UK Carbon Border Adjustment Mechanism (UK CBAM): What you need to know

In December 2023, the UK government announced its intention to introduce a UK Carbon Border Adjustment Mechanism (“UK CBAM”) from January 2027 to discourage relocation of energy intensive activities out of the UK and reciprocate the imposition of an equivalent scheme on UK imports into the EU.

In March 2024, the government launched a consultation on the design and administration of the proposed UK CBAM on imports of certain carbon intensive imported goods from specific sectors, and as part of the Autumn 2024 budget, on 30 October the government’s response to the consultation was published. 

Mirroring the European Union’s approach, the proposed UK CBAM aims to ensure that imported goods bear the same cost of carbon emissions as those manufactured in the UK, levelling the playing field for energy intensive domestic industries that are vulnerable to international competition (for more information on the EU CBAM, see our previous blog post, and also see here for commentary from the Draghi Report evaluating the EU CBAM). As the UK increasingly constrains the availability of emission rights to UK industry, the UK CBAM will ratchet up the cost of imports with a border tariff equivalent to the cost of carbon in the UK emissions trading scheme. 

The UK CBAM will focus on the most emissions intensive industrial goods imported to the UK from the aluminium, cement, fertiliser, hydrogen and iron and steel sectors (the “UK CBAM Sectors”) that are most at risk of “carbon leakage” (i.e. the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation). 

It aims to ensure highly traded, carbon intensive goods imported from outside of the UK face a carbon price that is comparable to what would have been payable had they been produced in the UK. Notably, the government has opted not to include electricity in the list of UK CBAM Sectors (i.e. imports of electricity are excluded), which is captured by the EU CBAM.

How will it work in practice?

Once fully in place in 2027, the UK CBAM will work as follows: 

• A levy will be applied on the embodied GHG emissions of a specified list of goods imported in the UK CBAM Sectors, which are set out in the list of commodity codes published in Annex B to the response to the consultation. This list will be kept under review by the government post-2027. 
• A notable difference from the EU CBAM regime is that under the UK CBAM, in-scope businesses will not need to purchase and surrender CBAM certificates. 
• It will apply to direct emissions (i.e. those related to the production processes of UK CBAM goods, including emissions from the production of heating and cooling consumed during the production processes) and indirect emissions (i.e. those related to the production of electricity, which is consumed during the production of UK CBAM goods irrespective of whether the electricity was produced on or off site) embodied in UK CBAM goods. The UK CBAM will also apply to emissions embodied in select “precursor product emissions" embodied in UK CBAM goods at a point further up in the value chain. Whilst the response to the consultation does not include a definition of what these products are, the EU Commission defines precursor materials for the purpose of the EU CBAM as being: “simple or complex goods which have embedded emissions, and which are identified as being within the system boundaries for the calculation of embedded emissions of a complex good" - i.e.  products that serve as “precursor” for EU CBAM goods. Information on relevant precursors under the EU regime is set out under Annex II (Part 3) to the Commission Implementing Regulation (EU) 2023/1773, and see also EU CBAM Q&As dated 31 January 2024. 
• A carbon price is applied (i.e. the UK CBAM rate) to each tonne of embodied emissions attributed to the relevant goods, which will reflect explicit carbon pricing in the UK, net of free allowances and other allowances made to reduce the domestic cost of carbon. UK CBAM liability can be reduced if the embodied emissions in the imported UK CBAM goods were subject to an explicit carbon price overseas and the liable person provides evidence of this. This means that the overall UK CBAM liability will account for explicit carbon prices applicable in other jurisdictions to ensure the measure focuses on mitigating the risk of carbon leakage driven by the differentials in carbon pricing between jurisdictions.
• The tax point arises when the UK CBAM good is released into free circulation on the market - i.e. when the UK CBAM good has cleared any customs controls. This is the same as how the charge arises under the EU CBAM. For goods that are exported under the outward processing procedure and re-imported into the UK as a UK CBAM good, the tax point arises at free circulation but will be based on the processing emissions that took place outside of the UK. For UK CBAM goods that originated outside of the UK and are reimported using the returned goods relief (which enables businesses and individuals to re-import goods into the UK without incurring taxes, assuming those goods were originally exported from the UK), there will be no UK CBAM liability providing the conditions for applying the relief for customs purposes are met. This means UK CBAM goods which are reimported into the UK within 3 years in an unaltered state will be out of scope and not incur a UK CBAM liability.
• In relation to the calculation of emissions, a single set default value for each UK CBAM good will be available to ensure that goods can continue to be imported and CBAM complied with where actual emissions data for goods is not available, though in the response to the consultation the government states that independently verified actual emissions data will be preferable. The government will also publish the methodology for calculating default values before introducing the UK CBAM. Clearly, these values are likely to incentivise reporting of actual data in most cases. 
• Emissions need to be verified by an independent person accredited by a member of the International Accreditation Forum (IAF) in the UK, such as the United Kingdom Accreditation Service (UKAS). 

