In 2027, the UK will introduce a carbon border adjustment mechanism (CBAM) on imports of certain carbon intensive goods. The CBAM will impose a charge on the emissions embodied in relevant imports that take place on or after 1 January 2027.

Businesses that are directly or indirectly involved in the importation of relevant goods into the UK will be keen to decipher the CBAM’s implications. The design and administration of the CBAM is subject to finalisation pursuant to a government consultation (from 21 March to 13 June 2024) which provides an opportunity for stakeholders to submit their comments.

While the UK’s proposed CBAM deviates from the design of the EU’s CBAM in some ways, there will be useful lessons that the UK can draw from the EU’s experience in the coming years. By the time the UK CBAM is introduced, the EU CBAM will have passed its transitional phase (1 October 2023 – 31 December 2025), and completed the first year of its full compliance phase – see here for an overview of the EU CBAM and here for our analysis on the EU CBAM’s impact on non-EU businesses.

As the design of the UK CBAM takes shape, key questions that businesses should consider include:

• Which of my products will be within scope of the CBAM?
• What potential challenges and costs might my business face as a result of the CBAM?
• What knock-on impacts should I prepare for if my supply chain partners face CBAM liability?
• How can I maintain a clear view of the carbon prices that apply to in-scope products across relevant jurisdictions, and how will that impact on business strategy?
• What internal and external expertise should I draw upon to ensure that I comply with my CBAM obligations?

We highlight key features of the proposed UK CBAM in the following paragraphs. All references to “CBAM” refer to the UK CBAM unless otherwise stated.

UK CBAM scope

The purpose of the CBAM is to avoid carbon leakage by ensuring comparable treatment of imported goods and domestic products from a carbon pricing perspective. The CBAM will apply to goods that end up on the UK market; it should not apply to imported goods that are not placed or released for consumption on the UK market.

Sector scope: As previously announced by the government, from 1 January 2027, the CBAM will apply to imports of specified goods as determined by a list of commodity codes in the following seven sectors: aluminium; cement; ceramics; fertilisers; glass; hydrogen; and iron & steel. Where this differs from EU CBAM is that the EU version does not include ceramics or glass, but does include electricity. The government proposes that scrap imported goods within the aluminium, glass and iron & steel sectors will not be within scope.

Product scope: The government has drafted an initial list of commodity codes for inclusion in the CBAM by 2027. The list of proposed products in the EU CBAM (where relevant) has been used as a starting point for drafting the UK list. To reflect UK emissions trading scheme (ETS) policy as closely as possible, only goods whose production would be within scope of the UK ETS if produced domestically, and which would be produced as a result of activities currently deemed at risk of carbon leakage within the UK ETS, will be considered for potential inclusion within the scope of the CBAM.

The CBAM will apply to ‘direct’, ‘indirect’, and select ‘precursor’ product emissions embodied in imported goods – this is equivalent to applying the CBAM to Scope 1, Scope 2, and a limited part of Scope 3 emissions embodied within CBAM goods. The precise goods to be deemed ‘precursor goods’ will be specified at a later date and mapped to resulting complex goods, also within scope of the CBAM. Businesses who foresee issues with calculating emissions associated with ‘precursor goods’ may provide supporting evidence in response to the consultation.

The government intends to keep the sectoral and product scope of the CBAM under review, as new evidence comes to light to reflect changes to carbon leakage risk as well as methodological and technological advances.

UK CBAM liability

The government proposes that the liable person (or their tax agent) submits a return to His Majesty’s Revenue & Customs (HMRC) containing details of emissions embodied in CBAM goods at the end of the accounting period. Based on the return submitted to HMRC, it is proposed that CBAM liability will be calculated by multiplying the emissions value per type of good per production source by the effective UK carbon price (known as the “UK CBAM rate”), minus the overseas carbon price at the given exchange rate.

It is proposed that there will be seven rates of tax, one for each sector, to be determined by a set methodology and updated by the government on a quarterly basis, reflecting the UK’s moving carbon price under the ETS.

The consultation includes proposals on how the overseas carbon price should be measured, adjusted, evidenced and verified.

