Carbon Border Adjustment Mechanism

10 Jun 2024


Carbon Border Adjustment Mechanism (CBAM) will place a tax on the imports of relevant emission intensive goods into any part of the UK from countries with a lower or no carbon price.

The tax will be based on the level of carbon emissions generated in the production of a certain good, as well as the gap between the carbon price (the tax or equivalent paid) applied in the country of manufacture and the carbon price (tax due) applied in the UK. CBAM will be introduced in the UK by 2027.

Carbon emissions: changing attitudes

The world is changing its attitude on how the issue of carbon emissions is addressed. Major economies all over the world are taking steps to decarbonise following commitments made following the COP28 summit last year. As part of the UK’s commitment, the government has introduced regulations and rules, such as the UK Emissions Trading Scheme (UK ETS), which is incentivising businesses to decarbonise by imposing a cost on carbon emissions. Imported goods are not subject to the UK ETS, which can lead to variances in carbon pricing across the UK market.

With domestic emission regulations getting tougher, emission intensive companies may look to shift their operations to countries with more relaxed laws regarding emissions. This will lead to ‘carbon leakage’ – which remains a big piece in the puzzle to reach global net zero targets. A co-ordinated international approach would be required to mitigate the risk and with the European Union (EU) recently implementing its CBAM, the UK government is following suit.

How will CBAM operate in the UK?

How CBAM will operate in the UK is still under government review. The UK government issued a consultation on CBAM on 21 March 2024, which seeks views on the detailed design, implementation and administration of CBAM. The consultation sets out the government’s current proposals for CBAM and states that it will apply to ‘direct’, ‘indirect’ and select ‘precursor’ product emissions embodied in imported ‘CBAM goods’.

The UK CBAM rate will be based on the effective carbon price, which is the price paid by the producers after accounting for the impact of free allowances and other reductions. There are suggestions that the CBAM tax on imports may be less than the equivalent payable under UK ETS.

Which goods will be within the scope of UK CBAM?

‘CBAM goods’ shall apply to emission intensive industrial commodity codes in the following sectors:

  • Aluminium
  • Cement
  • Ceramics
  • Fertiliser
  • Glass
  • Hydrogen
  • Iron
  • Steel

In HMRC’s recent CBAM consultation webinar, HMRC stated that the sectoral scope of CBAM has been determined by reference to the following:

  • Whether goods are already subject to the UK ETS,
  • Whether the goods are at risk of carbon leakage, and
  • Whether it’s practically feasible to apply UK CBAM to those goods.

Due to difficulties with measuring the emissions associated with ‘scrap products’, HMRC have confirmed that these will be excluded from UK CBAM. HMRC have however confirmed that UK CBAM will apply to ‘precursor goods’ which are input materials used in the production of a second ‘CBAM good’.

CBAM will therefore be due on both the precursor goods and on the final goods manufactured. The specific list of precursor goods has not yet been published by HMRC; however, these are expected to be within the list of commodity codes already published.

HMRC is seeking views on the list of commodity codes published in the consultation for inclusion in UK CBAM. We would therefore encourage businesses operating in these sectors to respond to the consultation to share any concerns or practical suggestions they may have.

How will the UK CBAM liability be calculated?

The government is proposing that the tax point for determining the CBAM liability will depend on whether goods are subject to customs control. If so, the tax point would be the date on which the goods are released. If not, the tax point would be the date the goods first enter the UK.

The ‘liable person’ for CBAM would be either the person responsible for goods when they are released into free circulation (if subject to customs controls) or the person on behalf of whom the goods are imported (if not subject to customs controls). The ‘liable person’ would be required to register for CBAM if the value of CBAM goods passing a tax point exceeds £10,000 over a 12 month rolling period (both retrospective and forward looking).

The consultation provides that the CBAM liability will be calculated by reference to direct and indirect emissions. The emissions value will be calculated by reference to a default value set by government and actual emissions. The relevant CBAM rate will be set by government at the beginning of each quarter and each sector will have an individual default rate. The CBAM liability will be adjusted for overseas carbon prices paid and the consultation currently states that the onus will be on the taxpayer to gather evidence of the amounts paid.

The calculation to determine CBAM liability can therefore be summarised as follows:

CBAM liability = (Total emissions emitted per type of good x relevant CBAM rate) – carbon price payable overseas

How will UK CBAM be administered?

The consultation states that the initial CBAM return will be for the 12 month period running from 1 January to 31 December 2027. The government proposes to move to quarterly CBAM returns from 2028. Businesses that are liable to CBAM would need to submit CBAM returns at the end of each prescribed accounting period, even if the liability to CBAM is nil. The consultation confirmed that businesses would be able to deregister if a number of consecutive nil returns are submitted. The government has confirmed that tax agents will be able to submit CBAM returns on behalf of liable persons. There are currently no plans for a CBAM deferment scheme.

The consultation also confirmed that penalties will apply for compliance errors, for example, failure to register for CBAM, failure to submit CBAM returns, failure to keep records. The government is considering a penalty system similar to the UK ETS.

Who will be affected?

If you’re a UK business importing emission intensive industrial goods into the UK, you may fall within the scope of CBAM. Affected businesses must consider the impact of the additional reporting requirements, and the cost of charges levied onto them under CBAM, and plan accordingly once further details of the UK implementation become available.

How we can help

The introduction of CBAM will present challenges for those operating within the affected sectors, and preparing for the changes is strongly advised.

We help our clients in assessing how CBAM will impact them and their business, and how likely it is that new processes will need to be introduced internally to ensure compliance with CBAM. We are liaising with the government departments and can therefore provide real time insights into the implementation of UK CBAM.

If you would like to discuss any of the points raised above, or would like to find out more about CBAM, please get in touch with Sean McGinness or Aalia Ahmed.

Contact Us

Sean McGinness
Partner, Edinburgh

Key experience

Sean is Head of the Edinburgh office.