Carbon Border Adjustment Mechanism in the UK

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.

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