Legislation

• Part III and Schedule 5 of the Finance Act 1996
• Section 42 and Schedule 12 of the Finance Act 2018
• EU Landfill Directive (1999/31/EC)
• Consultation on Reform of Landfill Tax in England and Northern Ireland (April 2025)
• Paris Agreement 2015
• s1 Climate Change Act 2008Renewed Agenda for European Union – United Kingdom cooperation common understanding (May 2025)
• Environment Act 2021
• The Environmental Targets (Residual Waste) (England) Regulations 2023, regulation 2

 Cases

• Waste Recycling Group Ltd v HMRC [2008] EWCA Civ 849; [2009] STC 200
• Patersons of Greenoakhill Ltd v HMRC [2016] EWCA Civ 1250; [2017] 1 WLR 1210; [2017] STC 225
• Devon Waste Management Ltd v HMRC [2021] EWCA Civ 584; [2021] 4 WLR 89; [2021] STC 990

• Joshua Stevens | Pump Court Tax Chambers
• Zizhen Yang | Pump Court Tax Chambers

Welcome to Pump Court Tax Chat podcast series brought to you by the barristers at Pump Court Tax Chambers. We are the largest UK tax set and our podcasts aim to give you insight into recent developments in tax law and procedure. Across the series, we'll look at a range of topics covering issues that arise both in disputes and in advising clients more generally.

All of the cases and legislation mentioned in a podcast are set out on our website in the listing for that particular recording. If you have any questions, please do contact one of our staff team. You can find their details on our website, PumpTax.com.

Hello, thank you for joining us on Pump Court Tax Chat. I'm Zijin Yang.

And I'm Joshua Stephens, and we are barristers at Pump Court Tax Chambers.

Today, we'll be talking about environmental taxes, two in particular, landfill tax and carbon border adjustment mechanism. Before we leap into the deep waters, as it were, Josh is just going to lead off with a brief introduction to the concept of environmental taxes.

Joshua 01.31

There is some interesting theory behind environmental taxation, which is a very unique breed of taxation. Most taxes, of course, are primarily intended to raise revenue. That's the obvious thing that taxes are meant to do. Although inevitably, taxes become very tied up with politics and policy, and so they have their own policy objectives as well. What distinguishes them is that the policy objective comes to the forefront, and they are characterised by having an explicit policy objective rather than a revenue raising objective, first and foremost.

So the theory behind environmental taxes is to tax an activity which is environmentally harmful so that there is then less of that activity. And that's based on an economic theory of imposing costs on externalities or negative impacts which are not fully priced into the market price of doing whatever it is that the tax is targeting, the harmful activity in question. And for that reason, they're sometimes called corrective taxes.

And there's a similar rationale to so-called sin taxes as well. But what this means for environmental taxation is for those taxes which have an express environmental objective, what makes them strange is that a perfectly effective environmental tax which eliminates the harmful activity in question is in fact one that raises very little or no revenue because that harmful activity being taxed no longer is taking place. And so they are, in that sense, almost aimed at doing the opposite of what we generally consider taxes to do.

That's one of the things that make them interesting, that's one of the things that makes them unique. And as I say, there are two main examples of this that we want to look at today, which are hot topics in the first case because it's under considerable reform and in the second case because there is a new tax in the offing. And the first one is the landfill tax and the second is the carbon border adjustment mechanism due to come in in the UK in 2027.

Landfill tax, now by way of a short history, this was introduced in the UK on the 1st of October 1996. It was in part three and schedule five of the 96th Finance Act. This was our first environmental tax aimed at reducing the amount of waste going to landfill by increasing the cost of disposing of waste in this way.

And the aim was to meet targets set out in the EU landfill directive, which was to incentivise a move to reuse, recycle and recover waste, so-called circular economy. And what it did was recognise that waste disposal was at the bottom of this waste hierarchy. The waste hierarchy is a guide to sustainable waste management.

It's also a legally binding consideration for governments when developing waste policy. What the waste hierarchy does is it gives priority to prevention. Then you have reuse, recycling and recovery in the middle.

And disposal is a measure of last resort that sits at the bottom of the hierarchy. So landfill tax is meant to help drive waste behaviour up the waste hierarchy and away from disposal. There are two rates of landfill tax. There's the lower rate, which is currently four pounds and five pence per tonne. It's applied to broadly non-hazardous, inert waste. So things like concrete, glass, ceramics, ash, soil, rocks, they're non-biodegradable. So they're less polluting because they don't generate landfill gas, which is largely methane and carbon dioxide. And they don't generate leachate, which is this rubbish water that you sometimes get even accumulating at the bottom of a domestic bin. So that's the lower rate.

