Publication
International arbitration report
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
Carbon Border Adjustment Mechanism in the UK
What is it and how does it interact with the EU CBAM?
Global | Publication | February 2024
Content
Introduction
The Department for Energy Security and Net Zero has published its response (the Response) to its consultation addressing carbon leakage risk to support decarbonization (the Consultation). The Response confirmed that a UK CBAM will be brought into force by 2027. There will be further consultations during 2024 regarding the structure and operation of the UK CBAM, although some key details were included within the Response.
Combatting carbon leakage
“Carbon leakage” is the term given to the movement of production activities, and therefore the associated carbon emissions, from one country to another, in order to avoid higher levels of carbon pricing and more stringent climate regulation. The government is seeking to reduce the level of carbon leakage from the UK as it shores up its legislative framework in an effort to accelerate industrial decarbonization, and hit the net-zero targets enshrined in the UK’s Climate Change Act 2008.
The UK CBAM was one of the measures that was proposed in consultations during 2023 to combat carbon leakage. The UK CBAM introduces a carbon price on imported products that reflects the carbon emitted in the production of the product and taking into account any gap that exists between the carbon price applied in the country of origin, and the carbon price that is incurred by UK-based production. The UK CBAM would then operate alongside other established mechanisms to support decarbonization, such as the UK Emissions Trading Scheme (UK ETS) (which we have previously covered in our briefing Technical consultations on the future of the UK Emissions Trading Scheme (UK ETS) | Global law firm | Norton Rose Fulbright).
Key features compared with the EU CBAM
The responses to the proposed key elements of the UK CBAM are set out below, alongside a brief summary of the equivalent details of the EU CBAM.
| UK CBAM | EU CBAM | |
|---|---|---|
| Scope | The majority of respondents agreed that the UK CBAM should only apply to products in sectors which are already subject to the UK ETS, as this gives more coherence between existing and future carbon leakage mitigation strategies. The UK CBAM will apply to scope 1 and scope 2 emissions, and certain precursor product emissions, in similar scope to the UK ETS. |
By 2030, the scope of the EU CBAM is intended to be extended to all products subject to the EU Emissions Trading System (EU ETS), or to all products carrying a risk of carbon leakage. The EU will consider the inclusion of indirect emissions and downstream products. |
| Sectors |
Industry participants considered the UK CBAM would not be effective or feasible in the electricity, agri-food, complex goods and industrial tools sectors. The Response confirmed that the UK CBAM will levy a charge on the carbon emissions embodied in imports from the aluminum, cement, fertilizer, hydrogen, iron and steel, ceramics and glass sectors. The majority of respondents agreed that the UK CBAM should be designed in a manner to leave open the possibility of extending it beyond the initial sectors covered. |
The EU CBAM currently applies to EU imports in the aluminum, cement, fertilizers, hydrogen, iron and steel and electricity sectors. There is no materiality threshold, so any relevant exports to the EU carry a requirement to comply. |
| Data verification |
The majority of responses confirmed that there should be an obligation on importers to provide accurate and independently verified emissions data, in order to ensure that the environmental integrity of reporting under the UK CBAM is maintained. |
The EU CBAM reporting requires data on greenhouse gas (GHG) emissions per product, to be verified by an independent third-party. Where actual data is not available, default emissions data may be used. |
| Pricing |
The UK CBAM levy will be calculated by comparing the carbon price (of the carbon emitted in the production of imported goods) applied in the country of origin against the carbon price faced by UK producers. If there is a gap between these figures, a payment will be levied. |
The price of the EU CBAM certificates that importers must surrender proportionally to their embedded GHG will be calculated depending on the weekly average auction price of EU ETS allowances, in euros per tonne of carbon dioxide emitted. |
| Timeline |
The timeline for the introduction of the UK CBAM being aligned with the EU’s adoption of the charging elements of the EU CBAM in 2026 was supported by around half of responses. However, the government is targeting implementation by 2027. |
Currently in the process of a phased introduction, which commenced on October 1, 2023. The full requirements (including the obligation to pay a charge) do not enter into force until January 1, 2026. |
Other decarbonization measures
Other potential policy measures such as mandatory product standards (MPS) were explored in the Consultation, and the Response confirms that the government will continue to consider the applicability of MPS from the late 2020s. MPS would set an upper limit on the embodied emissions for individual products placed in the UK market, or produced in the UK, prohibiting products which are more emissions intensive than the defined threshold.
In an effort to grow the market for low carbon products, the government set out in the Response its intention to collaborate with industry to implement a framework of voluntary product standards (VPS), which will set out the recommended limits to be imposed on the carbon content of industrial products. The scope and detail of a VPS regime will be subject to further consideration by way of a technical consultation later in 2024. The government also intends to gather views in a further technical consultation on potential digital solutions for delivering an embodied emissions reporting framework, in an effort to increase data sharing and reduce the administrative burden placed upon reporting entities and administrative bodies.
Implications of the UK CBAM
The UK CBAM is still in its early stages of development with further, more detailed, consultations on its structure and operation planned during 2024. When it is introduced, it will be an important measure in the government’s efforts to combat carbon leakage. The UK CBAM represents a convergence of EU and UK decarbonization legislation, and its interaction with the EU CBAM will be a crucial area of consideration for businesses that operate under both regimes. See our detailed review about the EU CBAM.
The Norton Rose Fulbright Environment team is on hand to advise and support entities in navigating the developing decarbonization legislative framework. We will continue to monitor and provide further updates on amendments to the UK and EU CBAMs, and advise of any other jurisdictions looking to follow suit – for example, Turkey, Indonesia, Vietnam and Thailand have previously stated intentions to consider the introduction of domestic CBAMs. Our global climate change and sustainability practice has extensive experience advising clients across all key environmental and carbon markets.
With thanks to Rebecca Bell (trainee solicitor) for her contributions
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