Each component of the proposed calculation methodology is subject to consultation. For example, stakeholders may: (i) comment on the government’s proposed approach to the UK CBAM rate, including whether the suggested calculation is a fair reflection of the price paid in the production of goods in the UK; and (ii) propose alternative arrangements as regards verifying and evidencing overseas carbon prices to reduce CBAM liability.

When determining the embodied emissions liable to UK CBAM, the liable person may choose to use:

• default emissions values, which the government proposes to set for each CBAM good calculated in line with global average emissions, weighted by the production volumes of the UK’s key trading partners. This initial approach to default values will be used at least for an initial period of 2027-2030; or
• data on the actual embodied emissions, which will need to be independently verified to maintain the integrity of the UK CBAM. To ensure equitable treatment with goods produced in the UK, the government proposes that the existing principles of verification used for the UK ETS will also be applied to the UK CBAM, including the requirement to have an agreed emissions monitoring plan and site visits. The government will set out further detail on the methodology and rules for monitoring and reporting embodied emissions at a later date.

UK CBAM administration, payment and compliance

The person that needs to register with HMRC for CBAM, submit returns, and pay the liability will be the ‘liable person’. The government proposes that the liable person will be either:

• where there are customs controls, the person responsible for the goods when they are released into free circulation. This means the liable person could be the importer of the CBAM goods, but this is not always the case (for example where there is a change of ownership while the goods are under customs control); or
• where there are no customs controls, the person on whose behalf the goods are moved to the UK.

The liable person (or their tax agent) will have to submit an online return after the end of each accounting period (typically within a month of the end of the period) and must pay any CBAM liability due at the same time. There will be a longer period for returns and payment in relation to the first accounting period for which CBAM applies, while HMRC systems and processes are tested and developed.

The self-assessment tax model is similar to that in operation for other indirect taxes in the UK and therefore the process should be familiar to importers with other tax liabilities. It is notable that the government does not propose to follow the EU CBAM’s model of ‘the purchase and surrender of CBAM certificates at the current ETS market price’. The government considers that that model would add complexity for UK importers and the government.

To reduce the administrative burdens for those importing small quantities of CBAM goods, there will be a minimum registration threshold (currently proposed to be £10,000) that will exclude those below the threshold from having to register and account for the CBAM. The government proposes to assess the threshold in relation to the total value of a person’s CBAM goods that pass a tax point from 1 January 2027, with the value determined in accordance with the existing methodologies used for customs.

Enforcement

The government will aim to implement the CBAM in a way that minimises the risk of avoidance or evasion and provides a level playing field for businesses. Where there is non-compliance, HMRC will use similar enforcement and inspection powers to those that are currently used to administer other taxes.

The government has proposed an alignment, so far as possible, with the penalty points system recently introduced for VAT for late submission of returns or late payment. It will also introduce a general penalty for any non-compliance specific to CBAM, such as failure to keep appropriate records, late registration, and failure to provide information.

In setting the level of penalties, the government will consider the penalties due under the UK ETS as well as taxes administered by HMRC.

Consistent with other taxes, a liable person will be able to ask for a review of a decision of the Commissioners or an officer of HMRC and, if that person remains dissatisfied, to appeal the matter to the VAT and Duties Tax Tribunal.

Next steps for businesses

Businesses that expect to be impacted by the CBAM may take the opportunity to respond to the consultation in writing and/or participate in a consultative meeting with the CBAM policy development team.

Post-consultation, the government will aim to analyse the responses within 12 weeks and publish a formal response document thereafter. In due course, stakeholders should also have an opportunity to comment on the legislation which the government will prepare to give legal effect to the CBAM.

As previously announced, the government intends to work with industry to establish voluntary product standards that businesses could choose to adopt to help promote their low carbon products to consumers; and to develop an embodied emissions reporting framework that could serve future carbon leakage and decarbonisation policies. These measures will be subject to further technical consultation in 2024.

For a fuller discussion on the UK CBAM and the EU CBAM and to access our bulletin(s) on related regulatory topics, please contact the authors of this bulletin.