The UK has committed to reduce emissions by 68% by 2030 compared to 1990 levels and to reach net zero by 2050. As the UK government (the Government) has confirmed that policies designed to meet UK environmental objectives should not lead to a net increase in global emissions, it has recently consulted on possible measures to combat carbon leakage risk in the UK.
In the consultation "Addressing carbon leakage risk to support decarbonisation" (the Carbon Leakage Consultation), the Department for Energy Security and Net Zero (DESNZ) and HM Treasury sought views on a range of policies including a UK CBAM, voluntary product standards (VPS), mandatory product standards (MPS), product labels and an embedded emissions reporting framework.
In its response, the Government confirmed it plans to (1) implement a UK Carbon Border Adjustment Mechanism (a UK CBAM) by 2027 and (2) to consult on detailed proposals for VPS later in 2024. Further technical consultations are also expected in relation to other carbon leakage mitigation measures, including MPS and product labels.
The UK CBAM is likely to have a significant impact when introduced – importers of goods that could fall within the scope of the CBAM should monitor developments in this space and consider responding to the UK CBAM consultation ("Introduction of a UK [CBAM] from January 2027") which runs until 13 June 2024 (the CBAM Consultation). Businesses may also wish to monitor other carbon leakage measures as proposals for these are developed and consulted on.
uk cbam
The Government has confirmed it plans to implement a UK CBAM by 2027. The EU has already implemented a CBAM, which is currently in a transitional phase (from 2023 to 2026) and will enter into full effect from 2026.
The UK CBAM will place a price on certain carbon-intensive goods imported into the UK in sectors that have been identified as most at risk of carbon leakage. It will aim to ensure comparable treatment from a carbon pricing perspective of imported goods with those produced domestically, to reduce the risk of domestic production being relocated.
Scope
The UK CBAM would apply to emissions embodied in the imports of certain goods, determined by commodity codes (Annex A of the CBAM Consultation), in the following sectors: aluminium, cement, ceramics, fertilisers, glass, hydrogen, iron and steel. A range of factors were considered in determining the proposed scope, including whether a sector is (1) at risk of carbon leakage, and (2) in scope of the UK ETS. The UK ETS Authority's list of sectors most at risk of carbon leakage was used as a base.
Proposed mechanism
Unlike the EU CBAM which operates through a system of certificates, the UK CBAM would operate as a levy. If the total value of CBAM goods passing a tax point (see below) is equal to or exceeds £10,000 on a rolling 12-month period, a liable person would need to submit a CBAM return and pay its CBAM liability at the end of each accounting period.
It is proposed that the first accounting period would be 12 months (1 January to 31 December 2027), with subsequent accounting periods becoming quarterly from 2028.
| Custom regime | Tax point | Liable person |
|---|---|---|
| Good is subject to customs control | Point at which the good is released into free circulation | Person responsible for the goods when they are released into free circulation |
| No customs controls | Point at on which the CBAM good first enters the UK | Person on whose behalf the goods are moved to the UK |
Calculation of CBAM liability
| Embodied emissions |
These would be measured in tonnes carbon dioxide equivalent (tCO2e) and determined using:
These would include direct and indirect embodied emissions, including those in any precursor goods1, to ensure that the UK CBAM coverage is comparable to that of the UK ETS. |
| Multiplied by | |
| Effective UK carbon price |
This will be known as the "UK CBAM rate". Determined quarterly, the UK CBAM rate for each sector would be calculated using the following factors:
These factors would be weighted per sector to reflect the proportion of direct and indirect emissions within such sector in order to produce a single CBAM rate. |
| Minus | |
| Effective overseas carbon price |
Any explicit carbon price that the embodied emissions in the CBAM goods were subject to overseas. An explicit carbon price is a price t/CO2e placed directly on GHG emissions produced during a given process, such as manufacturing. These usually take the form of either an ETS with a market-based price or a carbon tax with a fixed price. An importer must provide sufficient evidence of this.
It is proposed that any overseas carbon price would need to be verified by an independent third party. Further detail will be set out at a later date. |
Although the Government is yet to define which embodied emissions would be relevant for the purposes of the UK CBAM, it has confirmed that following responses that the categorisation of emissions by "Scopes" was not clear, it will use the following terms:
- direct emissions – those related to production processes of CBAM goods; and
- indirect emissions – related to the production of electricity consumed during the production of goods. It would not be relevant whether such electricity were produced on site or off site.
Penalty
HMRC will use similar enforcement and inspection powers as those that are currently used in respect of other taxes in order to reduce any potential complexity. The Government has outlined its intention to:
- align the penalty regime for late submission of returns or late payment with the penalty points system for VAT;
- introduce a general penalty for any non-compliance specific to the CBAM, including a failure to provide information or keep appropriate records); and
- consider both the penalties due under the UK ETS and existing taxes administered by HMRC when setting the level of penalties
Voluntary product standards
For the purposes of the Carbon Leakage Consultation, VPS describe a voluntary system for benchmarking products based on their embodied emissions. VPS could help define, and differentiate between, lower and higher carbon versions of products.
The Government concluded that VPS would provide greater transparency in relation to the embodied emissions in a product, which would in turn provide consumers with a better understanding as to how they can use their purchasing power to further environmental goals. The voluntary nature of VPS would not create an onerous regulatory burden, as companies could elect not to adopt such standards.
The scope, operation and implementation timelines of VPS will be subject to further technical engagement later in 2024, but the Government confirmed it plans to build on existing international and sector-led initiatives, particularly in the steel, cement and concrete sectors.
Other measures to protect against carbon leakage risk
Mandatory product standards
MPS are defined in the Carbon Leakage Consultation as "a form of regulation to set a maximum limit on the embodied emissions for a product", which could utilise the VPS system (eg in an A-G range, 'G-rated' products may be prohibited). Any MPS would be based on the way a product is made, unlike minimum energy performance standards which focus on operational emissions.
The Government confirmed that although they would not be implemented at this stage, it would continue to explore whether MPS could have a role in UK measures to combat carbon leakage from the late 2020s or early 2030s. The range of responses received prevented the Government from being able to conclude that MPS should be implemented for a specific sector or product. Further information would be required in relation to the likely impacts of MPS.
Product labels
Product labels would provide information about a product's embodied emissions (including any VPS a product meets) to enable consumers to make informed purchasing decisions.
The majority of respondents supported labels that would include embodied emissions data or energy efficiency-style lettering (or both). The Government confirmed that it would continue to explore options for product labelling as a potential additional measure to prevent carbon leakage and support the effectiveness of other measures (eg VPS).
Emissions reporting framework
The Government indicated that it would continue to develop an emissions reporting framework which would ultimately underpin the range of carbon leakage policies in the UK. Respondents to the Carbon Leakage Consultation were supportive of a new framework, although responses were split as to whether any such framework should use existing methodology based on site level emissions data from the UK ETS or those based on life-cycle assessments.
The Government recognised that any new framework would maximise use of existing data and aim to strike a balance between minimising the burden for industry whilst ensuring timely policy implementation. This will be the subject of further technical consultation in 2024.
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A 'precursor good' is defined as a 'good which is used as an input material in the production of a second good. A precursor good can be either a simple or complex good whereas by definition the resulting second good would always be a complex good'.
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This would not change more than once each year.
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