It was confirmed in Autumn Budget 2025 that the UK’s much heralded Carbon Border Adjustment Mechanism (UK CBAM) will come into force on 1 January 2027. The idea is that the UK CBAM will impose a carbon price on certain imported goods so that they bear a comparable carbon price to similar goods produced domestically under the UK Emissions Trading System (ETS). In other words, the measure is designed to prevent so-called ’carbon leakage’ - the shifting of production to countries without, or with limited, carbon pricing.
Who is affected?
The UK CBAM will impact directly upon importers of specified goods in the following sectors:
- Aluminium;
- Cement;
- Fertilisers;
- Hydrogen;
- Iron; and
- Steel.
It will have an indirect impact on other sectors, notably construction and infrastructure for whom goods such as steel and cement are essential.
How will it work?
There will be a de minimis threshold of £50,000 of CBAM goods over a twelve month period. Importers of goods with specified tariff codes will be required to register with HMRC as CBAM declarants and will then have to submit quarterly returns reporting quantities and embedded emissions, and pay any CBAM charges due. There will be a long first period ending on 31 December 2027 with payment to be made by 31 May 2028. Thereafter, the UK CBAM will operate on quarterly returns.
The primary legislation confirms that the CBAM rate calculation will be based on a sectoral average of emissions covered by Free Allowances over a baseline period, adjusted annually by a 'reduction factor' to reflect the phasing out of Free Allowances under the UK ETS. Further information has been published by HMRC.
Will it work alongside the EU CBAM?
The CBAM concept is not new. The UK CBAM’s EU counterpart has been bedding in since October 2023 but was recently radically changed by the introduction of a de minimis limit which has taken all but the biggest importers of CBAM goods out of the EU CBAM net. It differs from the UK CBAM in that electricity is also covered and it does not operate as an indirect tax but rather as a reporting and payment scheme. Although the UK and EU have said that there will be a “mutual exemption mechanism for EU/UK CBAM”, details about this remain scanty.
What is the key message?
Be prepared! We are about to embark on a twelve month countdown to this new tax and both UK importers and overseas exporters of CBAM-able goods should already be looking at the impact on their businesses. Long-term contracts that are already in place could be affected, and new contracts should build in CBAM provisions.
Apart from considering the strategic trading position, businesses should also prepare for the more mundane aspects of compliance. Who will be responsible within the business? Do changes need to be made to accounting systems? January 2027 might still seem some way away, but it is never too early to begin the housekeeping process.
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