The UK government has announced that the UK Carbon Border Adjustment Mechanism (“UK CBAM”) will be implemented by 2027, one year after the European Union Carbon Border Adjustment Mechanism (EU CBAM) becomes fully operational in 2026. The UK CBAM implementation is expected to be linked with the UK Emissions Trading System (“UK ETS”). The UK government launched a consultation process regarding the implementation of the UK CBAM on March 21, 2024. The consultation process will end on June 13, 2024.

Through this mechanism, the UK aims to create a carbon tax on imported products to align with the carbon prices paid by domestic producers, and to prevent “carbon leakage,” where production of carbon-intensive products shifts to regions with more lenient emissions reduction policies.

The UK has had its own emissions trading system since January 1, 2021. The UK ETS is one of the key policies implemented by the UK to address greenhouse gas emissions and achieve emission reduction targets. The UK ETS aims to achieve a 75% reduction in CO2 emissions by 2030 and to reach net-zero emissions by 2045. According to a report by The Institute of Export and International Trade, the UK CBAM is designed to protect the metallurgical sector in the UK.

The report from the Institute of Export and International Trade indicates that the UK CBAM initiative is being considered due to the possibility that steel produced overseas in countries with lower environmental standards could be imported into the UK at lower prices than locally produced steel.

The UK CBAM will cover emission-intensive sectors subject to the UK ETS, initially including aluminum, cement, ceramics, fertilizers, glass, hydrogen, iron, and steel, with a carbon price applied to products imported from these sectors.

Under the structure of the UK CBAM, importers of products from countries with low carbon prices will be subject to a tax on products based on the amount of carbon in the production of the imported products and the difference in carbon prices between what UK producers pay and what is paid in the country of production.

Who is responsible, and when?

The UK government outlines that the point of responsibility under the UK CBAM will be either:

  • The date when a product is released for free circulation where it is subject to customs control, or
  • The date when a product first enters the UK in cases where there are no customs controls.

It is expected that there will be no reporting requirement if the total value of products within the CBAM scope is below the threshold of £10,000 during a 12-month period.

The responsible person for the UK CBAM could be:

The person responsible at the moment products enter free circulation when under customs control (this could be the importer, but if ownership changes while the products are under customs control, it could be someone else), or

The person acting on behalf of products brought into the UK in cases where there are no customs controls.

The responsible person must submit a CBAM declaration at the end of each accounting period and pay any liability arising from it. It is stated that a tax representative can act on behalf of the responsible person. If there is a carbon pricing scheme that offsets the cost under the UK CBAM for certain products, then no fee would be charged under the UK CBAM. However, the declaration must still be submitted even if there is no CBAM fee to be paid. The first accounting period will cover imports of CBAM products between January 1 and December 31, 2027. From 2028 onwards, accounting periods are expected to be quarterly.

How is the liability determined?

When the responsible person submits a declaration, the possible financial UK CBAM liability is calculated by multiplying the total emissions for each product type by the relevant UK CBAM rate and then subtracting the carbon price payable overseas.

For the calculation of emissions, there are two options:

  • Providing independently verified information on emissions associated with CBAM products, or
  • Using assumed emission values published by the government.

Assumed values will be based on the weighted global average for the relevant sector.

The CBAM fee will be applied to specific products within the covered sectors. The government plans for the UK CBAM to cover direct emissions from the production process (Scope 1 emissions), indirect emissions from energy used in the production process (Scope 2 emissions), and certain inputs used in the production of imported products (Scope 3 emissions).

While emission intensity varies between different countries and regions, the government has decided that establishing assumed values for various countries and regions by 2027 is not feasible. Therefore, it proposes setting an assumed value for each CBAM product, aligned with the weighted global average based on production values of the UK’s trading partners.

Importers of any product within the CBAM scope will be charged a fee according to the carbon price under the UK ETS, with a discount considering that UK producers have access to various mitigation plans. These plans include free allocations granted to certain UK producers and the Energy Intensive Industries Scheme, which provides tax breaks to energy-intensive industries. The resulting “effective” carbon price varies across sectors, which is why the government proposes seven tax rates, one for each sector. The UK CBAM rates will be determined by a fixed methodology and updated every three months, reflecting the changing carbon price under the UK ETS.

The sectoral scope of the UK CBAM will be reviewed as new evidence emerges to reflect changes in carbon leakage risk and methodological and technological advancements.

Product-level scope of the CBAM

A core component of the UK CBAM design is converting activities and products under the UK ETS carbon price into a list of imported products that would be part of those activities if produced in the UK. The UK CBAM is intended to prevent carbon leakage risk.

By 2027, an initial list of product codes specified in Appendix A has been prepared for inclusion in the CBAM. The UK plans to review the sectoral and product scope of the UK CBAM during its post-2027 implementation phase, with the possibility of changing the list of product codes subject to CBAM.

The UK CBAM should align as closely as possible with the UK ETS policy. Consequently, only products that would fall under the UK ETS if produced in the UK and those resulting from activities considered at risk of carbon leakage under the UK ETS are potentially included in the UK CBAM scope.

Regarding carbon leakage risk and potential inclusion of products in the CBAM, the “UK Carbon Leakage List” is reviewed by the UK ETS Authority. The government and the UK ETS Authority will work together to ensure coordination with the UK CBAM from 2027 onwards, adapting changes to the Carbon Leakage List as necessary.

Considering stakeholder feedback emphasizing the importance of alignment with similar mechanisms from other jurisdictions, the list of sectors to be included in the UK CBAM has been decided to use the EU CBAM as a starting point, as the UK and EU have a similar carbon leakage risk profile.

The EU CBAM came into effect in October 2023 and will be in its transition phase until 2026. During this period, importers of products with the highest carbon leakage risk must report the emissions contained in those products. The first reporting period ended on December 31, 2023. However, from 2026, importers must purchase and submit EU CBAM certificates, priced based on the EU Emissions Trading System (“EU ETS”) allowance prices. These certificates correspond to allowances that EU producers would have to submit if the products were produced within the EU.

Similarly, as outlined in more detail above, the price importers must pay under the UK CBAM is linked to the price paid by UK producers under the UK ETS.

There are three significant implications for the relationship between the EU CBAM and the UK CBAM:

  • Products manufactured in the UK already face a cost under the UK ETS, and if they are exported to the EU, they could potentially face additional costs under the EU CBAM from 2026. Additionally, there may be administrative costs related to additional reporting requirements under the EU CBAM.
  • Since the EU CBAM will be fully implemented before the UK CBAM, there is a risk that carbon-intensive products from other countries could be redirected from the EU to the UK to avoid the EU CBAM. Additionally, if EU CBAM costs are higher than UK CBAM costs, this risk persists.

If the requirements of the UK CBAM differ from those of the EU CBAM, it could result in excessive costs for UK importers, potentially leading to higher costs for UK consumers.