UK to implement a carbon border adjustment mechanism (CBAM) by 2027

In its joint response ^[1] to an earlier consultation, the UK Department for Energy Security and Net Zero and HM Treasury has confirmed that a UK CBAM will be implemented by 2027. The CBAM will impose a levy on those importing the most greenhouse gas (GHG) emissions-intensive products into the UK, which will reflect the gap between the carbon price that would have been imposed if the good had been produced in the UK and the carbon price already applied in the country of origin, if any. In doing so, the UK government is seeking to avoid “carbon leakage”: the phenomenon of UK based entities importing emissions-intensive products from outside the UK to avoid the charges placed on emissions-intensive products produced in the UK through the UK Emission Trading System (ETS).

With the EU CBAM already up and running in its transitional phase from October this year (2023), and in the absence of any internationally agreed measures, similar and responsive measures were expected in many jurisdictions, particularly the UK. Understanding any variance between the regimes and their interaction will be key to avoid unnecessary costs and reducing wider CBAM associated burdens. The potential for the two schemes to be linked will be an important factor.

Background

Earlier this year, the UK government consulted^[2] on a variety of policy options seeking to address the risk of carbon leakage. While the consultation covered a number of policy options, including mandatory products standards and other demand-side measures to grow the market for low carbon industrial products, one of its standout proposals was the UK CBAM. Our commentary on those proposals can be accessed here: Addressing carbon leakage: EU CBAM is adopted as UK consults on future (cms-lawnow.com)

The introduction of a UK CBAM follows the introduction of the EU’s CBAM. The EU CBAM technically took effect from 1 October 2023, but there is a transitional period in which importers of in-scope products are required only to report the GHG footprint of products imported into the EU quarterly until 2026 – with the first quarterly report being due in January 2024. From 2026, importers will also be required to purchase CBAM certificates to reflect the embedded GHG emissions; and by 31 May 2027, in-scope importers must make declarations relating to products imported in the previous calendar year and surrender the requisite number of CBAM certificates. A reduced number of certificates may be surrendered to reflect the carbon price already paid in the country of origin for the declared embedded emissions, where this exists. At present it is unclear whether the EU CBAM is intended to apply in Northern Ireland – which post-EU exit applies certain EU laws via the Windsor Framework - where electricity is covered under the EU ETS; the response to the consultation has limited information on linking the two regimes which would make goods produced in the UK exempt from the EU scheme.

Details

The UK government’s response confirms the following operational details of the UK CBAM:

1. Timing – the government will implement a UK CBAM by 2027.
    
2. Financial liability – CBAM liability will lie directly with the importer of relevant imported products. The precise liability will depend on the GHG emissions intensity of the imported good and the gap between the carbon price applied in the country of origin (if any) and the carbon price that would have been applied under the UK ETS had the good been produced in the UK.
    
3. Financial arrangements – the system will not involve the purchase or trading of emissions certificates. Instead, it will involve the imposition of a levy directly on the importer.
    
4. Material scope – the UK CBAM will place a carbon price on the most emissions-intensive industrial goods from the aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel sectors. The precise list of products in scope has not yet been determined and will be the subject of further consultation.
    
5. Emissions scope categories – the UK CBAM will apply only to Scope 1 (emissions relating to the direct activities owned or controlled by an organisation), Scope 2 (emissions relating to an organisation’s consumption of purchased electricity) and selected precursor emissions embodied in importer products.
    
6. Effective carbon pricing – other CBAM frameworks either use an express carbon price (i.e., a £/tCO2e value for fee imposed directly on GHG emissions) or an effective carbon price (the price paid by producers after accounting for the impact of free allowances and other support mechanisms). The UK CBAM will apply an effective carbon price to imports, which will be significantly lower than the headline express UK ETS price to reflect domestic free allowances.
    
7. Relationship with UK ETS – the UK CBAM will work cohesively with the UK ETS, including free allowances, to ensure imported products are subject to a carbon price comparable to that incurred by UK production, mitigating the risk of carbon leakage.
    
8. Next steps – the design and delivery of CBAM will be subject to further consultation in 2024. This will cover the precise list of products falling in scope.

Commentary

The relationship between the UK and the EU CBAM is yet to be set out in any detail.

The most striking aspect of the UK’s announcement is the way in which it will intentionally diverge from the EU’s CBAM. Most notably, the UK’s CBAM will not cover the importation of electricity, but it will additionally cover ceramics and glass. Such a lack of harmonisation will only add complexity for importers having to comply with both regimes.

Additionally, the UK CBAM – unlike the EU CBAM – will not rely on the purchase or trading of emissions certificates and will instead apply via the imposition of a levy directly on the importer.

Those potentially affected by the evolving UK CBAM should monitor the anticipated consultation on the detail of the scheme in 2024 which will be used to settle the precise scope of the CBAM. Those not yet familiar with the EU CBAM should review how they may be directly and indirectly affected and if they are aware of present obligations – registration and filings are compulsory by the end of January 2024.

References: 

^[1]Microsoft Word - Summary of responses and government response to the UK carbon leakage consultation.docx (publishing.service.gov.uk)

^[2] Addressing carbon leakage risk to support decarbonisation - GOV.UK (www.gov.uk)