Like many other economies, the UK is taking decisive action to prevent carbon leakage by introducing the Carbon Border Adjustment Mechanism (CBAM). With the UK’s carbon footprint from imported goods accounting for nearly half of its total emissions, policymakers have recognised the urgent need for a solution that ensures fair competition while driving corporate sustainability.
CBAM is designed to place a carbon price on imported goods, ensuring that businesses operating within the UK face a level playing field when competing with international suppliers. As businesses prepare for its 2027 implementation, understanding how CBAM works and how it compares to the EU’s version will be essential for compliance and long-term competitiveness.
What is the Carbon Border Adjustment Mechanism (CBAM)?
The UK CBAM is a policy initiative designed to place a carbon price on certain imported goods, reflecting the carbon emissions produced during their manufacture. This mechanism aims to prevent “carbon leakage,” where companies might relocate production to countries with less stringent carbon regulations, thereby undermining domestic decarbonisation efforts. It will initially apply to imports from sectors such as aluminium, cement, fertilisers, hydrogen, iron, and steel. Products within these sectors that would fall under the UK’s Emissions Trading Scheme (ETS) if produced domestically are included.
Why was the CBAM introduced?
The UK CBAM was primarily introduced to support the country’s net-zero commitment by ensuring that imports of carbon-intensive goods face a fair carbon price, just like domestically produced goods. Below are some other reasons for its implementation.
- Preventing carbon leakage: The main reason the UK CBAM is being introduced is to prevent carbon leakage. It ensures that imported goods are subject to a carbon price equivalent to that of UK-produced goods, discouraging companies from moving operations abroad.
- Ensuring fair competition for UK industries: UK industries already operate under the UK ETS. However, without a border adjustment, cheaper, high-carbon imports from countries without strict carbon pricing could undercut domestic businesses. The CBAM levels the playing field by applying a carbon price to imports from high-emission sectors, ensuring that UK businesses remain competitive.
- Encouraging global emission reductions: By introducing a carbon charge on imported goods, the CBAM creates an incentive for international industries to decarbonise. Non-UK manufacturers looking to export to the UK will be encouraged to reduce emissions in their production processes to avoid higher costs.
- Supporting the UK’s net-zero strategy: The UK has committed to achieving net-zero greenhouse gas emissions by 2050. By introducing CBAM, the UK ensures that imported emissions are accounted for, reinforcing its commitment to reducing emissions across all sectors.
- Generating revenue for green investment: The revenue collected from the CBAM will be reinvested into climate initiatives and green technologies, supporting the country’s transition to a low-carbon economy. This could include funding renewable energy projects, carbon capture technologies, and industrial decarbonisation efforts.
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How does the CBAM work?
Below is an overview of how the CBAM mechanism works.
Step 1: Identifying covered sectors and products
The CBAM applies to imports of carbon-intensive goods that are already subject to carbon pricing under the UK ETS if produced domestically. These include:
- Aluminium
- Cement
- Fertilisers
- Hydrogen
- Iron and steel
- Ceramics and glass (included in the UK CBAM but not in the EU CBAM)
Unlike the EU CBAM, which includes electricity imports, the UK CBAM does not cover electricity.
Step 2: Importers calculate carbon emissions
Importers of UK CBAM-covered goods must report the carbon emissions embedded in their imports, including:
- Direct emissions (Scope 1) – Emissions from the production process.
- Indirect emissions (Scope 2) – Emissions from electricity, heat, steam, and cooling used during production.
This ensures a comprehensive approach to carbon accounting, similar to the UK ETS.
Step 3: Levy calculation and payment
Unlike the EU CBAM, which requires importers to purchase CBAM certificates, the UK CBAM will apply a levy system. The levy will be set quarterly by the UK government, based on the prevailing UK ETS carbon price and varied by sector.
If a carbon price has already been paid in the country of origin, the CBAM UK will deduct this amount, ensuring that the importer only pays the difference between the UK carbon price and the foreign carbon cost. Only explicit carbon prices (e.g., carbon taxes or emissions trading systems) will be recognised, while indirect carbon costs (e.g., renewable energy subsidies) will not be considered.
Step 4: Compliance and reporting
Importers must register under the UK CBAM scheme if they import £50,000 or more of CBAM-covered goods over a 12-month period. They must:
- Report quarterly on the emissions embedded in their imports.
- Pay the CBAM levy based on the UK ETS price for that period.
- Maintain detailed records to ensure accuracy and compliance.
The UK government will oversee enforcement and compliance, applying penalties for non-compliance or inaccurate reporting.
Step 5: Integration with the UK ETS
The UK CBAM is designed to work alongside the UK ETS. As free allowances in the UK ETS are gradually phased out, UK businesses will pay a higher carbon price, making the CBAM levy more crucial to prevent unfair competition from lower-cost, high-emission imports.
EU CBAM vs UK CBAM
The EU and the UK have both developed CBAMs to address carbon leakage and promote global emissions reductions. While both mechanisms share a common goal, there are notable differences in their design and implementation.
Implementation timeline
The EU CBAM is currently in a transitional phase that began on October 1, 2023, with full implementation scheduled for January 1, 2026. In contrast, the UK plans to implement its CBAM by 2027, without a transitional period.
Sectoral coverage
The EU CBAM initially covers imports of aluminium, cement, fertilisers, hydrogen, iron and steel, and electricity. The UK’s proposed CBAM regulation includes aluminium, cement, fertilisers, hydrogen, iron and steel, as well as ceramics and glass, but excludes electricity.
Emissions scope
Both CBAMs cover direct (Scope 1) emissions. The EU CBAM also includes indirect (Scope 2) emissions from electricity consumed during production. The UK CBAM proposes to cover indirect emissions from electricity, heat, steam, and cooling.
Mechanism and pricing
The EU CBAM requires importers to purchase and surrender CBAM certificates, with prices linked to the EU ETS. The UK CBAM proposes a levy system, with rates set quarterly by the government, based on previous UK ETS prices and varying by sector.
Administrative thresholds
The EU CBAM applies to all in-scope imports valued at €150 or more. The UK CBAM proposes a higher threshold, requiring importers to register if they import CBAM goods worth £50,000 or more over a 12-month period.
Treatment of third-country carbon pricing
Both mechanisms account for carbon pricing in the country of origin. The UK CBAM allows importers to pay the difference between the UK CBAM carbon price and the carbon price in the country of origin, recognising only explicit carbon prices, such as emissions trading systems or carbon taxes.
Final thoughts
As the UK prepares to introduce its own CBAM by 2027, businesses must take proactive steps to assess their supply chains, quantify embedded emissions, and integrate sustainability into procurement strategies. With carbon pricing set to reshape global trade, organisations that adapt early will gain a competitive advantage, reduce regulatory risks, and strengthen their position in an increasingly carbon-conscious economy.
Beyond CBAM, corporate sustainability reporting is becoming a critical compliance requirement, with regulations like the Corporate Sustainability Reporting Directive (CSRD) mandating greater transparency on carbon emissions, climate risks, and ESG performance. Our sustainability compliance training helps businesses navigate these evolving regulations and ensure their business meets the highest sustainability reporting standards.
