Next Steps for the UK ETS/CBAM: A View from the Ceramics Sector

Written by Dr Andrew McDermott, Deputy Chief Executive, Ceramics UK

When we talk about the Carbon Border Adjustment Mechanism (CBAM), the focus naturally falls on the sectors that will be in scope from 2027. But if we're discussing the long-term future of the UK Emissions Trading Scheme (UK ETS) and the UK's approach to carbon leakage, we should also look beyond the first wave of sectors and ask a simple question:

 What happens after 2027?

Because carbon leakage risks do not stop at aluminium, cement, fertiliser, hydrogen and steel. They also affect sectors like ceramics, which are already within the UK ETS, compete in international markets, and are recognised as carbon-leakage exposed sectors.

From the perspective of the ceramics sector, there are three messages we want to highlight.

First, carbon leakage is not a theoretical risk. It is already affecting UK manufacturing.

Ceramics is one of the UK's most energy-intensive foundation industries.

In 2019, the UK ceramics sector operated 54 ETS installations and emitted around 1 million tonnes of direct CO₂ emissions. By last year, that had fallen to 45 installations and approximately 650,000 tonnes of CO₂. Some of that reduction reflects ongoing decarbonisation. But a significant proportion reflects lower output and the loss of UK manufacturing capacity. Meanwhile imports of ceramic goods to the UK have been rising.

The sector competes in fiercely competitive global markets where many overseas producers continue to rely on coal and other high-carbon fuels, often without facing any carbon emissions cost. By contrast, UK manufacturers are subject to the UK ETS and other climate policy costs.

UK ETS compliance costs paid by the ceramics sector now exceed £10 million a year and will rise further as carbon prices increase and free allocation is progressively reduced.

The sector is formally recognised as being at risk of carbon leakage and receives free allocation for some of its direct emissions which helps reduce, but not eliminate, that risk. However, as a predominantly gas-intensive sector, it receives no protection from the indirect carbon costs embedded in electricity prices.

So, the carbon leakage challenges that is designed to address is not confined to the sectors entering the mechanism in 2027.

The challenge for the next phase of UK climate policy is how we continue to reduce emissions while maintaining competitive UK production.

Secondly, CBAM is a simple idea, but a complex policy to implement.

At its core, CBAM is straightforward - if an imported product competes with a product manufactured in the UK, it should face a comparable carbon cost.

In principle, that helps create a level playing field on the domestic market and reduces the incentive to shift production, investment, jobs, and emissions overseas.

But while the concept is simple, implementation is anything but.

Ceramics, for example, encompasses thousands of products, multiple manufacturing routes, diverse raw materials and widely varying emissions intensities. Two products may look similar but have very different carbon footprints depending on the raw materials used, firing temperature, fuel source, manufacturing process and product performance requirements.

That makes accurate measurement, verification, benchmarking and default values particularly challenging.

There is also an important question around compliance and enforcement. Wherever carbon costs exist, there is a financial incentive to minimise them. UK manufacturers operating under the UK ETS are subject to extremely robust monitoring, reporting and verification requirements. For CBAM to be effective, imported products must be subject to equally rigorous standards. Otherwise, emissions may be under-reported, carbon costs understated, and carbon leakage risks left largely unchanged.

The lesson is not that sectors such as ceramics should never be considered for CBAM. Rather, it is that future expansion should be guided by evidence that CBAM can be implemented accurately, fairly and effectively in each sector, recognising that industries differ significantly in both their complexity and their implementation challenges.

As the UK looks ahead, we suggest four principles: recognise differences between sectors and products, maintain robust monitoring and verification, maximise the use of actual emissions data rather than relying on blunt default values, and work closely with industry before expanding scope.

Those principles matter because the objective should not be the widest possible CBAM. It should be the most effective CBAM.

Put simply, a CBAM that is easy to administer, but fails to reflect real carbon costs or ensure robust compliance, will perpetuate rather than eliminate carbon leakage.

Third, CBAM does not solve the export challenge.

One of the key limitations of CBAM, both in the UK and Europe, is that it protects producers in the domestic market against imports. It does not protect UK manufacturers competing in international export markets.

For many sectors, including ceramics, exports remain an important part of the business model. If UK producers face rising carbon costs while overseas competitors do not, they can quickly become less competitive abroad, even if domestic leakage is reduced.

That is why CBAM and free allocation cannot be considered in isolation.

If CBAM is intended to replace free allocation over time, Government must also address how it will protect the competitiveness of UK production in export markets.

That could mean retaining some free allocation for exported production, cost compensation, or another mechanism that provides equivalent protection.

A final thought.

The success of the UK ETS should not be judged by the carbon price it creates, or by reductions in UK territorial emissions.

It should be judged by whether it delivers genuine global emissions reductions while maintaining competitive, low-carbon manufacturing in the UK.

The ceramics sector is not seeking protection from decarbonisation. Quite the opposite. The sector has invested heavily in reducing emissions and remains committed to the transition to net zero.

What industry needs is protection from unequal carbon costs that simply move production, investment, jobs, and emissions elsewhere.

Ultimately, the test of success is whether we achieve decarbonisation through innovation and investment, rather than through deindustrialisation.

Ceramics is therefore not simply a sector outside today's CBAM. It is a useful indicator of the challenges that will shape the next phase of carbon leakage policy.

The opportunity now is to learn from the first phase of CBAM, align carbon leakage policy with competitiveness policy, and build a policy framework that supports both industrial growth and decarbonisation.

Because if we get this right, the UK will not just produce fewer emissions. It will help reduce global emissions while continuing to make the products our economy depends on.

And surely that should be the real objective - reducing emissions without reducing industry.

If government get it wrong, we'll achieve lower territorial emissions at the expense of UK manufacturing, investment and jobs, while global emissions remain unchanged or even increase. That would represent an enormous failure of both climate policy and industrial policy.