During yesterday’s Autumn Budget, the government confirmed that 1 January 2027 will be the implementation date of the proposed UK Carbon Border Adjustment Mechanism (UK CBAM). The government also released its response to the UK CBAM consultation on the same day, providing details of its approach to integrating international cooperation into this carbon reduction and pricing strategy. UK CBAM is designed to advance one of the five missions of the government - to make Britain a clean energy super-power. 

The UK CBAM will levy a carbon tax on certain goods (above a £50,000 threshold) placed on or released into the UK market from carbon intensive sectors which are considered to be at high risk of carbon leakage - aluminium, cement, fertiliser, hydrogen, iron and steel.

As proposed, it will cover ‘direct’, ‘indirect’, and certain ‘precursor’ product emissions to align with the UK ETS. The rates will account for the explicit carbon pricing in the UK, minus free allowances and other domestic reductions, in order to close any gap by ensuring that imported goods face a carbon price similar to that of UK-produced goods. 

The government also announced that it will introduce legislation in the Finance Bill 2024-25 to allow HMRC to prepare for implementation of the UK CBAM, and to enable the UK Emissions Trading Scheme (ETS) Authority to supply relevant data required by HM Treasury and HMRC to support development of the UK CBAM reforms, including reducing the number of ETS permits available for purchase by 45% up to 2027, along with a decrease in the number of free allowances during that period. 

The intention is for relevant imported products to face a carbon price comparable to that payable had production been in the UK. This, in principle, is to protect against carbon leakage from differential pricing, which is seen as a hindrance to decarbonization and the aim of a lower global carbon economy. 

The mechanism mirrors the EU CBAM which is currently in its transitional phase until January 2026.

Confirmation of the government’s commitment to a UK CBAM is just one step in what appears to be the continuation of efforts to test how market mechanisms can be used, and harmonized, to achieve global decarbonization.

This post was co-authored by Benedikt Corkill.