The New UK Carbon Border Adjustment Mechanism
On January 1, 2027, the UK Carbon Border Adjustment Mechanism ("UK CBAM") will enter into force, placing a carbon price on specified imports of carbon-intensive industrial goods. Operating alongside an expanding UK Emissions Trading Scheme ("UK ETS"), the UK CBAM represents a significant development in the UK's carbon-pricing architecture with far-reaching implications for importers, domestic producers, and the wider business community.
Overview and Scope
The UK CBAM is designed to address "carbon leakage," which is the movement of production and associated emissions to jurisdictions with weaker, or nonexistent, carbon pricing. It will ensure that carbon intensive imports face a price comparable to that borne by UK domestic producers under the UK ETS, ensuring competitive parity for UK manufacturers and safeguarding investment in industrial decarbonization. The mechanism will operate as a tax administered by His Majesty's Revenue and Customs ("HMRC"), with full financial obligations from the outset (although the first payments are not due until May 31, 2028). The operation of the UK CBAM as a tax makes it distinct from the European Union Carbon Border Adjustment Mechanism ("EU CBAM"), which operates through a certificate purchase-and-surrender system.
The UK CBAM will, in its initial phase, apply to imports within five designated sectors: aluminum, cement, fertilizers, hydrogen, and iron and steel. Glass and ceramics have been excluded from the initial scope following analysis indicating lower emissions intensity and carbon leakage risk, though they may be added in the future. Notably, and in contrast to the EU CBAM, electricity imports are excluded.
Liability and Compliance
The UK CBAM liability is calculated by multiplying embodied emissions in imported goods by the applicable UK CBAM rate, minus any qualifying overseas carbon price already paid (i.e., carbon price relief). Only direct emissions will be covered from 2027, with indirect emissions delayed until 2029 at the earliest. The UK CBAM rate will be sector-specific, set quarterly, and will be based on the average UK ETS auction price for the preceding quarter, adjusted to reflect the proportion of emissions covered by free allowances in each sector.
The "liable person," which is generally the person in whose name the customs declaration is made, must register with HMRC, submit periodic returns, and pay the tax due. A person must register for CBAM with HMRC if the value of CBAM goods meets or exceeds a minimum threshold of £50,000, which will be assessed on a forward-looking and backward-looking basis. The forward-looking test will consider whether CBAM goods being imported over the coming 30 days will meet or exceed £50,000. By contrast, the backward-looking test will review, on the first day of the month, the CBAM imported goods over the preceding 12-month period to determine whether the total value met or exceeded £50,000. The first accounting period will be annual (January to December 2027), with payments due by the end of May 2028. Thereafter, accounting periods will be quarterly.
Interaction with the UK ETS
The UK CBAM is designed to complement the UK ETS, together forming an integrated carbon leakage framework. Free allocation under the UK ETS, which has historically been the primary leakage mitigation tool, will be gradually phased out over nine years beginning in 2027 for CBAM-covered sectors, with the CBAM rate adjusted accordingly.
The UK ETS is also expanding more broadly, with maritime transport entering the scheme beginning July 1, 2026, energy from waste being targeted for inclusion by 2028, and engineered greenhouse gas removals expected from 2029, with a second scheme phase confirmed for 2031 to 2040.
UK ETS Interactions with the EU and Mutual CBAM Exemptions
At a UK-EU Summit on May 19, 2025, the UK and EU committed to working toward linking their respective emissions trading schemes. In November 2025, the EU Council authorized the Commission to begin negotiations, and formal talks commenced in January 2026. If concluded, the agreement could result in mutual CBAM exemptions, which the UK government estimates could prevent UK industry from paying approximately £800 million due to the EU CBAM by 2030.
Key Takeaways
In light of the January 1, 2027, commencement date, affected businesses should be taking preparatory steps as a matter of priority. Importers should audit their portfolios to identify CBAM goods by commodity code and assess whether they exceed the £50,000 registration threshold. Businesses should engage with overseas suppliers to obtain verified actual emissions data, which may significantly reduce CBAM liability compared with default values. They should also evaluate whether qualifying overseas carbon prices may be deducted from their liability. UK ETS participants in CBAM sectors should model the combined impact of the CBAM and the phasing out of free allowances on their cost structures. Businesses exporting to the EU should monitor the progress of UK-EU linked negotiations while continuing to plan for EU CBAM compliance in the interim.