Then you have the standard rate at a much higher level of 126 pounds and 15 pence per tonne currently. That's applied to hazardous or active waste, which is broadly the biodegradable fraction. And the standard rate in real terms has increased between 1998 and 2014 by 700 per cent.

The tax is charged per tonne, so you apply the applicable rate to the weight of the material you're disposing of. It's an indirect tax in that although it is the landfill site operator who is liable for the tax at a landfill site, the economic burden of the tax is passed on by the operator to the waste producers and waste processors who bring the waste to the site in order to dispose of it. Now landfill tax has been successful in practise in reducing the amount of waste going to landfill.

So local authority waste, for example, going to landfill in England has fallen by 90 per cent since 2000. It's also, of course, generated significant revenue for the Treasury because landfill is a large business. It's not without its negative side effects.

In a sense, taxing disposals at landfills incentivises illegal disposal. It's estimated that up to 18 per cent of waste, that's about 34 million tonnes a year, may be handled illegally. It's this fly tipping, things like that.

It also translates into a significant tax gap, which is estimated at around 14 and a half per cent, about 100 million pounds. Over the years, there have been several significant cases and legislative developments. The first most significant case, perhaps, was in 2008.

It was Court of Appeal in a case called WRG. What the court found was that WRG, the landfill site operator, was entitled to a refund of the tax in relation to inert material which had been deposited on its landfill site, but which it then used for engineering purposes, such as the construction of site roads, and what's called daily cover, which is material, often shredded tyres, that one puts over the top of the deposited waste at the end of a day's operation to prevent the waste being blown about by wind or pecked at by birds overnight. What the Court of Appeal in WRG confirmed was that the material once labelled waste need not always be waste in the future.

And in the circumstances of that case, it was the intention of WRG as the landfill operator and not the original producer of the material that was relevant in determining whether there had been, quote, a disposal of material as waste for the purpose of the tax. And that depended on whether WRG had the intention to discard the material. Now this requirement was removed in 2018 because there was a whole scale rewriting of the legislation.

But going back to WRG, what the Court of Appeal said was that the actual use made of the material by WRG meant that it couldn't have intended to discard the material. Bearing in mind that daily cover was often not reused. So after one night, in the morning, it stayed in the void and it would have been buried together with the further waste added the next day.

But because WRG didn't intend to discard it when it was placed there in the evening, no landfill tax was charged on the disposal of daily cover, even though by the morning it just ended up as rubbish in the void. After WRG, which was 2008, further legislation was enacted, which then imposed tax on disposals of daily cover. That was legislation in 2009.

And then subsequently in 2021, three landfill site operators, BIFA, Devon Waste Management and Veolia together went to the Court of Appeal, and it was found that perhaps in a slight refinement of what was found in WRG, that the actual use of material on a landfill site was not determinative of an absence of intention to discard the material. The material in the BIFA-Veolia-Devon Waste Management case was what's called base, side and top fluff. That was material made up mainly of soft household waste, so black bin waste.

They were placed against the edges of landfill cells, those are the big voids in the ground, to prevent damage to the lining and other infrastructures that prevent pollution by leachate and landfill gas. What the Court of Appeal said was that by putting fluff layers against the sides of the cells, the site operators were doing no more than disposing of waste carefully, and the fact that they actually made use of this material was not determinative of the tax analysis. They were carrying out, in fact, taxable disposals.

And what the Court of Appeal did in that case was to identify a number of factors as being relevant to the question of whether there was an intention to discard the material. And that included whether the material was placed in the cell or somewhere else on the landfill site, whether it was separated and stored, whether the expectation was that the material would stay in the cell permanently, and the economic circumstances surrounding the acquisition of the material. And it probably didn't help in that case that the material was paid for, the waste producers and processors who brought it onto the site had to pay for the site operators to take that material.

One difference is that in Wales, landfill tax on disposals at unauthorised sites, so on the regulator and are not there for landfill sites, disposals on those unauthorised sites in Wales is charged 150% of the usual rate. Then in 2018, significant legislative change was introduced to charge landfill tax on disposals at sites that were not authorised landfill sites in England and Northern Ireland. Previously, tax was only charged for disposals on landfill sites, so the sites that hold a permit from the regulator.

