The EU and UK Carbon Border Adjustment Mechanisms: A Comparison
22 May 2024
In 2023 the EU introduced the world's first Carbon Border Adjustment Mechanism which took effect from October 2023 (EU CBAM). During a transitional phase until the end of 2025, importers of goods in EU CBAM sectors will be subject to EU CBAM reporting requirements. From 2026, the EU CBAM will become fully operational, requiring importers to pay a carbon import levy for certain "carbon-intensive" goods originating from countries that lack an equivalent carbon pricing regime. The EU CBAM's main objective is to reduce "carbon leakage" and incentivise the EU's global trading partners to decarbonise their heavy emitting sectors.
The development of a UK CBAM is slightly behind that of the EU CBAM; however, things are changing at pace. Having been trailed in the 2023 Autumn Statement, the UK Government confirmed on 18 December 2023 that it will implement a UK CBAM by 2027. On 30 March 2024, HM Treasury and the Department for Energy Security and Net Zero published a detailed consultation on the introduction of a UK CBAM, which sets out the UK Government’s “minded to” positions on the detailed design of the UK CBAM. This consultation closes on 13 June 2024, and will feed into the final design of UK CBAM.
The purpose of this document is to compare, in high level, the EU and UK CBAMs, highlighting particular areas of divergence.
Should you wish to understand more about either the EU or UK CBAM, or participate in the UK CBAM consultation response, please get in touch.
UK CBAM | EU CBAM | |
Scope | From the outset: aims to capture only those goods whose production would be in scope of the UK ETS if produced domestically and which would be produced as a result of activities currently deemed at risk of carbon leakage within the UK ETS. Scope 1 and scope 2 emissions (rebadged as "direct" and "indirect" emissions). Limited part of Scope 3 emissions: certain precursor product emissions i.e. an in-scope CBAM good used as an input into the production process of a complex good that is also within scope of the CBAM – to be further specified at a later date. | By 2030: aims to extend the mechanism to all products subject to the EU ETS Scope 1 and scope 2 emissions (electricity consumed for the production of CBAM goods) Limited part of scope 3 emissions: input material under CBAM scope. Further review on downstream products. |
Sectors | Aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel | Aluminum, cement, fertiliser, hydrogen, iron and steel and electricity |
Products | Initial list of commodity codes based on list of proposed products in the EU CBAM (but excluding commodity code relating to electricity as this is not in scope for UK CBAM). Additional codes:
| List of commodity codes. Used as starting point for drafting the UK list on sectors included in the UK CBAM. |
Form | CBAM liability calculated by multiplying the embodied emissions by the CBAM rate, less an adjustment for the effective overseas carbon price for each type of good. Reported on a CBAM return. | Purchase and surrender of CBAM certificates (representing the embedded emissions less a reduction corresponding to the carbon price paid in the country of origin) at the current EU ETS market price. |
Calculations | CBAM liability = Embodied emissions x (CBAM sectoral rate – "Adjustment") | Number of CBAM certificates to be surrendered = embedded emissions – reduction corresponding to the carbon price paid in the country of origin |
Embodied Emissions | Embodied emissions will be calculable either by:
| Embedded emissions are calculated based on the actual emissions Simple goods: attributed direct and indirect emissions of goods / quantity of the goods produced by the installation over the period Complex Goods: {attributed emissions of goods + Embedded emissions of precursors} / quantity of goods produced by the installation over the period OR Where actual emissions cannot be adequately determined, the embedded emission are determined using the default values. |
Verification | Data on actual emissions to be "reliably and independently" verified by a body accredited by accreditation services which are part of the International Accreditation Forum. | To be verified by an independent third-party (verification principles and accreditation of verifiers rules still to be determined) |
CBAM Rate | Set separately for each of the seven sectors. Determined quarterly. It will take into account (i) the average of the UK ETS auction price over the preceding quarter, (ii) the free allocation of allowances under the UK ETS and (iii) carbon price support rates. Both indirect and direct emissions prices will be taken into account, on a weighted basis. | The price of CBAM certificates is set as the average of the closing prices of EU ETS allowances on the auction platform, for each calendar week. N.B. While not part of the CBAM rate calculation per se, the CBAM certificates to be surrendered shall be adjusted to reflect to reflect the extent to which EU ETS allowances are allocated free of charge to EU installations producing the same goods. |
Adjustment | CBAM liability will be reduced by any evidenced explicit carbon price overseas applied to the embodied emissions in the imported CBAM goods. The government will specify which carbon price mechanisms may be credited; this will normally be an emissions trading scheme or a carbon tax with a fixed price. Regulatory policies or non-pricing carbon reduction measures will not be sufficient. Calculated by using an average of the headline carbon price over the previous quarter and adjusted to account for domestic support mechanisms and similar (i.e. the effective rate). Applies also to indirect imports. | A CBAM declarant may claim in the CBAM declaration a reduction in the number of CBAM certificates to be surrendered in order to take into account the carbon price effectively paid in the country of origin for the declared embedded emissions (taking into account any rebate or other form of compensation available in that country that would have resulted in a reduction of that carbon price). The requirements for such reduction and the applicable conversion will be specified in implementing acts. |
Timing | No transitional period In force for imports made on or after 1 January 2027 Extended reporting timeline for 2027, to allow sufficient time for the UK CBAM online registration and returns service to be set up and for liable persons to establish appropriate processes with their suppliers. Proposed deadline for submitting the first CBAM return and payment for the entire 2027 period of 30 May 2028. From 2028 onwards, reporting on a quarterly basis. Return submitted within a month of the end of the relevant accounting period i.e. by 30 April / 31 July / 31 October / 31 January. | Reporting-only transitional phase from 1 October 2023 Fully in force for imports made on or after 1 January 2026 N/A Calendar year (12 months) Declaration to be submitted by 31 May of the following year. |
Administration | ||
Tax Point | A CBAM liability will arise:
The CBAM rate as at this date will apply. | CBAM applies where the goods, or processed products from those goods resulting from the inward processing procedure are imported into the customs territory of the EU. |
Liable Persons | UK Importers / person on whose behalf the goods are moved to the UK | EU Importers, who have to apply for the status of authorised CBAM declarant |
Agent | A liable person will be able to appoint a tax agent to submit CBAM returns on their behalf. The tax agent will not take on joint and several liability for CBAM. | Where the EU importer appoints an indirect customs representative, the indirect custom representative can agree to act as an authorised CBA declarant. It is mandatory when the importer is not established in a member State. |
Authors: Paul Miller, Partner; Kerion Ball, Partner Raphael Dionis, Avocat; Vicky Brown, Expertise Counsel
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.