The draft outlines the legislative framework for the CBAM tax on certain imported goods into the UK, which will become effective from January 1, 2027.
The tax will apply to direct and indirect emissions embodied in the imported CBAM good.
“This represents continued momentum for the adoption of CBAM mechanisms globally, as countries follow in the EU’s footsteps to use trade as a tool for climate policy. It also helps better align policies in the UK and the EU, smoothing the way to progress linking of the UK and EU emissions trading systems, which will be a topic for discussion at the UK-EU Summit in May,” Stuart Evans, Fastmarkets’ chief economist and head of environmental markets, said.
As it stands, goods imported to the UK are not subject to the UK’s Emissions Trading System (ETS).
The ETS operates through a “cap and trade principle,” whereby the cap is set by the ETS and participants can trade emission allowances as needed.
CBAM aims to prevent carbon leakage in the UK, since imported goods not subject to the UK ETS have also not been subject to a similar carbon price from the jurisdiction they were produced in.
A “CBAM” good is defined in Schedule 1 of the draft primary legislation as:
- Aluminium
- Cement
- Fertilizers
- Hydrogen
- Iron and steel goods
Specific CBAM goods will be subsequently identified by commodity codes.
The CBAM tax rate will be charged “at an amount equal to the sectoral domestic price” of the good and multiplied by the number of tonnes of CO2 embodied in the good.
The “sectoral domestic price” will be calculated by the Treasury for each CBAM sector every quarter.
This would involve using the previous quarter’s average UK ETS auction price.
The importer will be liable to the CBAM cost, but exemptions are available if the good has originated in the UK, it has been returned or the good has been imported outside the course of business.
Registration with His Majesty’s Revenue and Customs (HMRC) will be required if CBAM goods with an aggregate value of £50,000 ($67,033) or more have been imported into the UK over 12 months, or it is expected that this quantity will be met before the end of a 30-day period.
According to the draft legislation, registration must occur within 30 days of triggering the above threshold.
The first accounting period for the CBAM tax will run from January 1, 2027, to December 31, 2027; returns and payments will be due five months after the end of the first accounting period (May 31, 2028) to provide businesses and HMRC sufficient time to adjust to the new system.
From January 1, 2028, CBAM costs are required every quarter and are due two months after the accounting period ends.
Alignment between CBAM and UK tax models
Initially the consultation proposal outlined quarterly accounting periods from 2028 with a one-month return and payment window. But after concerns around data availability were raised, this has been amended to two months, to bring greater alignment between CBAM and other UK tax models and provide businesses more time to gather the data required to submit their return.
As part of the submission, the government will allow the use of the most recently verified emissions data, and the most recently verified information to determine the “deductible carbon price.” According to the draft legislation, independently verified data or default values can be used by the importer.
From 2027, the government will proceed with a single default value per good, and the methodology for its calculation and publication will be confirmed prior to the beginning of CBAM in 2027.
The government noted that it is considering moving to an alternative approach from 2028 onward.
Importers can reduce their CBAM liability through a carbon price relief if the embodied emissions of the goods they have imported have previously been subject to a “deductible carbon price.”
This could be either through another country’s ETS or taxation.
In a previous consultation, the government confirmed that only explicit carbon prices that place a price per tCO2e can be used as part of this relief. Other policies, such as fuel duties or carbon regulations, are not allowed to form part of any deductions.
The UK government also proposed an exemption for goods that originated in a jurisdiction with a linked carbon pricing scheme, since carbon leakage risk would be minimal because the ETS prices would converge.
The consultation will end on July 3, and feedback is encouraged from all affected stakeholders.
UK-EU carbon markets relationship
The EU’s equivalent CBAM policy will come into effect on January 1, 2026, which has prompted other countries to look at setting up similar measures and their own ETS.
But the European Commission is planning to review legislative proposals amending CBAM in the fourth quarter this year, Fastmarkets recently reported.
The proposed amendments will be in three directions – to address the problem of carbon leakage for CBAM goods exported from the EU to third countries; to introduce CBAM scope extension to certain steel downstream products, to address the risk of carbon leakage being pushed further down the value chain; and to propose anti-circumvention measures, including those against resource shuffling.
Harmonizing CBAM policies between the UK and EU would provide domestic producers a way to offset associated CBAM costs when exporting to the UK through domestic pricing schemes.
The UK is at risk to lose £3.5 billion-8 billion in revenue from 2025 to 2030 if it remains outside the EU carbon market, since UK ETS allowance prices are lower than those in the EU, a UK Energy report from October 2024 shows.
“The UK Emissions Trading Scheme (ETS) is 10 times smaller, more volatile and, since mid-2022, has been priced lower than the EU ETS… A lower UK carbon price leads to reduced revenues for Treasury and lessens the incentive to decarbonize,” the report reads.
“Analysis by Frontier Economics projects shows that the introduction of the EU CBAM will lead to £800 million being paid to EU member states on export across all impacted sectors between 2026 and 2030,” it continued.
For example, in January 2025, UK ETS allowance prices were just around £32.57 per tCO2e. In contrast, EU carbon emissions allowance prices hovered around €71.52 ($74.06) per tCO2e in Janaury 2025, peaked at over €81 per tCO2e in mid-February, and then dropped below €60 per tCO2e in early April.
The projected average price for the year is around €75 per tCO2e, which is 15% higher than in 2024, according to the outlook for European Union Allowance, the financial instruments within the EU Emissions Trading System.
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