In the meantime, the rate of landfill tax has gone from where it started, which was £7 per tonne at the standard rate and £2 per tonne at the lower rate in 1996, to the current rate, as we said, which is just over £126 per tonne standard and just over £4 per tonne at lower rate. So, the trend has been a progression towards both expanding the basis for taxation and increasing the rate of the tax, so as to generate ever more revenue from the tax, but of course, only as long as waste is being landfilled. One sees this in practice, this increase in revenue generation, one sees it in practice in the Commissioner's consistent and, one might say, insistent targeting of, first of all, non-landfill sites.

It's been interesting hearing how, since its inception in 1996, both the case law and legislative developments have led to landfill tax becoming both more and more targeted and more and more expensive for the taxpayer. One can see those same trends in the latest consultation for the reform of landfill tax.

The consultation is very much couched in the language of justifying the landfill tax changes by reference to the policy objectives, but also with the happy side effect that, because people will still be disposing of waste, notwithstanding the stated intention of decreasing the amount of waste that's being disposed of, it will still have the happy side effect from the government's point of view of raising more money. And one can be as cynical as one would like about that. So what is this consultation from April this year proposing the reform of landfill tax? What is it trying to do? Well, it is essentially, as I'll explain in a minute, targeting two things.

One is the gap, the massive gap between the standard rate and the lower rates for landfill tax. And the other one is trying to cut back or eliminate entirely in some instances, the exemptions or the reliefs that apply in certain circumstances to certain disposals. And so the stated aim of the consultation and the reforms put forward in it are to reflect the fact that the current approach of applying landfill tax rates based on material type is outdated and does not fully align with our ambition, the government's ambition, for a circular economy for all resources.

And so in that way, it reflects a drive towards the near elimination of municipal biodegradable waste, which is a policy objective the government has, and doing that in order to support net zero and other environmental goals, which are important to the government and to the country. So those are the policy objectives, but also with an eye to trying to tackle some of the unwanted side effects, some of the perverse incentives that have been created by the current regime, such as waste crime and the perceived tax gap, which Zizhen mentioned earlier.

Now, you talked just now about the consultation being directed at eliminating or supporting net zero and other environmental goals. Do we know what those goals are?

So that's an excellent question, because we hear a lot about net zero, we hear a lot about environmental goals, and they seem to cast a shadow over a lot of policymaking and legislation. But it is always good, especially as lawyers, we're looking for the source of these things to pin down exactly what we mean by net zero or environmental goals. And there are a few specific legislative commitments, which the government is bound by under current legislation, which really influence this and other areas of environmental policy.

And then also there are specific binding legislative commitments, which the government is required to adhere to as well. So there is a commitment in Section 1 of Climate Change Act 2008 to reach net zero by 2050. So those are the overarching net zero goals to do with overall carbon emissions.

So those are the goals, the legislative underpinnings here. And that helps put into context these reforms to the landfill tax, which have been published and proposed this year.

So as I mentioned, there are two main planks to the reforms, one to do with the dual rate structure between the lower rates and the standard rates and the issues that that massive discrepancy between the two has caused, as has been explained. The lower rate hasn't changed enormously over the last decades, but there's been a massive, massive increase in the standard rates. And then secondly, the second plank is that there's a need to refine and look at, again, some of the exemptions and reliefs.

So the consultation justifies it in this way. It says that the application of the dual rate structure and range of reliefs can be open to misinterpretation, which has made landfill tax increasingly challenging for businesses to comply with and for HMRC to enforce. So they couch it in language of, we're doing this to help you to make life easier for business because it's been difficult to comply with.

So making businesses' life easier and HMRC's life easier, according to the consultation. And then it goes on to say that there is a need to divert more inert wastes, which are currently lower rated for landfill tax purposes, up the waste hierarchy to recycling and reuse. So that really does go back to the essential environmental objective of the tax, which is to drive waste up the waste hierarchy. And the concern is that the gulf between the lower rate and the standard rates has become an obstacle to doing that. And some of the exemptions and reliefs have as well.

