Carbon Border Adjustment Mechanism (CBAM)
Background
CBAM is a policy tool to drive consistent carbon reduction in intensive industries. Currently, UK businesses are subject to the UK Emissions Trading Scheme (ETS), where they pay for emissions above a set level to encourage carbon reduction. CBAM will ensure these businesses are not undercut by imports which have not reduced emissions to the same level, by applying a tax. The EU has adopted a similar policy approach, its CBAM scheme begins on 1st January 2026. The proposed UK legislation allows the Government to align with other schemes such as the EU one to reduce the burden on supply chains.
The Government consulted on a CBAM scheme in October 2024. It has now published draft legislation and invited comments by 3 July 2025. Its intention is to implement legislation by the end of the year with UK CBAM coming into force on 1 January 2027.
This paper outlines the key proposals in the draft legislation
Scope of CBAM
CBAM will apply to specified goods in aluminium, cement, fertiliser, hydrogen and iron and steel sectors. A full list of relevant commodity codes is in the policy update which you can read here. Although many of these products will be more relevant to engineering, manufacturing and construction, there are some products such as fertilisers, screws and metal products relevant to retail sales.
Calculating CBAM
The CBAM rate will be based upon the UK pricing of carbon relating to ETS related to the actual emissions from imported goods. The calculation is complex and available in the policy briefing document. Importers will need to ensure they have relevant emissions data for the product; the Government would prefer it to be actual emissions data but there will be default values available where necessary.
CBAM rates will be calculated and published at the beginning of each quarter beginning on the 1/1/27.
The Government is considering the use of international agreements to ease compliance. Where another jurisdiction, such as the EU, is operating an aligned CBAM scheme to the UK those goods would not need to be reported. The UK draft legislation allows the approach to be incorporated as countries align with the UK position. We may see more on the position of alignment with the EU following the trade reset discussions which will begin at the UK/EU summit on the 19th May.
Liability for CBAM
The importer of the goods into the UK is liable for CBAM. They need to register with HMRC ahead of the 1/1/27 deadline. For the first year, the importer will need to record total liability for CBAM and pay within 5 months. From 2028, the accounting period will be quarterly, but payment will be required within 2 months. The return will be based on the volume of CBAM covered goods imported, their total emissions and any deductable carbon price.
Next Steps
The Government will consider any responses to the draft legislation in the Summer before publishing the final legislation at the end of 2025. HMRC will issue detailed guidance to enable businesses to prepare for 2027.
