Why is the UK introducing Carbon Border Adjustment Mechanism (CBAM)?
To address the additional risk of carbon leakage, the government will introduce a UK Carbon Border Adjustment Mechanism (CBAM). Introducing a UK CBAM will ensure highly traded, carbon intensive goods imported from overseas face a carbon price that is comparable to what would have been payable had they been produced in the UK. In response to the spring 2023 consultation titled ‘Addressing carbon leakage risk to support decarbonisation’, there was broad support for a UK CBAM, with approximately 70% of respondents supporting the use of domestic measures, alongside international action, to mitigate carbon leakage.
In considering the timing of the implementation of the UK CBAM, it is important to balance the need for expedient action on carbon leakage with the imperative to give businesses time to prepare for the introduction of a novel and complex measure. To strike that balance, the government will be introducing the UK CBAM on 1 January 2027.
In September 2024 the UK ETS Authority also consulted on moving the start of the second free allocation period from 2026 to 2027 and extending the current allocation period to include 2026. A move to 2027 would enable the government to align the implementation of the Free Allocation Review with the introduction of the UK CBAM, ensuring a holistic policy approach to carbon leakage. The UK ETS Authority will make a final decision and respond to the consultation in due course.
The government has reconsidered the initial sectoral scope of the UK CBAM that will be introduced by 2027. In considering which sectors should be included in the CBAM from 2027, it has looked primarily at three factors:
(1) Inclusion in the UK ETS – the purpose of the UK CBAM is to ensure comparable treatment of imported goods and domestic products from a carbon pricing perspective, to avoid carbon leakage. In line with that objective, the government considered a potential UK CBAM only where the production of goods within those sectors would be within scope of the UK ETS if produced domestically. The UK ETS is the UK’s primary carbon pricing mechanism and the list of regulated activities is set out in legislation.
(2) Carbon leakage risk – the objective of the UK CBAM is to address carbon leakage risk, but this does not arise equally across all sectors within the UK ETS. The risk for sectors was determined initially by considering the ‘Carbon Leakage List’ currently used by the UK ETS Authority for the purpose of determining eligibility for free allowances. Further analysis was also done to understand the risk arising from the potential trade diversion created by other jurisdictions introducing similar measures to the UK CBAM, and the differential in UK and global emissions intensity for the sector.
(3) Feasibility and effectiveness – the UK CBAM will only be implemented in sectors where it will effectively mitigate carbon leakage risk. For example, the UK CBAM would not be introduced in a sector where it would create significant circumvention risks that would undermine its purpose. Feasibility of delivery is also essential and where the inclusion of a particular sector was not deemed feasible, the sector was not included within scope for implementation for 2027. For example, some sectors were not included within scope of the CBAM due to significant challenges around the ability to ascertain embodied emissions in imports at a product level.
Source: GOV.UK