From 2027, imports of emissions-intensive goods into the UK will also be subject to a carbon border adjustment. To this end, the UK government published the first draft legislation on April 24. The mechanism is similar to the EU’s CBAM, but with some differences in implementation designs.
UK CBAM starts in 2027
The introduction of a Carbon Border adjustment mechanism (CBAM) in the United Kingdom (UK) is taking shape. Like its EU counterpart, the UK CBAM intends to reduce the risk of carbon leakage.
This risk arises from domestic carbon pricing. Producers have to buy emission allowances in the UK Emissions Trading Scheme (ETS). Their prices ranged between GBP 43-46/t CO2e (EUR 52-54) on the primary market in April. In addition, the Carbon Price Support (CPS) levies a tax on fossil fuels of GBP 18/t CO2.
The UK ETS emerged from the EU ETS after Brexit. Its functioning and methods are similar. A share of allowances is allocated free of charge. Initially, the benchmarks and carbon leakage factors used for their calculation were the same as in the EU ETS.
As a core instrument for achieving net zero emissions in 2050, the UK ETS is now being tightened. To this end, the number of emission allowances is being cut and also, the free allocations are being revised. The new allocation rules were due to apply from 2026, but have been postponed to 2027.
The same year, the UK CBAM will be launched. Its introduction had already been announced by Rishi Sunak’s government in December 2023. Following a consultation, its main design elements were confirmed in October 2024.
Since April 24, the first legislative drafts along with explanatory notes have been available. A further consultation period is now underway until July 3. Based on the feedback, the primary legislation is expected to be adopted by the end of the year as part of a finance bill.
Differences between the UK and EU CBAM
Our initial analysis of the draft legislation reveals many similarities between these CBAMs –in terms of their objectives and their functioning. However, the two systems differ in the design of some implementation aspects.
Sectoral and geographic CBAM scope
The sectoral coverage is almost identical:
- Both systems cover aluminum, cement, fertilizers, iron & steel, and hydrogen. The CN codes and greenhouse gases included in these sectors are also identical.
- The EU CBAM additionally covers electricity.
The scope of application is to be continuously reviewed. Initially, it had been proposed that the UK CBAM should also include glass and ceramics. Similarly, the EU CBAM is currently being reviewed for an expansion to include additional sectors and downstream products within the already covered sectors.
Imports of these goods originating from outside the UK will be subject to CBAM from 2027 – including those that enter the country via special customs procedures. This is similar to the EU CBAM. In both systems, imports from countries with an equivalent carbon pricing mechanism are to be exempt.
CBAM registration and liability
Responsibility for CBAM compliance lies with the entity that imports the goods into the United Kingdom or on whose behalf the goods are imported. A group treatment of connected companies can be requested. The EU CBAM has similar provisions via an indirect customs representative.
Companies must register with HM Revenues & Customs (HMRC), the CBAM tax authority, as soon as CBAM goods worth over GBP 50,000 are imported. Below this value, no CBAM obligations apply.
Registration is required:
- On the first day of the month following the 12 months in which the threshold is exceeded (backward looking test); or
- On the day it is expected that imports over the threshold will be made within the next 30 days (forward looking test).
The EU CBAM currently only exempts individual consignments below a shipment value of EUR 150. However, a quantity-based threshold is being considered. The Commission’s proposals define 50 tons accumulated over a calendar year. This limit would come closer to the threshold in the UK CBAM.
In the UK CBAM, tax returns and payments are due quarterly —within two months after the end of each quarter as an accounting period (i.e., by the end of May for Q1). In the EU CBAM there is an annual CBAM declaration, but there are quarterly holding requirements. Both systems grant extended payment periods in the first year.
CBAM payments and calculation
A major difference from the EU CBAM is that the UK CBAM explicitly imposes a fixed carbon-based tax rate on imports. Although the EU CBAM also applies a carbon-based levy, it operates through the purchase of CBAM certificates.
While the actual payment levels could theoretically be the same in both systems, several practical differences arise:
- In the UK CBAM, the tax rate is determined based on the UK ETS and CPS prices for the quarterly accounting periods. This results in better predictability.
- In the EU CBAM, the prices for CBAM certificates can fluctuate depending on the time of purchase. Their price is determined weekly on the basis of the prices in the EU ETS auctions. In the first quarter of 2025, prices ranged between EUR 68 and 80.
Another difference is that the UK CBAM sets a sector-specific tax rate, adjusted for the free allocation of emission allowances based on the previous year’s sector average. In contrast, the EU CBAM uses product-specific benchmarks (by CN code) to account for free allocations.
In both systems, carbon prices already paid in the country of origin can be deducted. Only explicit carbon prices from ETS or carbon taxes are to be recognized. However, the rules for the exact calculation are still to follow in the UK CBAM but also in the EU CBAM.
Determination of CBAM emissions
In both systems, levies are calculated on the basis of direct emissions from production processes. Differences exist regarding the treatment of indirect emissions from electricity use:
- In the UK CBAM, indirect emissions are included in all 5 sectors, as they are priced under the UK ETS and CPS.
- In the EU CBAM, indirect emissions will only need to be included for cement and fertilizers. For aluminum, iron & steel, and hydrogen, they are excluded for the time being— however, an extension is being examined.
Actual emissions data from manufacturers is preferred in both the systems. As in the EU CBAM, these must be independently verified. Verifiers require accreditation from a member of the IAF. Alternatively, default values can be used, as is also the case in the EU CBAM.
However, for 2027, the UK CBAM will only provide a single default value per CN code, and therefore, no differentiation by country of origin as in the EU CBAM. The feasibility of a more differentiated system will be examined for the years after 2027.
As in the EU CBAM, the calculation of emissions will include emissions from precursors. Further details on system boundaries and monitoring requirements will be set out in delegated legislation, which may reveal further differences in emissions calculation between the two CBAMs.
Fragmented rules and increasing trade barriers
With the UK following the EU, it becomes the second jurisdiction worldwide to implement a carbon border adjustment. Overall, these instruments are still uncharted territory. The first experiences in the EU have already revealed implementation challenges. As a result, far-reaching simplifications have now been proposed.
While the first draft of the UK CBAM have been able to build on this experience, they also went through extensive consultations. However, changes are also possible here. Further regulatory developments must therefore be monitored in order to start the necessary preparations, including for:
- Payment of CBAM taxes and collection of the necessary data by companies importing CBAM goods into the UK;
- Collection of emissions data from across supply chains according to the UK CBAM methodology by companies exporting CBAM goods to the UK;
- Adjustment to price increases and crediting of carbon prices already paid in the UK under the EU CBAM for EU companies with imports from the UK.
There is still time to prepare. In the first year of the UK CBAM, payments for 2027 will not be due until May 31, 2028. However, companies with global supply chains must get ready for nationally varying standards, methodologies and implementation rules when importing emissions-intensive goods.
With this fragmentation, trade barriers could become even greater in the current environment of rising tariffs. Other countries are also considering the introduction of border adjustment mechanisms, such as Canada and Australia. And even in the USA there are proposals for carbon-based tariffs.
To avoid negative trade effects, improved coordination is necessary, as highlighted by international organizations. Accordingly, the International Chamber of Commerce (ICC) has already proposed principles for the design of border carbon adjustments, including approaches based on international accounting standards.
Sources and further information:
- HM Revenue & Customs: CBAM Draft Legislation
- HM Treasury: CBAM Factsheet
- Department for Energy Security and Net Zero: ETS Guidance and Tools
- ICC: Global Principles for Effective Border Carbon Adjustments
Photo by Flavio Vallone on Unsplash
