1 November 2024
Tim Atkinson & Lili Strege
On December 18, 2023, the former UK government announced plans to introduce a UK Carbon Border Adjustment Mechanism (CBAM), followed by a public consultation that closed on June 13, 2024. This week, the Labour government responded to the consultation alongside the release of the 2024 Budget.
Read our previous CBAM overview, here.
The UK CBAM is an import tax that introduces pricing for carbon dioxide emissions embedded in certain goods. Domestic sectors covered by the UK Emissions Trading Scheme (UK ETS) pay a carbon price for each tonne of CO₂ equivalent they emit in their industrial activities.
To prevent carbon leakage from international competition, some domestic industries receive free allowances under the UK ETS.
As the CBAM will apply similar carbon pricing to foreign producers selling in the UK, it will be aligned with the new approach to free allocation from 2027. This will mean that free allocations could be phased out, though the government has not given any public statements on this.
Starting in 2027, importers will be responsible for reporting relevant imports subject to CBAM obligations.
Goods will incur CBAM fees at the point of release for circulation on the UK free market. Importers will pay the ‘UK CBAM rate’ directly to HMRC through a yet-to-be-established system.
There will be an initial five-month window for return submissions, beginning five months after the end of the first accounting period (i.e. after 31st December 2027 until 31st May 2028), with quarterly reporting starting in 2028.
Across 5 sectors, specified products will be liable to the CBAM: Iron and Steel, Aluminium, Fertilisers and Hydrogen. The original proposal included Glass and Ceramics Sectors.
A provisional list of commodities included in CBAM is available in Annex B of the consultation response.
A UK based importer will have to register as liable person. Subsequent registration for liabilities under CBAM is required as soon as the cumulative threshold to a value of £50 000 imports of CBAM goods is foreseeable or has been overstepped.
Designed to reflect the absolute Carbon price paid by domestic industries who are subject to the UK Emissions Trading Scheme (UK ETS) the UK CBAM rate will be:
UK CBAM rate = Net domestic carbon price = Average UK ETS Auction Price of the relevant quarter – Allowances allocated to Industry for free - Industry support schemes
Each sector will receive a respective, quarterly applicable ‘UK CBAM rate’ , applicable per tonne of embodied Carbon dioxide equivalent emissions attributed to CBAM goods.
Direct, i.e. emissions resulting from the manufacturing process, indirect emissions i.e. emissions embedded in the electricity used during the manufacturing and emissions in precursor products will be regarded, though details outlining process boundaries await.
From 2027 to 2028, importers will use HMRC-provided default values specific to each product, reflecting average global emissions based on the UK’s weighted distribution.
After 2028, importers can use actual emissions, as verified by an approved body, or where unavailable use the default values provided.
To prevent circumvention, the government will implement security measures to counter practices like under-declaring the weight of imported CBAM goods. HMRC will apply existing powers, including a VAT penalty point system, for late submission of CBAM returns, late payments, and misclassification of imported products. Criminal penalties for fraudulent evasion of UK CBAM obligations will also be introduced. The exact pricing is yet to be announced.
HMRC will conduct monthly compliance checks to prevent under-reporting.
The UK CBAM is modelled on the EU’s CBAM, introduced to the EU customs union in October 2023.
EU importers currently report relevant imports and, starting January 1, 2026, will be liable for CBAM payments for embedded emissions in the ectors Iron and Steel, Aluminium, Fertilisers, Hydrogen, and Electricity.
The UK CBAM is explicitly designated as a tax and will require importers to pay based on embedded emissions reported to HMRC.
The EU CBAM, on the other hand, operates through a digital CBAM registry, where importers purchase CBAM allowances and must hold at least 80% of their annual requirement in their account each Fridays.
The government “notes the frequency of requests for international alignment on CBAM scope, particularly with the EU CBAM.
The product level scope of the UK CBAM as published in Annex B of this publication aligns with that of the EU CBAM where sectoral scope also aligns…”
HMRC will draft primary and secondary legislation to present to Parliament.
Impacted parties will gain access to a comprehensive communications package that will outline procedures and liabilities under the mechanism.
The government also intends to establish a UK CBAM industry working group and a CBAM international group in the near future, emphasising global collaboration.
CFP Energy can support your organisation to mitigate your risk and navigate CBAM with clarity, contact our team here.
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