The UK government has confirmed that from the start of 2027 the Carbon Border Adjustment Mechanism (CBAM) will put a fee on embedded CO₂ emissions in relevant goods imported into the UK customs union. The introduction of this fee on selected goods will create a unique challenge for importers and their trading partners across the international supply chain. As a result, tailored advice to each operator’s case is highly recommended.

The CBAM was first discussed in the EU in the early 2000s, when the UK was still involved in those discussions as part of the EU Emissions Trading Scheme (EU ETS). In 2021, after Brexit, the UK established its own UK ETS. The UK ETS puts a price on CO₂ emissions originating from the combustion of fossil fuels in the power, industrial and aviation sectors.

In effect, the UK CBAM, due to be implemented on 1 January 2027, is a complement to the UK ETS. If effective, this system will ensure that domestic operators remain competitive against imported products that are not subject to a carbon price. The exact methodology is yet to be confirmed, but it is reasonable to expect that free allocations given to UK industry to protect them against the UK ETS cost will be phased out from 2027, in line with a phase-in of the CBAM obligation.

From the start of 2027 the Carbon Border Adjustment Mechanism (CBAM) will put a fee on embedded CO₂ emissions in relevant goods imported into the UK customs union.

The cost for importers
The cost of UK CBAM for importers is worth clarifying. In practice, the ‘CBAM rate’ will be pegged to the effective UK ETS price paid by domestic industry, minus any reimbursements that occur via free allocations and subsidies. The cost is due for importers who anticipate the value of CBAM-goods imported will surpass £50,000 or in the past 12 months have surpassed this threshold. They must register with HMRC and, each quarter, submit the CBAM tax return with HMRC and pay the taxes due (even if liability is nil). In this way, the process in the UK differs slightly from the EU CBAM system where CBAM certificates must be purchased to comply.

The first accounting period in the UK will be 1 January 2027 to 31 December 2027, while the first return will be due at the end of May 2028.

However, this may change as the UK and EU are seeking to align their emissions trading schemes and create a common CBAM border. The EU CBAM, by contrast, is currently set to start from 1 January 2026.

UK and EU policymakers are collaborating to explore how UK based operators can be exempt from the EU CBAM obligation when importing into the EU (or vice versa), given that this divergence could create a loophole for trade diversions that could overwhelm the market.

Domestic impact of the UK CBAM
Unlike the EU CBAM, the UK CBAM does not include indirect emissions in the scope, subsequently emissions related to electricity used in manufacturing of goods (Scope 2 and 3 emissions according to the Greenhouse Gas Protocol) are not subject to the UK CBAM. This is an important distinction as it creates a risk for trade diversions, where the UK could become a more attractive market for carbon-intensive goods.

The CBAM was created to level the playing field for internationally competitive sectors. Over time, operators in CBAM sectors should face less of a pricing disadvantage for carbon compared to competing products on the domestic market. It should also be noted that the UK government is committed to supporting the implementation of foreign ETSs with the hope that the CBAM will serve as an incentive to make lower emissions goods more favourable over higher emissions goods internationally.

A full regulatory domestic impact assessment is due to accompany the UK CBAM legislation ahead of the 2027 start date.

While the CBAM provides an opportunity for CBAM sectors – that is, iron and steel, aluminium, fertilisers, cement and hydrogen – downstream sectors could experience higher costs if they rely on imported CBAM products with a high carbon footprint. Cost pass-through will differ by sector, depending on how competitive the downstream and upstream markets are, how differentiated products are, and how much bargaining power downstream buyers have.

However, whatever the cost difference, the message for affected businesses is clear: early preparation is key, with companies that implement a carbon strategy better placed to meet the regulatory, financial and operational challenges that CBAM will bring.

The views and opinions expressed in this article are strictly those of the author only and are not necessarily given or endorsed by or on behalf of the Energy Institute.

• Further reading: ‘UK and EU extend post-Brexit collaboration on energy’. The UK and European Union reached a political agreement in May to extend their post-Brexit collaboration on energy. Among the announcements at the UK-EU Summit was an agreement to explore the participation of the UK in the EU’s internal electricity market and a commitment to link their respective emissions trading schemes (ETS).
• What are the implications of including energy-from-waste plants in the UK Emissions Trading Scheme (UK ETS)? Find more about how the UK emissions reduction scheme compares to that of the European Union (EU ETS).