UK CBAM: a new tax on carbon-intensive imports

As governments and businesses move toward a greener future, we’ve recently seen borders used as the point to address “carbon leakage” with the launch of the European Union’s Carbon Border Adjustment Mechanism (CBAM) back in October 2023. The UK is now following suit using the new tax as one of the ways it intends to meet its legally binding net zero 2050 target.

In December 2023, the UK government announced its intention to implement a new UK CBAM which will apply from 1 January 2027 to specific carbon-intensive goods within the aluminium, iron and steel, cement, ceramics, fertiliser, glass and hydrogen product groups. This decision comes after a first consultation that ran between March and June 2023. Further details on the planned implementation of the UK CBAM have now been released as part of a new consultation which will close on 13 June 2024.

In this blog we’re going to explore what the new tax will look like, who should be thinking about it, and how will it affect businesses with the help of indirect tax experts Claire Galineau, Zoe Hawes, Ethan Godden and Alexander Butterworth.

What is the aim of the UK CBAM?

The new UK CBAM seeks to address carbon leakage – the offshoring of carbon-intensive production to a country with a lower carbon price or less stringent decarbonisation efforts. It works through taxing imports of carbon-intensive products to ensure such goods from overseas face a comparable carbon price to those produced in the UK.

The consultation emphasises the link to the UK Emission Trading Scheme (ETS), which acts as the country’s primary carbon pricing mechanism. Indeed, the UK CBAM will only apply to goods whose production would have been within scope of the UK ETS if produced domestically, and where the risk of carbon leakage is such that the UK CBAM can be justified on environmental grounds. In addition, the government has considered the feasibility and effectiveness of a UK CBAM when determining the sectors covered.

What are the key features of the new UK CBAM?

Key elements of the government’s proposed approach to the UK CBAM are outlined below. The design of the UK CBAM could change in response to the findings of the consultation.

Sectors, goods and emissions in scope

The UK CBAM will impose a carbon price on the emissions embodied in relevant imports into the UK. It will cover specific products in seven sectors: aluminium, cement, ceramics, fertiliser, glass, hydrogen and iron and steel. This will include some precursor goods that are used in the production process of another CBAM good.

A draft list of commodity codes falling within the scope of the UK CBAM is provided in the consultation document. The sectors covered will be kept under review by the UK government to reflect changes to carbon leakage risk.

The UK CBAM will apply to the embodied emissions in these CBAM goods, with comparable coverage to the UK ETS. This includes both direct emissions, generated during the production process of the goods, and indirect emissions, related to the production of electricity that is used in the manufacture of CBAM goods. These emissions are determined at product level and will be measured in tonnes of carbon dioxide equivalent (tCO2e).

UK CBAM liability

For goods imported into the UK, the person liable will be the person responsible for the goods when they are released into free circulation (typically the importer), or where there are no customs controls, the person on whose behalf the goods are moved to the UK.

To arrive at the UK CBAM liability, the liable person will need to consider the following:

• The ‘tax base’: the embodied emissions in the imported goods. This can be determined using either default values (set at product level) based on the global average embodied emissions weighted by production volumes of key UK trading partners, or verified data on the actual emissions embodied within CBAM goods (calculated in line with a prescribed methodology).
• The carbon price applied: the UK CBAM rate will apply per tonne of embodied emissions in CBAM goods. The government will define each quarter the UK CBAM rate applicable for each of the seven sectors of goods in scope, which will be aligned to domestic carbon pricing policies. This price can be reduced where the importer can evidence that an explicit carbon price (i.e. a price per tCO2e on greenhouse gas emissions produced – typically in the form of an ETS or carbon emissions tax) has been paid overseas. This overseas price could include adjustments for domestic support mechanisms which serve to reduce the price, a carbon price incurred on CBAM goods en route to the UK, and overseas CBAM charges.

There will be a registration threshold of £10,000 on a twelve-month rolling period under which no UK CBAM liability arises.

Administration of the UK CBAM

The new tax will be administered by HMRC. The liable persons (or their tax agents) will need to submit an annual tax return for the period 1 January to 31 December 2027 (due 30 May 2028), followed by quarterly reporting for the period 1 January to 31 March 2028 onwards (due at the end of the month following the reporting period, but with an extension to 30 June 2028 for the first quarterly return). The deadline for payment of the tax corresponds to the return deadlines.

It will be the responsibility of the importer to self-assess its liability to UK CBAM, following the model typically taken for other indirect taxes. Importers will not be required to purchase and surrender UK CBAM certificates.

The government intends for the UK CBAM liability to apply to imported goods that are released for consumption on the UK market only. It is intended that the tax point for UK CBAM is at the point the CBAM goods are released into free circulation, or where there are no customs controls for the product, the date on which the CBAM goods first entered the UK.

Wider considerations

Whilst the consultation appears to allow for the application of the UK CBAM in Northern Ireland (e.g. references to the application of UK CBAM in the event there are no customs controls, which would be relevant to goods entering Northern Ireland from the EU), there is no explicit mention of how a UK CBAM would apply in Northern Ireland. There remains an open question as to whether the UK or EU CBAM would apply (which needs to be considered in the context of the Windsor Framework and the Northern Ireland Protocol). It is anticipated this will be addressed when primary legislation is published.

Businesses will also need to consider the data, systems and processes in place to manage UK CBAM obligations. For businesses that import CBAM goods into both the EU and the UK, consideration will need to be given to identifying synergies and managing areas of divergence.

It is another policy development in sustainable supply chains which is likely to require collaboration across parties in the supply chain, particularly where importers choose to rely on actual emissions data. Even where businesses do not face direct UK CBAM obligations, there is likely to be an increased cost in the supply chain, with commercial implications for where that cost is borne.

Next steps

The UK government is currently seeking views from importers, their agents and other businesses. Businesses who want to respond to this consultation can complete the response form and can also register interest in participating in future roundtable discussions and/or joining the UK CBAM mailing list.

After this consultation process is complete, the government intends to analyse the responses before publishing a formal response document, which we would expect towards the end of 2024 or early 2025. After that, primary legislation will be issued – likely initially in draft for consultation.

In conclusion

With both the UK and EU CBAMs, it is clear that carbon pricing is becoming ever more prominent as governing authorities accelerate their decarbonisation efforts towards net zero by 2050. In the absence of a global carbon price, we may see other jurisdictions introduce similar measures to address the risk of carbon leakage.

With the lack of a transition period for UK CBAM, this consultation process provides businesses with early insight into the likely operation of the measure, along with the opportunity to help shape the design of the new tax ahead of implementation.