Understanding UK CBAM and What it Means for Businesses
The UK Carbon Border Adjustment Mechanism (UK CBAM) marks a major milestone in the UK’s journey toward achieving net zero emissions. Announced by the government on 30 October 2024 and due to take effect from 1 January 2027, this new policy is designed to ensure that the UK’s decarbonisation efforts translate into genuine global emission reductions and not outsourcing of pollution to other countries.
In simple terms, the UK CBAM functions as a tax on the carbon emissions produced by certain imported goods. By assigning a carbon price to imports from emissions-intensive sectors, it ensures that foreign producers pay a comparable price for their emissions as UK manufacturers already do under domestic carbon pricing systems like the UK Emissions Trading Scheme (UK ETS).
Why Is UK CBAM Coming?
- Preventing Carbon Leakage
One of the primary motivations for introducing the UK CBAM is to combat carbon leakage. Thats a situation where companies shift production to countries with weaker climate policies to avoid domestic carbon costs. This can lead to a rise in global emissions, undermining the UK’s climate goals.
While the UK has taken bold steps in industrial decarbonisation through mechanisms such as the UK ETS, many countries do not yet impose similar carbon pricing measures. This disparity creates an uneven playing field and incentivises businesses to move production abroad. The UK CBAM addresses this by ensuring imported goods face a carbon price comparable to that paid by UK producers.
- Ensuring Fair Competition and Reducing Global Emissions
The UK CBAM is also about protecting domestic industry and global decarbonisation. By levelling the carbon cost between domestic and imported goods, the UK ensures that climate action at home doesn’t simply push emissions elsewhere. This approach aligns economic competitiveness with environmental responsibility, creating a more balanced framework for global decarbonisation.
How Does UK CBAM Work?
From 2027, the UK CBAM will apply to imported goods from five key emissions-intensive sectors:
- Aluminium
- Cement
- Fertilisers
- Hydrogen
- Iron and steel
Originally, the government considered including glass and ceramics, but these have been excluded for now (though this may be revisited in future reviews). Unlike the EU CBAM, the UK version does not include electricity.
In terms of emissions, the mechanism covers both:
- Direct emissions – those generated during the manufacturing of the goods.
- Indirect emissions – those linked to the electricity used in production.
The UK CBAM operates as a tax on embodied emissions in imported goods. The liability is calculated by multiplying the total embodied emissions by the CBAM rate, which reflects the UK carbon price. Importers can reduce their liability by showing that a carbon price has already been paid in the exporting country (for example, through a local carbon tax or emissions trading system).
This system complements the UK ETS, ensuring that both domestic and imported goods are subject to equivalent carbon costs – thereby reducing the risk of carbon leakage across the UK economy.
UK CBAM vs EU CBAM: Key Differences
The UK CBAM shares the same fundamental goal as the EU CBAM: preventing carbon leakage and protecting domestic decarbonisation efforts. However, there are notable structural differences between the two mechanisms:
Aspect | UK CBAM | EU CBAM |
Start Date | 1 January 2027 (fully operational) | 1 January 2026 (fully operational) with transition period currently active |
Form | Tax on embodied emissions | Requirement to buy CBAM certificates (from January 2027) |
Transitional Phase | No transitional period | Reporting-only phase (Oct 2023–Dec 2025) where there is no financial liability |
Sectoral Scope | Excludes electricity | Includes electricity |
Minimum Threshold | £50,000 over 12 months | < 50 tonnes annually |
The UK and EU have signalled their intention to explore linking their emissions trading systems (ETS). If successful, UK exports to the EU (and vice versa) could become exempt from CBAM charges, reducing administrative complexity and improving trade alignment. Such linkage would also create a more integrated carbon market across Europe.
What Does This Mean for Businesses?
The UK CBAM will have wide-reaching implications for businesses operating in and trading with the UK, particularly those involved in affected supply chains.
Impact on Importers and Manufacturers
- New Tax Liabilities: Importers of goods from covered sectors will face a CBAM charge based on the emissions embodied in their products.
- Compliance Requirements: Businesses must gather accurate emissions data from suppliers, verify it, and submit regular CBAM returns.
- Data Management: Where actual emissions data is unavailable, importers may use default values published by the UK government.
- Administrative Threshold: Companies with less than £50,000 in annual CBAM liability will be exempt, reducing the burden on smaller firms.
- Strategic Reassessment: Businesses may need to reassess suppliers, pricing strategies, and investment decisions to remain competitive under the new regime.
International Trade Implications
The UK CBAM will influence not just importers but also domestic industries and regions dependent on emissions-intensive manufacturing. And in tandem with the EU CBAM – major steel and industrial producers may see transitional challenges as supply chains adapt. Globally, CBAM will reshape trade dynamics:
- Encouraging Global Decarbonisation: Exporters to the CBAM countries will have strong incentives to adopt cleaner production methods or introduce carbon pricing policies domestically to reduce CBAM costs.
- Trade Complexity: Differences between the UK and EU CBAMs may lead to dual compliance challenges for businesses trading across both markets.
- Supply Chain Shifts: Companies may relocate or reconfigure supply chains to minimise exposure to carbon costs.
- Policy Diffusion: The UK and EU CBAM is part of a growing global trend – alongside similar discussions in Canada, Japan, and the US – to align trade policy with climate objectives.
UK CBAM - The Bottom Line
The UK CBAM represents one of the most significant climate and trade policy developments of the decade. By pricing the carbon content of imported goods, the mechanism supports fair competition, prevents carbon leakage, and reinforces the UK’s commitment to global net zero goals.
For businesses, this means preparing now – understanding emissions in supply chains, improving data collection, and evaluating potential cost impacts. For policymakers, it’s an opportunity to shape a more sustainable global trading system where economic growth and climate ambition go hand in hand.
At Carbon Complete, we are helping companies lead the way in CBAM readiness. We know from first-hand experience that those prepared for regulatory hurdles reap the benefits. Contact us today to learn more about how UK CBAM will impact your company and how to best prepare for those changes.
