UK Carbon Border Adjustment Mechanism: How will it work?

UK Carbon Border Adjustment Mechanism

In February, we reported on the Department of Energy Security and Net Zero’s confirmation that a UK Carbon Border Adjustment Mechanism (CBAM) would be bought into force by 2027. See our review of the UK CBAM and comparison with the EU CBAM here.

HM Treasury and HM Revenue and Customs (HMRC) have recently published a consultation on the introduction of a CBAM on imports into the UK of certain carbon intensive goods (the Consultation). The Consultation seeks views on the design, implementation and administration of the CBAM to ensure that its implementation meets the government’s environmental and other objectives, while not placing disproportionate burdens on business. 

Carbon leakage

Carbon leakage is the movement of production activities and the associated carbon emissions from one country to another in order to avoid higher levels of carbon pricing and more stringent climate regulation. The CBAM will mitigate the risk of carbon leakage by applying a carbon price, known as the CBAM rate, to imported goods. The CBAM rate will reflect both the carbon emitted in the production of the goods together with any gap between the carbon price applied in the country of origin and the carbon price incurred by UK-based production.

The proposals

The Consultation seeks views on the following proposals: 

• Calculation of liability – the CBAM liability will be calculated using the following equation:
  
  CBAM liability =Emissions value per type of good per production source ×(Effective UK carbon price-Overseas carbon price)
  
  Importers will have two options available when calculating the emissions associated with imported goods (including those associated with precursor goods): to use default values determined by the government in line with global average embodied emissions weighted by the production volumes of key UK trading partners; or to use data on the actual emissions involved. In either case, embodied emissions will cover direct and indirect emissions.

• CBAM rate – the effective UK carbon price varies depending on the availability of other carbon leakage mitigation policies and the electricity intensity of production, making it difficult to determine a single CBAM rate for all sectors. The government is therefore proposing that each sector will have an individual CBAM rate. The CBAM rate payable for each sector of goods will be determined by a set methodology and will be updated on a quarterly basis, reflecting the UK’s moving carbon price under the UK Emissions Trading Scheme (ETS).
• CBAM rate adjustment – the CBAM rate can be reduced if the embodied emissions in the goods were subject to an explicit carbon price overseas and evidence of this is provided. As such, if a CBAM overseas placed a carbon price on UK CBAM goods during the course of production or en route to the UK, the UK CBAM rate would be adjusted to account for this.
• CBAM scope – the CBAM will only apply to imported goods that are placed or released for consumption on the UK market. Liability will arise when the goods are released into free circulation in the UK, which is when customs rules apply, or when the goods first enter the UK. The person liable for the CBAM is i) when there are custom controls - the person responsible for the goods when they are released into free circulation in the UK, or ii) when there are no custom controls - the person on whose behalf the goods are imported into the UK. To reduce administrative burdens on those importing small quantities of goods, the liable person will only be required to register with HMRC once the total value of goods imported into the UK exceeds £10,000 a year.
• Administration – the person liable for the CBAM will be required to submit returns and pay the liability at the end of the accounting period. The government proposes that the first accounting period will run for 12 months and cover imports of goods from 1 January to 31 December 2027. From 2028, the government proposes that accounting periods will be quarterly.
• Enforcement – where there is non-compliance, HMRC will use similar enforcement and inspection powers to those that are currently used to administer other taxes. The government is considering the introduction of penalties for late registration, late submission of returns, late payment, failure to keep appropriate records and failure to provide information. 

Practical implications

The responses to the Consultation will influence the final design and implementation of CBAM legislation. The CBAM will be a key part of the government’s wider strategy to tackle carbon leakage risk and will ensure that highly traded, carbon intensive goods from overseas face a comparable carbon price to those produced here. The CBAM will operate alongside other established mechanisms, such as the ETS, to support decarbonisation.

The Norton Rose Fulbright Environment team is on hand to advise and support entities in navigating the developing decarbonisation 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 Katie Phipps (trainee solicitor) for her contributions