The UK government is consulting until June 2024 on the design and delivery of a Carbon Border Adjustment Mechanism for the UK from January 2027 (“UK CBAM”).  UK CBAM would be one of the first Carbon Border Adjustment Mechanisms globally, second only to the EU’s equivalent measure (“EU CBAM”) which was introduced in October 2023 and is in a transitional implementation period until January 2026. 

If introduced, UK CBAM would represent a significant new import levy.  UK businesses with international supply chains should start to model the potential impacts of UK CBAM, as should international businesses who export to the UK. 

The purpose of a Carbon Border Adjustment Mechanism is to address the issue of carbon leakage – the movement of production processes and their associated greenhouse gas emissions from one country to another because of differences in the countries’ decarbonisation efforts and regulation.  The UK’s decarbonisation policies and regulations, such as the UK’s carbon pricing system (the UK Emissions Trading Scheme or “UK ETS”) places a price on greenhouse gases emitted by domestic producers.  There is a risk that businesses will attempt to circumvent this carbon price by importing carbon-intensive goods from countries that do not impose a charge (or impose a lower charge) on carbon emissions.  UK CBAM would seek to combat this risk by applying a charge on carbon emitted during the production of imported products, ensuring equal treatment of domestic and imported products.

The consultation proposes that the UK CBAM will be structured in a similar manner to self-assessment tax models, akin to those already in place across the UK for other indirect taxes such as VAT.  The business which is legally responsible for registering with HMRC for CBAM and for declaring and paying CBAM would submit a return containing certain required information (e.g. the weight of the CBAM goods and any effective overseas carbon price).  Based on this submission, its CBAM liability would then be calculated by multiplying the emissions value per type of good per production source by the effective UK carbon price, less the overseas carbon price.

The consultation considers in the alternative adopting the EU CBAM’s model, whereby companies would buy CBAM certificates priced in line with the Emissions Trading Scheme, declare the emissions embedded in their imports, and then surrender the amount of CBAM certificates corresponding to their emissions.  However, the clear preference appears to be for the self-assessment tax model (akin to UK VAT). 

The scope of the UK CBAM is proposed to cover imports of goods in the following sectors: aluminium; cement; ceramics; fertilisers; glass; hydrogen; iron; and steel.  These are all currently covered under the EU CBAM except for ceramics and glass.  EU CBAM also includes electricity, which is not currently proposed to be part of UK CBAM.

The UK CBAM consultation closes at 11:59pm on 13 June 2024.  Businesses who expect to be impacted by the introduction of UK CBAM may wish to consider responding to the consultation so that their views can inform the mechanism’s detailed design.

If you would like support with navigating the implications of UK CBAM, please get in touch with Sarah Sackville Hamilton or another member of the Environment Team.