freshfields and Kirkland & Ellis are Band 1, for instance).

Conclusion

In short, the chancellor’s new plans to introduce a carbon tax on imports to the UK from 2027 appear a genuinely significant step towards utilising government-imposed financial mechanisms in order to improve competition and limit the ongoing climate crisis. Aspiring lawyers are advised to follow this story closely in the coming months before these changes are officially introduced.