What is a Carbon Border Adjustment Mechanism (CBAM)?
The aim behind both the EU and UK CBAM is to ensure that carbon intensive products (such as steel, cement and fertiliser) that are manufactured overseas and subsequently imported into the EU/UK are subject to equivalent carbon prices to those payable by EU/UK-based manufacturers. This ensures that decarbonisation efforts under both the EU Emissions Trading System (EU ETS) and UK Emissions Trading Scheme (UK ETS) actually lead to a reduction in global GHG emissions, rather than driving the relocation of carbon-intensive manufacturing and production activities overseas to jurisdictions with no equivalent carbon price (often referred to as “carbon leakage”). Historically, carbon leakage has been prevented through the “free allocation” of ETS allowances to operators in sectors identified as being at risk. However, both the EU and UK have signalled their desire to move away from free allocation (on a phased basis) consistent with their climate ambitions.
Broadly, both CBAM schemes work by requiring importers to calculate the embedded greenhouse gas (GHG) emissions generated as a result of overseas manufacturing activities for in-scope products, and then pay a carbon price to reflect those emissions when the product enters either the EU or UK market. Both schemes offer a mechanism enabling importers to deduct the amount of any carbon price already paid in the country of production to avoid double payment provided that adequate supporting evidence is available.
What are the key differences between the EU and the UK?
The EU CBAM scheme is already in place with the UK scheme set to become applicable from 1 January 2027. While both schemes have broadly the same objective, there are some key differences in the way that the two schemes work.
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What next for the UK CBAM?
The primary legislation is still under consideration by Parliament. Following adoption, HMRC will still need to finalise the necessary secondary legislation required to give effect to the scheme. HMRC is currently consulting on three sets of Draft Regulations and a further consultation on additional implementing legislation is expected later in Spring 2026.
HMRC is then expected to publish detailed guidance during the course of 2026 ahead of CBAM becoming effective from 1 January 2027.
What are the key developments to monitor for the EU?
With EU CBAM already in force, importers crucially need to have applied for authorised CBAM declarant status by 31 March 2026 to be able to continue importing into the EU.
The Commission has also published a proposal to broaden the scope of EU CBAM from 1 January 2028 to cover 180 additional steel and aluminium-intensive downstream products. The rationale behind this is that EU producers of downstream products are subject to CBAM costs in respect of imported aluminium and steel components used in their EU manufacturing operations, meaning that production of downstream products theoretically risks moving to countries with weaker climate policies. The expansion will largely cover industrial supply chain products, with a high steel and aluminium content, used in heavy machinery and specialised equipment. A small portion of the goods covered are household goods such as washing machines and tumble dryers. Motor vehicles are also added.
More broadly, the UK and EU have expressed a common understanding regarding the potential linking of the UK ETS and EU ETS, recognising that such linkage could facilitate mutually agreed exemptions under their respective CBAMs. However, negotiations remain ongoing and substantive progress has yet to be achieved, with no confirmed timelines or milestones for their completion. This uncertainty is highlighted in the recent House of Commons Foreign Affairs Committee report on the UK Government’s reset of UK-EU relations, which specifically notes the absence of clear scheduling for these critical discussions and underscores the broader implications for UK-EU climate and trade cooperation.
How can businesses prepare?
Most businesses impacted by EU CBAM will already have had to get to grips with the regime to an extent as a result of the transitional reporting obligations that applied from 2023 – 2025. Businesses now need to switch to ensuring compliance with the requirements of the definitive phase including applying for authorised CBAM declarant status by 31 March where required and modelling future cost impacts before EU CBAM allowances go on sale in February 2027.
The UK CBAM regime is obviously at an earlier stage in its development and while there are similarities with the EU regime, businesses will still need to develop a separate compliance process for UK CBAM as a result of the differing reporting and payment requirements.
That said, in respect of both regimes businesses should ideally seek to build an emissions data collection and verification system that can be used to feed into both the EU and UK reporting formats and should ensure that CBAM compliance is integrated into all procurement, finance and sustainability functions within the business.