Who does it apply to?

The liable person under the UK CBAM regime will be the person responsible for the goods when they are released into free circulation. Or, where there are no customs controls, it is the person on whose behalf the goods are moved to the UK. 

Individuals importing UK CBAM goods for personal use will not be liable for the UK CBAM. 

The liable person will be responsible for registering, submitting returns and paying the UK CBAM to HMRC. 

A person will not need to register for the UK CBAM if the total value of their UK CBAM goods is under a minimum threshold of £50,000 over a rolling 12-month period. 

When will it apply?

The government intends for the UK CBAM to apply from January 2027. 

Liable persons will have an initial 5-month period from the end of the first accounting period (up to 31 May 2028) before tax returns are due. The consultation proposed that from 1 January 2028, accounting periods would be quarterly and to gradually transition to returns with payments due a month later, to align with how other taxes are generally administered by HMRC. However, based on the feedback received to the consultation, the government intends to continue to consider the approach to accounting and payment periods from 2028.

Further clarity on specific application dates is expected to be set out in UK CBAM legislation that will be developed in due course. 

Interaction with UK Emissions Trading Scheme 

The UK’s current main measure to mitigate carbon leakage risk is the system of free allocation of emissions allowances under the UK Emissions Trading Scheme (UK ETS). 

In the response to the consultation, the government highlights that a key component of the UK CBAM design is the translation of activities in scope of the UK ETS into a list of imported products by identifying products which would have been subject to the UK ETS if produced in the UK.

Reforms to the UK ETS, which were set out by the UK ETS Authority in July 2023, will reduce the number of UK ETS emissions allowances available for purchase from the government by 45% between 2023 and 2027 and the number of free allowances issued will also decrease.

The UK ETS Authority consulted on moving the start of the second free allocation period from 2026 to 2027 and extending the current allocation period to include 2026. In its response to the UK CBAM consultation, the government highlights that a move to 2027 would enable it to align the implementation of the Free Allocation Review with the introduction of the UK CBAM, ensuring a holistic policy approach to carbon leakage. The UK ETS Authority will also make a final decision and respond to the UK CBAM consultation in due course. 

Under the EU ETS, free emissions allowances for EU CBAM sectors will be gradually phased out between 2026 and 2034. We will need to wait and see what approach the UK government decides to take in relation to the phase out of free allowances as the response to the consultation does not provide clarity on this point, simply noting that a minority of consultation respondents expressed uncertainty on how free allowances should be phased out, and that the government intends to continue to consider options as to how the UK CBAM rate will be adjusted for free allowances and will set out further detail “in due course”. 

It is important to note that free allocation of allowances provides an additional cost/cash flow benefit to operators relative to having to purchase allowances in auction notwithstanding the implementation of CBAM. Therefore, careful assessment will need to be made of the implications of removing free allocation for certain sectors and activities as part of the transition away from free allocation to CBAM. 

Penalties for non-compliance 

The government will use existing HMRC enforcement and inspection powers and penalties to those that are currently used to administer other taxes, including a general regulatory penalty for offences that are specific to the UK CBAM - for example, in relation to failure to keep appropriate records, late registration and failure to provide information. It will also seek to align with the penalty points system recently introduced for VAT for any late submission of returns or late payment.  

The government also intends to introduce a criminal offence for fraudulent evasion of the UK CBAM. 

Further clarity on penalties is expected to be set out in the relevant UK CBAM legislation in due course. 

Next steps 

Implementation of the UK CBAM will require primary and secondary legislation, which the government will publish in draft before introducing it to Parliament.

The government also intends to set up a UK CBAM industry working group and develop guidance on various aspects of the UK CBAM regime to support liable persons to comply with the requirements - for example, in relation to the test for whether the minimum threshold has been met before the tax comes into force and on reporting obligations for tax returns.  

More generally, the sectoral scope of the UK CBAM will be kept under review beyond 2027, to take into consideration any new evidence that comes to light to reflect changes to carbon leakage risk as well as methodological and technological advances.

Whilst we will need to wait for drafts of the UK CBAM legislation to gain clarity on the detail of the new regime, UK businesses that import in-scope goods should begin to consider the implications from a practical perspective, including consideration of how they will gather the required emissions data and the sufficiency of any existing data collection procedures.