Last week, HM Revenue & Customs (HMRC) and HM Treasury launched a public consultation on the introduction of a UK carbon border adjustment mechanism (CBAM), following its announcement in December 2023. The CBAM proposal forms part of the UK government’s wider strategy to tackle carbon leakage. To achieve this it will impose a carbon price on imported goods with the aim of levelling the playing field and ensuring that imported goods are subject to a carbon price that is comparable to that incurred by manufacturers based in the UK.
Interested parties, including businesses outside the UK and trade and professional bodies, can share their views until 13 June 2024 on the proposal set out by the UK government for the design and administration of the mechanism.
Under the proposed model considered in the consultation, the UK CBAM would diverge from the EU mechanism on key aspects, namely on:
The scope of UK CBAM is different
- The proposed list of products in scope includes glass (HS 7002 to 7008, 7010, 7016, 7019 – except 7019 62 10) and ceramics (HS 6901, 6902, 6903, 6904, 6905, 6906, 6907, 6910), which are not included as part of the EU CBAM.
- Electricity is not in scope, contrary to the EU CBAM.
- However, similar to the position under EU CBAM, UK CBAM aims to capture goods whose production would be in scope of the UK ETS if produced domestically and where there is considered to be a risk of carbon leakage through manufacturing taking place outside of the UK.
The UK CBAM is expected to enter into force in 2027, without a transitional period
- Under the proposals, unlike EU CBAM, there will be no reporting-only transitional phase for UK CBAM and so CBAM liabilities will be incurred as soon as the regime becomes operational at the start of 2027.
- However, the government is proposing a relaxed reporting timeline for 2027, to provide sufficient time for the UK CBAM registry to be set up and for liable persons to establish appropriate processes with their suppliers. Therefore, the proposed deadline for submitting the first CBAM return and payment covering the entire 2027 period will be 30 May 2028.
- From 2028 onwards, emissions will have to be reported on a quarterly basis with a return submitted within a month of the end of the relevant accounting period.
- Direct and indirect emissions (Phases 1 & 2 emissions) will have to be taken into account in the calculation as from 2027.
- Importers will be able to rely on default values, at least until 2031.
The form of the UK “carbon tax” will not work the same way as the UK Emission Trading System (ETS) and EU CBAM
- The UK CBAM will not replicate the model of purchasing and surrendering CBAM certificates (which is the way that the EU CBAM operates).
- The UK CBAM will be based on a “CBAM return” to calculate the “CBAM liability”, calculated by multiplying the emissions value per type of good per production source by the effective UK carbon price (minus the overseas carbon price).
- The UK Emission Trading System (ETS) will still be used as a reference to calculate the carbon price.
Creation of a £10,000 minimum registration threshold
- Below £10,000, importers will not have the obligation to register and account for the CBAM.
- This threshold would be set in relation to the total value of a person’s CBAM goods that pass the “tax point” from 1 January 2027, and a minimum threshold test would determine whether a person has exceeded the threshold for CBAM.
Differences regarding person’s liability
- As of yet there is no clear definition of who the responsible entity will be for UK CBAM and so it is not clear whether the definition will refer to the concepts of “importer” or “declarant” that are used in EU CBAM.
- However, based on the consultation proposals, the person liable will be the person responsible for the goods when they are released into circulation in the UK. This person could be the importer, but depending on the facts could also be another person e.g. where there is a change of ownership while the goods are still under customs control (i.e. are under the Inward Processing or the customs warehousing procedure).
- Where there are no customs controls (e.g. fraudulent entry into the UK territory), the person liable will be the person on whose behalf the goods are moved into the UK.
- The person liable for UK CBAM can appoint a tax agent (which can be a person other than the customs representative), which would submit CBAM returns on behalf of the person liable for CBAM. This would offer more flexibility for operators to outsource or centralise their CBAM compliance, especially as this tax agent will not take on joint and several liability for CBAM.
The UK CBAM proposal may prove to be an interesting benchmark for the EU to identify aspects that would work better for EU operators and Member States, e.g. the tax agent concept or the minimum registration threshold. Following this public consultation, the UK government will draft a legislative proposal, which will presented to the UK parliament.