And there'll also be power for HMRC to charge wrongdoing penalties, penalty interest and criminal sanctions. Just as a little tangent on that, as was mentioned earlier, the 2018 reforms to bring in the landfill tax for disposals at unauthorised sites, that is something which has applied retrospectively, but there is a provision there, which is that a person cannot be guilty of an offence or liable to a civil penalty solely as a result of the retrospective effect of those provisions. And so that does raise at least academically a question as to how the civil penalties regime for landfill tax will interact with that bar where it's being imposed retrospectively. But given the time that's elapsed, that may not be something that comes up much in practice if at all.

So the consultation acknowledges that this proposal to unify the rates may increase engineering costs for landfill operators because the inert material they use for engineering at the landfill site will now be subject to the standard rate tax rather than the much, much lower rate tax as it has been. The consultation says this will be balanced by a reduced administrative burden on operators through not having to decide whether something is standard rated or should attract the lower rate and the reduced risk of submitting an incorrect return. Again, whether that truly balances out the additional costs remains to be seen, but could be viewed with skepticism in some quarters as we'll see. And also the consultation acknowledges that there will be increased disposal costs to business. As was mentioned, it's an indirect tax. The landfill sites costs are passed on to the businesses using the landfill, and that will especially affect business in the construction and the demolition sector that need to dispose of lower rated waste to landfill.

There's a possible policy tension there with the government's drive to encourage and push through more house building and liberalise the planning system to make that possible. Arguably, this is something that goes in the other direction and cuts across those other objectives to build more houses and infrastructure. So we'll see how that all plays out.

Moving on then to the second plank of changes being brought in by the consultation, there will be a complete removal of the exemptions for quarry infilling and the exemption for dredging. So taking the quarry infilling exemption first, this was originally intended to address the difficulties quarry owners had in competing for qualifying material with similar sites.

Nowadays, quarries are being used to dispose of waste material in a similar way to landfill sites, the consultation claims, with the advantage of not paying landfill tax. And so the landfill tax exemption has, again, the consultation claims, enabled quarry operators to circumvent applying for a recovery permit and act as a barrier to material being moved up the waste hierarchy. This has created unfairness, the consultation says, and does not align with the government's circular economy ambitions.

And so the exemption has got to go. The proposal is for the exemption for quarry infilling to be removed from 2027 in relation to quarry infilling under a disposal permit. However, importantly, material used to fill quarries with a recovery permit, not a disposal permit, will remain outside the scope of landfill tax. So that's some good news for quarries there, at least.

However, to note that there are reported to be very long delays in the Environment Agency's deposit for recovery permitting process, typically of six to eight months, and so there could be difficulty in getting hold of those recovery permits. Moving on then to the dredging exemption, this was introduced to support the removal of accumulated sediment, which helps keep inland waterways clear and prevent flooding.

So it's an important environmental activity. The concern that's arisen here is that when standard rated dehydrating additives are added to the dredged material, that means that those additives, as well as the dredged material, are escaping tax because they are benefiting from the exemption. And that means that that material isn't being reprocessed and recycled, as we'd like to see in a circular economy. And so the proposal is to restrict the exemption to only the dredged material and not the additives from April 2027.

So those are the main changes being made to the exemptions. The consultation says also that other exemptions will be kept under review, including perhaps my favourite exemption in the whole world of tax, which is the special exemption for pet cemeteries from landfill tax, which is that pet cemeteries are treated as a landfill site because they need to be regulated by the Environment Agency and animals' bodies, like all bodies, are organic and will decompose. So all other things being equal, a pet cemetery would need to be treated as a landfill site, but there is a special exemption from the tax for them.

Yes, and my understanding is that people tend to get rather upset if you describe their dead pets as landfill. Also interestingly, Josh pointed out to me that there's a Stephen King book called Pet Sematary, with cemetery misspelt, because in the story it's misspelt. I'm spoiling it for everyone, but the action takes place beyond the pet cemetery, as it were, where if you bury your dead pet or dead wife there, they tend to get resurrected, albeit moved by malevolent force. So in a sense, it's a good thing that there is an exemption for pet cemeteries, because otherwise, well, we'd have to deal with the question of whether you get your landfill tax refunded if your buried pet were to become resurrected by malevolent force and escape the site, as it were.

So for now, we don't have to think about questions like that. Josh is then going to talk about the second part of the consultation, which is proposals to remove landfill tax reliefs.

