Executive summary

On 30 October 2024, the United Kingdom (UK) Government published its response to the consultation regarding the introduction of a UK Carbon Border Adjustment Mechanism (CBAM). The UK CBAM regime will be introduced from 1 January 2027 and cover the aluminum, cement, fertilizer, hydrogen, iron and steel sectors but not ceramics and glass, as had been originally set out in the consultation. The threshold triggering the UK CBAM was also raised from £10,000 to £50,000 of imported products each year.

UK CBAM in operation

Based on the UK Government's response, business will need to consider some key operational points, including the following.

Product coverage. In response to the consultation submissions, the UK Government narrowed the scope of the UK CBAM regime and will not include ceramic or glass products but has committed to keep this product scope under review. The Government confirmed that scrap aluminum and steel will not be included within the scope of the UK CBAM.

Emissions reporting. The Government confirmed that a dual approach will be applied, with businesses allowed to either use default values or actual embedded emissions data as part of their UK CBAM reporting for the period 2027–2030. The embedded emissions will include both indirect and direct emissions for CBAM goods. The UK Government will set out further definitions for indirect and direct emissions in legislation. All reported embedded emissions will be measured in tons of carbon dioxide equivalent (tCO2e).

UK CBAM rate. The UK CBAM rate applied to the embodied emissions will reflect the UK Emissions Trading Scheme price allowing for adjustment of any UK free allowances, with the intent to ensure imported products are subject to a carbon price comparable to the price paid by domestic UK producers. The UK CBAM rate will be set on a quarterly basis in line with the quarterly UK CBAM filings, which will be due from 2028 onward.

Recognition of carbon price paid. The Government response confirms that only explicit carbon prices will be able to be used in reducing a UK CBAM liability. Implicit carbon pricing will not be eligible for use. Where multiple carbon prices have been paid, businesses will be able to offset the total evidenced carbon price from their UK CBAM liability. The Government has committed to providing further detail on the specifics of this ahead of the introduction of the UK CBAM.

Verification. The Government confirmed that verification of embedded emissions for UK CBAM returns will be required by a body accredited by an International Accreditation Forum. The Government has committed to working with the United Kingdom Accreditation Service to ensure that there are sufficient accredited verifiers and robust standards and guidance for verifiers to start at the earliest opportunity.

Evidencing net mass. As a core requirement of the UK CBAM, businesses must evidence the net mass of their CBAM goods; however, the Government's response indicates that it recognizes the potential complications and will consider whether a range of weighing methodologies could be developed.

Customs procedures. The Government clarified that CBAM goods that are brought into the UK under the returned-goods relief will not be subject to the UK CBAM, provided that they satisfy the relevant customs procedures. Similarly, the importation of CBAM goods for personal use will not be subject to the UK CBAM.

UK CBAM threshold. In response to concerns raised by respondents to the consultation, the Government has raised the UK CBAM threshold to £50,000 over a rolling 12-month period. The Government will apply and "forwards and backwards test" to determine whether a business has become liable for the UK CBAM. For the backwards test, the government clarified that the frequency will be increased to monthly. Further guidance is expected on this point.

CBAM returns. Given that the UK CBAM will operate as a tax, the liable person will need to submit the required online tax returns at the end of each accounting period (quarterly from 2028), this will include nil returns unless deregistration requirements are followed. For the first calendar year of operations in 2027, the first return will be due by 31 May 2028. From 1 January 2028, the accounting period will be quarterly, with returns due one month later.

Administration of the UK CBAM. The Government confirmed that His Majesty's Revenue and Customs (HMRC) will extend its existing powers and penalties to apply to the UK CBAM and seek to align with the UK VAT penalties points system to the greatest extent possible. The Government will introduce a criminal offense of fraudulent evasion of the UK CBAM. HMRC and His Majesty's Treasury will continue to engage with key stakeholders that represent the sectors and industries most affected by the UK CBAM through the establishment of a CBAM industry working group. The group will be set up in the near future.

Next steps

To implement the UK CBAM, the Government will need to produce primary and secondary legislation. The Government has committed to ensure the opportunity for stakeholder feedback by publishing the legislation in draft form before introducing it to Parliament. The Government has said it will, in parallel, produce detailed guidance to help businesses prepare, and establish a CBAM industry working group.

What can businesses do

With additional detail now clear on the UK CBAM regime, businesses should consider taking these steps:

• Assign internal responsibility for managing preparations for the UK CBAM.
• Conduct an assessment to understand the level of imports into the UK of covered CBAM products.
• Engage with suppliers to understand their level of maturity with regard to providing actual embedded emissions data.
• Continue to monitor and assess any legislative developments on the topic.
• If preparations for the EU CBAM are complete, or are currently underway, consider options for harmonizing data collection and reporting processes across the two regimes, as well as other upcoming sustainability reporting measures (e.g., those covering deforestation, human rights and supply chain due diligence).