UK to Implement a Carbon Border Adjustment Mechanism by 2027

The UK government has announced plans to implement a Carbon Border Adjustment Mechanism (CBAM) by 2027 as it seeks to keep the UK on track to meet its carbon reduction efforts.

The government is yet to finalise the scope of the industries covered, the precise list of products in scope, and the detail on the design and delivery of the mechanism, but it has indicated that at least the aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel sectors will be covered, with importers needing to pay a levy. It will apply an effective carbon price to imports, on the basis of the explicit carbon price differential between the UK and the country where the products were produced. 

It has also revealed that product, labelling, and green procurement standards, which could be used to describe a system for benchmarking products based on their embodied emissions, would be voluntary. These details along with details of the emissions reporting framework and other technical details will be subject to further consultation in 2024, it has said. 

The UK CBAM will apply to Scope 1 and Scope 2 product emissions embodied in imported products, that is, the emissions generated by an organisation’s manufacturing production and an organisation’s indirect emissions from its consumption of purchased electricity, heat, steam and cooling respectively.

In a government response to a consultation that closed in June last year, the government revealed 85% of respondents said that carbon leakage was a current or future risk to their decarbonisation efforts.

The new rules aim to mitigate carbon leakage in which production is moved to lesser regulated jurisdictions and imported back into the UK. “This should give UK industry the confidence to invest in decarbonisation as the world transitions to net zero,” the Chancellor of the Exchequer Jeremy Hunt said.

As is the case with the EU’s CBAM, liability under the UK scheme will depend on the greenhouse gas 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 had the good been produced in the UK. The liability will lie directly with the importer of imported products within scope. 

The scheme has been designed to work alongside the UK Emissions Trading Scheme, to ensure imported products are subject to a carbon price comparable to that incurred by UK production. The government last year announced plans to lower the limits on carbon dioxide emission under the scheme, the net-zero cap for Phase 1. Only under 69 million allowances will be auctioned in 2024 as opposed to 79 million in 2023.

The UK’s announcement follows the introduction of the EU CBAM in October 2023.

The government’s response to the consultation with finalised details is available here.