What are the top 10 things you need to know about UK CBAM?

The UK government is currently consulting on draft primary legislation establishing a UK Carbon Border Adjustment Mechanism (“CBAM”), which is set to come into force from 1 January 2027 .

The current consultation is limited to ensuring that the draft primary legislation implements the Government’s stated policy intent, rather than seeking further stakeholder comment on the policy design itself and is open until 3 July 2025.

1. Introduction and Purpose of CBAM

The CBAM is a tax charged on the emissions embodied in certain specified goods imported into the United Kingdom. Those emissions include not only the emissions from the production process itself but the indirect emissions from the use of electricity used in that process. Its primary aim is to ensure that imported goods are subject to a carbon price equivalent to that faced by domestic producers, thereby preventing carbon leakage and supporting the UK’s climate objectives, specifically its commitment to achieve net zero by 2050.

2. Goods Covered by CBAM

CBAM applies to a defined list of goods, known as "CBAM goods" from five sectors, which are specified in Schedule 1 of the legislation by reference to their commodity code.

The main “CBAM goods” are grouped into the following main categories:

• Aluminium Products Includes unwrought aluminium, powders, bars, wires, sheets, foils, tubes, pipes, structural components, containers, and other articles made of aluminium.
• Cement Covers various types of cement and cement clinkers, including Portland, aluminous, and hydraulic cements.
• Fertilisers Encompasses nitric acid, ammonia, potassium nitrates, and a range of mineral or chemical fertilisers, particularly those containing nitrogen, phosphorus, and potassium (with some exceptions).
• Hydrogen Specifically includes hydrogen gas.
• Iron and Steel Products Comprises iron ores, a wide range of iron and steel products (such as bars, sheets, pipes, tubes, structural items, containers, fasteners, and other articles), with certain ferro-alloys excluded.

It should also be noted that “precursor goods”, that is to say, goods which are used in the production of end products which would themselves be CBAM goods are also covered by the tax.

3. Chargeable Event and Importation

CBAM is charged when a CBAM good is imported into the UK. The charge applies at the point when liability to import duty is incurred, or, in certain cases, when goods are imported from Northern Ireland or the Isle of Man, or re-imported after export.

4. Person Liable for CBAM

The importer is liable for the CBAM charge. This is generally the person in whose name the customs declaration is made, or on whose behalf the goods are imported.

5. Exemptions from CBAM

There are several exemptions, including:

• Goods originating in the UK
• Returned goods (i.e., goods previously exported and now re-imported)
• Goods imported otherwise than in the course of a business
• Importers who are neither registrable nor registered for CBAM purposes

6. Calculation of the CBAM Charge

The CBAM charge is calculated by multiplying the number of tonnes of carbon dioxide equivalent emissions embodied in the imported good by the sectoral domestic price, which is based on the UK Emissions Trading Scheme (ETS) price for the relevant sector and period.  An adjustment is made to the ETS price to take into account the fact that free allowances are available in some sectors, including iron and steel, to reflect the reduced burden on domestic producers and prevent any discrimination against non-domestic producers.  The basis of this reduction is proving controversial.

7. Carbon Price Relief

If a monetary amount (such as a carbon tax or payment for emissions allowances) has already been paid in relation to the emissions embodied in the imported good, the CBAM charge may be reduced accordingly. The Treasury will set out the rules for such relief.

8. Registration and Thresholds

Importers must register with HMRC for CBAM if, in the preceding 12 months, they have imported CBAM goods with an aggregate value of £50,000 or more in the course of a business, or if they expect to do so within a 30-day period. There are detailed rules for registration, de-registration, and group treatment.

9. Administration, Returns, and Payment

Registered or registrable persons must account for and pay CBAM for each accounting period (quarterly). Returns and payments are due by the end of the second month after the end of each accounting period. There are also requirements for record-keeping and evidence of emissions.  For the first year of the CBAM, the policy intent is that the accounting period will be 12 month with a period of 5 months for submitting returns and payment.

10. Enforcement, Penalties, and Appeals

The legislation provides for a range of penalties for non-compliance, including failures to register, submit returns, pay CBAM, or keep records. There are also criminal offences for fraudulent evasion and misstatement. Decisions by HMRC can be reviewed and appealed through specified procedures.

What regulations will be made in the future

The draft legislation for the CBAM provides extensive powers for the Treasury and HMRC to make future regulations to ensure the effective operation, administration, and enforcement of the regime. The following areas are specifically identified as requiring or permitting future regulations:

1. Determination and Evidence of Emissions

• The Treasury may make regulations specifying what it means for emissions to be attributable to the production of a CBAM good, including emissions from activities connected to the production of the good or its materials.
• HMRC may make regulations on how emissions embodied in CBAM goods are to be determined and evidenced, including the use of measurement, sampling, analysis, estimates, standard values, and verification requirements.

2. Calculation of the Sectoral Domestic Price

• The Treasury may make further regulations about the calculation of the sectoral domestic price, which is central to determining the CBAM charge for each sector and quarter.

3. Carbon Price Relief

• Regulations will be made to specify which monetary amounts (such as foreign carbon taxes or emissions trading costs) may generate relief from the CBAM charge, how such relief is to be calculated, and how it is to be evidenced.

4. Registration and De-registration

• HMRC may make regulations specifying the information required for registration, the process for registration and de-registration, and the determination of the value of CBAM goods for registration thresholds.

5. Returns and Payment

• Regulations may be made regarding the content and method of CBAM returns, the use of digital facilities for returns, and the methods of payment.

6. Measurement of Weight

• HMRC may make regulations about how the weight of CBAM goods is to be measured, the timing of measurement, evidence required, and the use of estimates or agreements.

7. Record-Keeping

• Regulations may require specified persons to keep and preserve records for up to six years, and may specify the form and means of record-keeping.

8. Group Treatment

• Regulations may be made regarding the application, modification, and termination of group treatment for corporate groups, including eligibility and notification requirements.

9. Artificial Separation of Business Activities

• HMRC may issue directions to prevent artificial separation of business activities to avoid CBAM, and regulations may support the administration of such directions.

10. Repayments and Reimbursement Arrangements

• Regulations may be made regarding claims for repayment of overpaid CBAM, the supporting information required, and the operation of reimbursement arrangements to prevent unjust enrichment.

11. Penalties and Enforcement

• The Treasury may make regulations to amend penalty amounts in line with inflation and to provide for the administration and recovery of penalties.

12. Linked Emissions Trading Schemes

• The Treasury may make regulations to exclude goods originating from countries with emissions trading schemes linked to the UK ETS from the CBAM charge, and to disregard such goods for registration thresholds.

13. Supplementary, Incidental, and Transitional Provisions

• Regulations may be made to address incidental, consequential, supplementary, or transitional matters, including the commencement and phasing-in of CBAM requirements.

14. Amendments in Response to Changes in Customs or Emissions Trading Law

• The Treasury may make regulations to update CBAM provisions in response to amendments or replacements of the Union Customs Code or related UK legislation.

Regulatory Process and Notices

Regulations under CBAM will generally be made by statutory instrument, with some subject to the affirmative or made affirmative procedure in Parliament, depending on their significance.