Update – UK Carbon Border Adjustment Mechanism (CBAM)

January 8, 2025

This month marks two years before the UK government plans to introduce a UK Carbon Border Adjustment Mechanism (CBAM), on 1 January 2027. Following the announcement of a UK CBAM in December 2023, we published an introduction to the principles of CBAM, which you can read here. The EU's version of CBAM already applies on a transitional basis - see further details here.

Under the UK's CBAM, importers of certain carbon-intensive goods from countries with a lower or no carbon price will be required to pay a levy on imports, aimed at levelling the playing-field between such foreign producers and domestic producers who pay for carbon emissions under the UK Emissions Trading Scheme (UK ETS).

On 30 October 2024, the UK government published its response to the consultation on the operation of a UK CBAM.¹ This article summarises the key further elements of CBAM set out in the government's response and considers its potential impact on businesses that import goods to the UK, as well as the steps that such businesses should take now to prepare.

Scope

CBAM will apply to industrial goods imported into the UK from the aluminium, cement, fertiliser, hydrogen, iron and steel sectors. Within these sectors, those products which would have been within the scope of the UK ETS if they had been produced domestically will be affected. The sectors within the initial scope of the UK's CBAM from 2027 are the same as under the EU's CBAM except that the UK's does not apply to imports of electricity.

Glass and ceramics sector products will be considered for future inclusion in the UK scheme but will not be in scope from 2027.

CBAM will be calculated based on direct (emissions related to the production processes), indirect (emissions related to the production of purchased electricity) and select "precursor" product emissions embodied in imported goods.

Smaller importers, who import CBAM-eligible goods worth less than £50,000 over a rolling 12-month period, will be exempt. This is a change from the initial consultation to consider the concerns of SMEs. Government modelling estimates that this approach will retain 99% of imported emissions within CBAM's scope, whilst excluding 80% of otherwise registrable businesses. This contrasts with the EU scheme under which all imports of in-scope products exceeding €150 in value are caught.

Mechanics of CBAM

CBAM will operate as a levy, essentially a tax payable by the importer consisting of a carbon price based on the emissions generated in the production and manufacture of the relevant CBAM-eligible product. This differs from the EU scheme which is based upon the purchase and cancellation of "CBAM Certificates".

The CBAM rate will be set (per sector) every quarter by the UK government, based on UK ETS carbon prices, the free allocation of allowances under the UK ETS and the Carbon Price Support rate on electricity generated using fossil fuels in Great Britain.

Verification

All actual embodied emissions, including the relevant direct, indirect and precursor emissions, will need to be independently verified.

CBAM also provides that, where an importer wishes to reduce its CBAM liability by demonstrating that an overseas carbon price has already been paid, third party verification will be required to verify the adjustment to the CBAM liability.

The UK government has confirmed that importers themselves will be responsible for providing verified emissions calculations. Third party verifiers will need to be accredited by a member of the International Accreditation Forum, such as the United Kingdom Accreditation Service in the UK.

Compliance

From 1 January 2027 those businesses or individuals who either (a) in the next 30 days, expect to import CBAM goods which will take them past the £50,000 value threshold, or (b) have imported £50,000 worth of CBAM goods in the previous 365 days, will have to register a liable person with HMRC.

CBAM will then operate as a tax, and so liable persons will need to complete and submit a tax return evidencing their CBAM liability. For 2027, this would happen on an annual basis and, from then on, on a quarterly basis (to align with how other taxes are generally administered by HMRC).

HMRC will use existing powers and penalties to enforce payment and penalise evasion of CBAM, including the introduction of a criminal offence for fraudulent evasion of CBAM.

Stakeholder engagement

The UK government will now set up a CBAM industry working group to engage with key stakeholders representing the sectors and industries most affected. It will also create an international group to engage with other governments whose exporters have an interest in the functioning of CBAM.

Impact on businesses

• Businesses should consider now whether the goods that they import into the UK fall within the scope of CBAM and take steps to ascertain their potential CBAM liability under current supply chains from 2027.
• Businesses which import goods into the UK that fall within the scope of CBAM will need to consider how, from 2027, they will measure and report emissions in their supply chains. Default values for products are available, but this will mean an inability to account for any carbon levies already paid in the country of origin or manufacture.
• Businesses that already import goods into the EU that are subject to the EU's CBAM will encounter many similarities in terms of the UK CBAM's sectoral scope and measurement of emissions, though these are not identical, and the UK's CBAM will take the form of a levy rather than the purchase of certificates.
• Businesses impacted should consider engaging with the UK government's working group or international group once established to input into and receive updates on CBAM's further development.

Dentons' International Trade team

Dentons' international trade lawyers already advise many companies, both in and out of Europe, in relation to the UK and EU CBAM and are well placed to advise and support those potentially affected by the new UK measures as they are introduced from 1 January 2027.

If you have any queries about any of the matters arising in the UK or EU, then please reach out to one of our team.

1. "Introduction of a UK Carbon Border Adjustment Mechanism from January 2027: Government response to the policy design consultation," gov.uk ↩