Thank goodness for that. I believe the Pet Sematary has been made into a film as well, but I can't claim to have watched the film or read the book. So I can't comment on that, but it is an unusual and unexpected crossover between the world of landfill tax and the world Stephen King horror stories. So there you go. Unexpected things crop up in all sorts of places.

So this has given rise to a concern that in some industries, the availability of the water discounting relief could mean that it's cheaper for businesses to send the material to landfill than to push the material up the waste hierarchy and maximise recovery or recycle instead, especially in the light of advances in recycling technologies, since the discount was first introduced to the tax, which means that water can now be more efficiently removed than was the case previously. And so the consultation's view is that the water discounting relief is open to abuse and difficult to enforce, with some waste disposers claiming a discount for water which has not been added, resulting in the under declaration of landfill tax. So that goes back to the tax gap point mentioned earlier. And there's also a risk to the environment caused by retaining water and waste, since the extra water can increase the risk for leachate.

So that's the rationale for removing the water discounting relief from 2027. And you can see a pattern here among all of these changes which are being proposed to the lower rates, to the exemptions, to water discounting relief.

So that wraps up the proposed changes to landfill tax, which will represent quite a significant overhaul of the current regime and will have a considerable impact on many businesses. So, Zizhen, what's been the response to these proposed reforms? And what do you make of them?

Well, the consultation closed in July this year. We haven't had a summary of responses yet, but we do know a few things. For example, because they've publicised it, FCC has written to the Chancellor of the Exchequer to warn that the proposed reform could make nationally significant infrastructure projects and major housing projects unviable. So FCC points out that a single flat rate of landfill tax could see a tax rise of almost 3000% for developers and major construction firms. They say the cost of removing 1000 tonnes of unusable or unrecyclable soil from a building site could increase from £4,000 to as much as £126,000.

Sorry, forgive my ignorance, who are the FCC?

FCC is one of the largest landfill site operators in the country. There have also been concerns expressed by the local government association, the LGA, that the proposal is going to have significant cost implications for councils. The reason is that councils enter into these waste disposal contracts that can run for many years and they often include a minimum tonnage requirement. So you have to take a minimum amount of waste to the site operator for disposal.

Councils are also concerned that landfill may be required on a short-term basis for all the environmental drives, etc. If you have a major flood event, you're going to need to landfill things, even if temporarily. If you need to cover gaps in planned maintenance, for example, for energy from waste facilities, you're going to need to store waste temporarily in landfill. Another consideration for councils is the risk of increased fly-tipping when you remove the lower rate of landfill tax.

The Mineral Products Association has also warned the government that the proposal, as regards quarry exemption, risks, they say, triggering a nationwide shortage of aggregates, which will threaten quarry restoration plans and hit construction with a price increase on two fronts. They say it would add billions of pounds onto the cost of operating many of the UK's quarries and delivering the restoration plans.

Now, these reforms, the proposed reforms, are clearly aimed to advance the environmental objective of driving waste up the waste hierarchy away from the disposal. It aims to do so by plugging perceived gaps, so the 200% rate that's proposed for disposals at unauthorised sites, the intentions to deter unlawful disposals, which are the most harmful of all, because they are being dumped in an uncontrolled, unregulated way without all the infrastructure that landfill sites have, as we say, to remove landfill gas, to remove leachate, so they don't pollute the environment. There's also an element of trying to update the tax to keep up with new technologies. So, for example, the concern that the water discounting relief may be preventing commercial actors from making the most of new available recycling technologies that are more recent.

But it's worth bearing in mind that certainly as regards disposals at unauthorised sites, they're often the result of criminal conduct, where the perpetrator is difficult to find, or even if you do find them, you find that they have limited resources. And the current regime already punishes the landowner, who is often an innocent victim, and that's not about to change under the proposal.

There's also a question as to whether as much as the proposal is aimed at achieving environmental goals, which are obviously laudable, it is also a revenue generating exercise. And that leads to an internal tension in what the tax is trying to accomplish, which is all the more acute because of the strain that's currently on the public purse.

Leading to a bigger point, which is how politically defensible or sustainable can attacks with explicit environmental goals be in the current climate, especially if it's perceived to impose additional costs on households or businesses, in a world in which environmental ambitions are perhaps increasingly seen as a luxury. But what's worth bearing in mind at the same time, is that the move away from landfill is already well underway, with significant planning, and investment on energy from waste and other forms of recycling and recovery solutions.

