On 30 October 2024, as part of the Autumn Budget, the Government provided an update on its plans for the introduction of a UK carbon border adjustment mechanism (CBAM). In doing so the Government confirmed that the UK CBAM will apply from 1 January 2027 and that the primary legislation required to give effect to the UK CBAM will be included in the Finance Bill 2024-25. At the same time, the Government also published its response to the public consultation undertaken by HM Revenue & Customs (HMRC) and HM Treasury (HMT) earlier this year (on which we previously posted a blog).
The CBAM proposal forms part of the UK Government’s wider strategy to tackle carbon leakage, which is caused by the movement of production activities and associated emissions from one country to another as a result of different levels of carbon pricing and climate regulation. To achieve this the UK CBAM will place a carbon price on goods imported to the UK from the aluminium, cement, fertiliser, hydrogen, iron and steel sectors, 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. The UK CBAM will broadly mirror the EU CBAM which is currently in a transitional phase until January 2026, although there are a number of key differences in the way the two regimes will work.
The Government response confirmed many aspects originally expected from the proposal:
- As outlined in the original proposal, the Government response confirmed that the UK CBAM will be introduced on 1 January 2027, without a transitional period.
- Under the proposals, unlike the EU CBAM, there will be no reporting-only transitional phase for UK CBAM; liabilities will be incurred as soon as the regime becomes operational at the start of 2027.
- As originally proposed, direct and indirect emissions will have to be taken into account in the calculation as from 2027.
- However, unlike in the EU CBAM, default values will be available to ensure that goods can continue to be imported where actual emissions data for precursor goods is not available or difficult to obtain. The consultation proposed the use of this approach for an initial period of at least 2027-2030. Post-2027, the consultation proposed that a review be held to assess the use and functionality of default emissions values, with any subsequent changes to be implemented from 2031 at the earliest.
One significant change in the Government response is the scope of the CBAM and the products covered:
- The original proposed list of products in scope included glass and ceramics which are not included as part of the EU CBAM. The response indicates more alignment in scope with the EU, as glass and ceramics are no longer included, although they will be considered for inclusion at a later date. Consultations also suggested that scrap aluminium/iron/steel should also be excluded from the scope.
- Electricity, however, remains outside the UK scope, contrary to the EU CBAM.
The UK government also provided additional clarifications regarding the moment when the tax point arises:
- The tax point should arise when a CBAM good is released for free circulation, which excludes goods under customs controls (e.g. placed under customs warehousing or inward processing relief). The UK CBAM rate applicable will be determined by the date on which the tax point arises
- For goods that are exported under the outward processing procedure and re-imported into the UK as a CBAM good, the CBAM tax point will arise at free circulation but will be based on the processing emissions that took place outside of the UK.
- For CBAM goods that originated outside of the UK and are reimported using the returned goods relief, there will be no UK CBAM liability providing the conditions for applying the relief for customs purposes are met. This means CBAM goods which are reimported into the UK within 3 years in an unaltered state will be out of scope and not incur a CBAM liability.
The UK government has also proposed changing the minimum registration threshold from £10,000 to £50,0000.
- Below £50,000, importers will not have an obligation to register and account for the CBAM. This sees an increase from the original proposal of £10,000, which is a positive for SMEs, without affecting the goal of the policy.
- 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, over a 12-month period, and a minimum threshold test would determine whether a person has exceeded the threshold for CBAM.
The response also detailed the approach on penalties for non-compliance:
- The government will introduce a criminal offence for fraudulent evasion of the UK CBAM, with powers and sanctions aimed at promoting compliance, and reassuring businesses that do comply that they will not be disadvantaged.
The Government has indicated a number of next steps.
- HMRC and HMT will continue to engage with key stakeholders that represent the sectors and industries most affected by establishing a CBAM industry working group, as well as an international group to engage with other governments whose exporters have a keen interest in the functioning of the UK CBAM.
- HMRC have also committed to developing a comprehensive communications package and detailed guidance, as well as publishing all necessary legislation in draft before introducing it to Parliament, in order to maintain engagement with all relevant stakeholders.
