Running with an Empty Tank: Why the UK Needs a Strong Refining Sector
Until around 2005, the UK was a net exporter of fuel. Today, domestic refineries supply just over half of the diesel and only about 20 percent of the jet fuel consumed inland. Yet, refined petroleum products still account for more than 38 percent of the UK’s primary energy consumption, making them essential to the normal daily functioning of the economy.
The growing reliance on imports not only exposes the country to global price shocks and geopolitical risks but also undermines national energy security and resilience. This trend is the consequence of asymmetric regulatory frameworks in which imported fuels are not subject to the same carbon levies as those produced in the UK.
Despite the strategic importance of the industry, the sector has shrunk from nine refineries to just five since the EU Emissions Trading Scheme (ETS) was launched in 2005. The pace of consolidation has accelerated with the recent closure of Grangemouth, once a cornerstone of Scotland’s energy infrastructure and the insolvency proceedings against Prax Lindsey Oil Refinery Limited (owner of the Lindsey Oil Refinery) in June 2025. These developments have the potential to further widen the gap between domestic production and imports.
With urgent policy reform, the UK can avoid becoming a passive consumer in the global energy market, exporting emissions to countries with the lowest environmental standards.
Policy Disconnect: The evolution of the UK ETS and Free Allowances
At the heart of the issue lies the UK Emissions Trading Scheme (UK ETS), which replaced the EU ETS post-Brexit. While the UK ETS aims to mirror the EU’s carbon pricing mechanism, so far it has failed to account for the unique vulnerabilities of domestic industries like oil refining, which sell commodity products in global markets.
“Without urgent reform, the UK risks becoming a passive consumer in the global energy market, exporting emissions and importing vulnerability”
Today, refined fuel imports represent one of the largest sources of carbon leakage among goods entering the UK. A gradual reduction of free allowances (FA) after 2026, applied uniformly across all sectors regardless of their carbon leakage risk, imposes a disproportionate burden on industries that cannot easily reduce emissions or pass on additional costs to consumers. This approach accelerates industrial decline, as we are already witnessing, rather than supporting a fair and sustainable transition.
CBAM: The Equaliser
The Carbon Border Adjustment Mechanism (CBAM) is designed to level the playing field by applying a carbon price to imports from countries with weaker climate policies. The EU is already phasing in CBAM for sectors like steel and cement, with the UK expected to follow suit a year later.
However, the inclusion of refined petroleum products in CBAM remains uncertain in both jurisdictions. Without it, UK refiners face a double disadvantage: they pay high domestic carbon costs while competing with imports that bear none. This asymmetry accelerates carbon leakage and deindustrialisation, undermining the very climate goals these policies aim to achieve.
The Risk of Blind Alignment with the EU ETS
Recent UK-EU negotiations have opened the door to linking the UK and EU ETS markets. While harmonisation could simplify carbon pricing and trade, the UK must retain the flexibility to adjust carbon pricing, cap levels and FA allocations to reflect its own trade and industrial realities. A one-size-fits-all approach would strip the UK of the tools needed to drive its own climate goals and protect its most vulnerable sectors.
A Call for Strategic Rebalancing
The UK’s decarbonisation strategy must be recalibrated if it is to succeed in avoiding carbon leakage, where the carbon dioxide emissions in its supply chain occur in another country. The UK must avoid sacrificing domestic industrial capacity to satisfy an accounting rule that ultimately doesn’t result in the overall emissions reductions required to meet climate goals. This doesn’t mean abandoning net-zero—it means achieving it intelligently and equitably. This can be achieved by implementing CBAM for refined products without delay to ensure fair competition, retaining control over free allowance allocations, especially for emissions-intensive, trade-exposed sectors like refining and providing targeted funding for low-carbon initiatives, such as hydrogen-ready infrastructure and carbon capture, to help refineries and other industries decarbonise without shutting down.
Conclusion
The recent closure of the Grangemouth refinery and the insolvency of the Lindsey refinery’s parent company are not isolated events; they are warning signs. Without urgent policy action, the UK will continue down a path of industrial decline, energy insecurity and climate policy failure.
A rebalanced ETS, a robust CBAM and a strategic industrial policy are both an economic necessity and a foundational pillar to a fair and resilient energy transition. Delays or indecision will only deepen the crisis.