So the proposed changes are consistent with that existing direction of travel, and they are likely to speed up those plans. Combined with practical action, therefore, it may well cut down further on illegal activities. Whether that happens in practice, we'll have to wait to see.

Yes, indeed. Exciting and perhaps unnerving times in the world of landfill tax. Now, I am Joshua Stevens.

And I'm Sejen Yang, and you are listening to Pump Court Tax Chat.

Next, Josh is going to tell us about a new tax, which I have to admit, I didn't know was coming in until you told me about it. It's the Carbon Border Adjustment Mechanism.

40:03 Joshua

Carbon Border Adjustment Mechanism, or CBAM for short, it doesn't have the word tax in the title. But it is, in fact, excitingly, an entirely new tax, and what's more, one with an explicit environmental objective. Although, as we've just seen with the proposed reforms for landfill tax, tax can be somewhat of a blunt instrument when it comes to environmental policy, and it can have wider and unforeseen repercussions. When it comes to the CBAM, what is the environmental objective being targeted here? Why do we need a new tax, in other words, don't we have enough of them? Well, the rationale for the CBAM is found in the phrase carbon leakage. And to explain what that means, in the UK, the domestic production of certain carbon intensive goods is made more expensive, because the producers have to purchase and surrender certificates under the UK's Emissions Trading Scheme, or ETS. We used to be in the EU ETS, since coming out of the EU, we now have our own version. And the ETS imposes an explicit carbon price for the domestic production of those goods.

41:30 Joshua

So this is intended to incentivise more carbon efficient production methods of things like steel and aluminium, which would be good for the UK's environmental goals, including those enshrined for net zero, as I mentioned previously. There is a potential problem, however, with the ETS imposing an explicit carbon price on domestic production of these carbon intensive goods, however, and that is carbon leakage. So a domestic emissions trading scheme, which makes production more costly, is an obvious push factor for the producers to move their production of the goods abroad, where there isn't an explicit carbon price being imposed.

And that would be bad for UK industry and the UK economy, and also bad for global emissions, which would remain unchanged. In other words, if all you have is an ETS, carbon leakage means that for the UK, it would be all pain for no global emissions gain. So at the moment, the problem of carbon leakage is managed through the allocation of free allowances in the UK emissions trading scheme.

42:47 Joshua

But the plan is to phase those out and to bring in the CBAM instead, which is meant to impose equivalent carbon costs on goods produced abroad and imported to the UK, and by so doing level the playing field and hopefully reduce carbon leakage, i.e. those producers, instead of going to make whatever it is they're making somewhere else, they'll keep making it here, but they'll do it in a more carbon efficient way.

43:17 Zizhen

That's the theory, that's the principle that sits behind the CBAM scheme. How is it meant to work in practise?

43:22 Joshua

In brief, the way it works is that the UK CBAM at least has been designed as a border tax, which is imposed on the imports of certain carbon intensive goods produced abroad and then imported into the UK. In the latest policy update we've got from the government on this in April this year, we can now see the specific commodity codes, which identify the categories of goods to which the CBAM will apply.

These fall within five covered sectors. Those are aluminium, cement, fertilisers, hydrogen, iron and steel. That coverage is going to be kept under review.

That's what falls within the scope of the CBAM. As for how liability will be imposed, well it will fall on the importers who are acting in the course of business. The tax point will generally be when the CBAM goods in question is imported into the UK and the goods would become subject to import duty.

45:09 Joshua

An importer of CBAM goods therefore will have to register with HMRC once the value of CBAM goods imported over the last year or to be imported in the next 30 days is more than a threshold of £50,000 or more. Those registered persons will then have an obligation to submit a CBAM return for each accounting period and to pay the tax as well.

45:32 Zizhen

How do you calculate the liability?

45:36 Joshua

Okay, so this is where it gets really complicated.

The liability will be calculated based on what's known as the embodied emissions in the imported goods as measured in tonnes of carbon dioxide equivalent. The embodied emissions include direct and indirect emissions that went into making the goods as well as the emissions embedded in relevant precursor goods. All of this needs to be calculated either using actual data which will need to be independently verified or in the absence of that the Treasury will provide default values for embodied emissions for each good within the scope of CBAM.

