UK Narrows Scope of Carbon Border Adjustment Mechanism

CBAM

The UK government has announced a scaled-back version of its planned Carbon Border Adjustment Mechanism (CBAM), which will now only apply to a select group of sectors. The measure, designed to level the playing field for UK industries and encourage decarbonization in other countries, will come into effect on January 1, 2027.

Initially, the CBAM was set to cover a wider range of sectors, including glass and ceramics. However, after careful consideration, the government has decided to exclude these sectors due to their lower carbon intensity and reduced risk of carbon leakage.

The revised CBAM will now impact the following sectors:

• Aluminium
• Cement
• Fertiliser
• Hydrogen
• Iron and steel

The mechanism will impose a carbon price on imported goods from these sectors, taking into account both direct and indirect emissions. The government will establish a default emissions value for each product, which will be used in cases where verified emissions data is unavailable.

The CBAM rates will be determined quarterly based on the UK Emissions Trading Scheme (ETS) price, adjusted for carbon price support and free allowances. Imported goods will be subject to the CBAM rate, even if they have already been subject to a carbon price in their country of origin.

To mitigate the potential impact on small and medium-sized businesses, the government has raised the value threshold for CBAM application to £50,000 per year. Additionally, a criminal offense will be introduced to deter CBAM evasion.

The UK government plans to establish an industry working group to engage with affected sectors and an international group to collaborate with relevant exporter governments.