UK confirms introduction of a Carbon Border Adjustment Mechanism

The UK government has recently published its response to a consultation on introducing a Carbon Border Adjustment Mechanism (“CBAM”), confirming that a UK CBAM will come into effect from 1 January 2027. The UK CBAM will place a carbon price on emissions intensive products imported into the UK.

This article recaps: what a CBAM is, key takeaways from the government’s consultation response, and differences between the UK CBAM and the EU CBAM.

What is a CBAM?

CBAMs are designed to address the risk of ‘carbon leakage’, which occurs where climate policies in one jurisdiction incentivise carbon-intensive industries to move their production to countries with less stringent policies. This can undermine national efforts to reduce carbon emissions, and can even risk leading to an overall increase in emissions.

For example, if country A has carbon pricing on C’s products, there is a risk that the production of C’s products will move to country B which has less stringent carbon pricing and/or that C’s products will become more expensive, so will be replaced by cheaper but more carbon intensive imports from country B.

A CBAM therefore aims to equalise the treatment of domestic and imported goods by applying a price to the carbon which was emitted during the production of certain imported goods.

Key takeaways from the UK CBAM consultation response

The government ran a consultation in Spring 2024 seeking views on its proposals for the design and administration of the UK CBAM. Key takeaways from the government’s response to this consultation are set out below.

• Sectors in-scope: The UK CBAM will place a carbon price on the emissions embodied in goods imported to the UK from the aluminium, cement, fertiliser, hydrogen, iron and steel sectors. Products from the glass and ceramic sectors that also give rise to a risk of carbon leakage will be considered for future inclusion but will no longer be in scope of the UK CBAM from 2027. In general, the government will keep the sectorial scope of the mechanism under review.
• Product level scope: Within the in-scope sectors, the CBAM will only apply to a specific list of imported ‘CBAM goods.’ These goods are identified by a draft list of commodity codes in Annex B of the consultation response. As with the sectorial scope, this product list will continue to be kept under review. 
• Direct and indirect emissions: As previously indicated, the UK CBAM will apply to both ‘direct’ and ‘indirect’ emissions in CBAM goods, in order to align with the UK Emissions Trading Scheme (“UK ETS”). ‘Direct’ emissions are emissions related to the production processes of goods, such as from heating and cooling, and ‘indirect’ emissions are related to the electricity used during production. 
• Liable person: The ‘liable person’ for paying the UK CBAM to HMRC will either be (i) where there are customs controls, the person responsible for the goods when they are released into free circulation or (ii) where there are no customs controls, the person on whose behalf the goods are moved to the UK. This means that the liable person will not always be the importer of the CBAM goods.
• Default emissions: The ‘liable person’ will be able to calculate their UK CBAM liability by either using (i) data on the actual emissions embodied within CBAM goods or (ii) default values as set by the government for each CBAM good.
• UK CBAM pricing: The UK CBAM rate applied to emissions will reflect explicit carbon pricing in the UK, net of free allowances and other reductions to the carbon price paid domestically. This will ensure that imported goods are subject to a carbon price comparable to that incurred by UK production. Further detail and guidance will be published in advance of the commencement of UK CBAM. The UK CBAM rate applied can also be reduced if the embodied emissions in the CBAM goods were subject to an explicit carbon price overseas that was greater than or equal to the UK CBAM rate for that sector.
• Minimum registration threshold: The government has concluded that the minimum registration threshold for CBAM goods that pass the tax point will increase from £10,000 to £50,000, as calculated over a 12-month rolling period to address concerns that the costs of complying with UK CBAM are proportionate to carbon leakage risks. 

The UK CBAM and the EU CBAM

The EU version of the CBAM is already in force and is currently in its transitional phase, ahead of a definitive regime being implemented from 2026. There are some differences between the UK and EU mechanisms, including but not limited to the following:

• Electricity: Both CBAMs apply to the aluminium, cement, fertiliser, hydrogen, iron and steel sectors, but the EU CBAM also applies to electricity.
• CBAM certificates: The EU CBAM requires the purchase and surrender of ‘CBAM certificates’ at the current EU Emissions Trading System (“EU ETS”) market price. The UK CBAM requires payment of a charge directly to HMRC.
• Separate CBAM rate for each sector: The UK government will apply a separate CBAM rate for each sector in the UK CBAM. This is not relevant in the EU CBAM, given the use of CBAM certificates which are calculated using the weekly average auction price of EU ETS allowances.

The CBAM pricing rate in both the UK and the EU is based on the carbon pricing in each jurisdiction’s respective emissions trading systems (UK ETS and EU ETS), and as these are separate systems, their average market prices differ with the UK historically trading lower than the EU. There have therefore been stronger calls recently to link the UK ETS and EU ETS as a persistent UK ETS price discount relative to EU ETS could that mean UK exports into the EU will pay a top up price from 2026 onwards due to the EU CBAM.

Conclusion

The next step for the UK CBAM is the publication of draft primary and secondary legislation, which the government has said it will publish ahead of introducing it before Parliament. In the meantime, it is worth companies spending time to understand whether, and if so how, the UK CBAM will impact them. If a ‘liable person’ under the UK CBAM, companies will need to review their imports against the commodity codes set out in Annex B of the government’s response to the consultation, and determine whether or not they are collecting the required data from their supply chains.

The UK CBAM is an example of the UK applying similar legislation to the EU, but while the policy drivers may be the same, the detail of the legislation is not. Companies need to understand whether each applies to them, and if so, the steps needed for compliance for the two regimes.