Once the embodied emissions are known, this will then be multiplied by the rate which will be set for each relevant sector quarterly to reflect the UK's domestic carbon price for that sector. That then gives what's known as the UK CBAM liability, but it's not quite the end of the calculation because the CBAM isn't meant to be protectionist, it's meant to level the playing field. Where goods being imported have already suffered an explicit and it will need to be an explicit rather than implicit carbon price in another jurisdiction, then that can be deducted from the UK CBAM liability to give the final liability. So there's quite a complicated formula which will need to be employed to work out what the final liability will be.

47:10 Zizhen

Yes, that sounds like it could get very complicated in practise.

47:13 Joshua

Yes, I'm afraid so and as a result it threatens to impose quite a considerable additional administrative burden on the affected businesses, especially because the person responsible for reporting and paying the tax, i.e. the importer, may not have easy access to the data from the producers which they need to determine the CBAM liability.

And then this is even more difficult where the embodied emissions includes those of precursor goods and so the calculation is having to take into account emissions several steps down the production chain. These are all issues that many businesses will already be considering in terms of how they organise their contractual relations down the production chain so that they can work these types of things out.

48:02 Zizhen

And presumably this complexity is only going to be compounded by the fact that UK exporters are also going to have to EU CBAM.

48:12 Joshua

Yes, exactly. So the UK CBAM is an issue for UK importers. For UK exporters exporting to the EU, they will need to be taking the EU CBAM into account.

If that were to happen, then the EU CBAM ought no longer to apply to UK goods moving to the EU and vice versa for EU goods moving to the UK. However, that's a question of if and when that happens. It's nothing that's been legislated for or that we can confidently predict as yet.

49:59 Zizhen

Will all this be worth it at the end of the day?

50:03 Joshua

As for whether it will be effective as a policy tool to reduce carbon leakage, that's a little bit beyond my ken to judge. Carbon leakage is obviously a problem that needs to be dealt with in some way if the UK is to operate an ETS without suffering loss to its own industrial base. However, the CBAM, I think it's fair to say, is prone to attract controversy internationally with our trading partners. Without turning this into a foreign affairs podcast, it's easy for even a lay person such as myself to see that the mood music in current trade and diplomatic relations at the moment isn't one that's conducive to harmonious international cooperation to reduce global emissions.

Now, as I say, the UK has been at pains to stress that the CBAM is not meant to be protectionist but all the same, one can see how it could come under fire from certain trading partners. It's not difficult to see how it could be a source of friction in trade relations which may impair how effective it is as a tool of reducing global carbon emissions.

On a more legal note to do with that type of issue, there's also the prospect, a very real prospect, that CBAMs could be prone to a challenge under WTO rules. In fact, Russia has initiated disputes under WTO rules against the EU CBAM earlier that year. In that regards, there may be an interesting question as to whether the design differences between the UK's CBAM and the EU CBAM would make them more or less susceptible to challenge but that's probably not something we have time to go into today.

58:36 Zizhen

By way of summary then, we've taken a canter through the history of landfill tax. We've seen how it's become a significant revenue generating exercise further to its provenance as a scheme to deter waste disposal that have a negative impact on the environment. The latest consultation we've seen from the treasury seems to double down on that by proposing increased tax rates and removing exemptions and reliefs.

But of course, the tax very much retains its spirit as a defender of the environment since the revenue generated would be precisely zero if no one disposed of waste by landfill. Then Josh told us about a new environmental tax, the carbon border adjustment mechanism, which is aimed at discouraging carbon leakage or as I like to think of it, carbon price shopping in jurisdictions other than the UK, which would both reduce the size of the UK economy and disincentivize more carbon efficient production mechanisms.

So, the idea behind CBAM is that businesses won't get an advantage from moving their production overseas where the carbon cost is lower if they want to import the end product back into the UK. The tax calculation involves multiple steps and there will be logistical complications in practise because the reporting obligation and the tax liability is imposed on the importer who will therefore need to ensure it can acquire adequate data from the producers under its relevant contracts. Now, CBAM is said not to be protectionist but of course, as it is aimed at disincentivizing moving production outside of the UK, that claim does ring somewhat hollow.

And one asks, would it not be better to incentivise better environmental practices by reducing the cost for businesses that adopt innovative practices to protect the environment, rather than increasing the cost for all businesses unless they do so? But of course, the country does have a black hole in its budget and that may play into considerations. And that's all we have time for today. So thank you for listening.

I'm Zizhen Yang.

55:01 Joshua

And I'm Josh Stevens. And thank you very much for your time.

55:06 Laura

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