UK CBAM consultation

UK CBAM consultation

The UK government has published its proposal to introduce a UK CBAM with effect from 2027. The consultation, “Introduction of a UK carbon border adjustment mechanism from January 2027” sets out details of the proposal, including its scope, method of calculation and administration features. In particular, the UK has chosen not to follow the example of the EU CBAM in using tradeable CBAM certificates, but will simply apply a domestic CBAM charge on importers of goods within the scope of the charge.

Background

A CBAM is seen as one of a range of options to counter so-called "carbon leakage". Carbon leakage is where countries impose local environmental requirements on domestic industries, which results in these industries either relocating or losing out to competitors in cheaper countries with lower environmental standards.

The introduction of a CBAM was agreed in principle within the EU in March 2022 and was introduced from October 2023 but with a transition period where the obligations of the importer is initially limited to reporting only. However, the full CBAM scheme will be phased in as the free allowances under the ETS are phased out - meaning that CBAM will therefore commence in earnest in 2026 and be fully phased in by 2034.

In the UK, the Environmental Audit Committee published a report, "Greening imports: a UK carbon border approach" on 4 April 2022. In that Report, the Committee recommended that the government should commence work immediately on developing a comprehensive UK carbon border approach, in order that this might be implemented during the 2020s. In particular, the Committee recommended that this should include a CBAM as part of a co-ordinated set of policies including product standards, alongside work to build consensus with trading partners, industry and consumers on the need for this policy response.

In response, the government published a consultation, "Addressing carbon leakage risk to support decarbonisation: A consultation on strategic goals, policy options, and implementation considerations", in March 2023 and, in December 2023 and, in December 2023, HM Treasury confirmed that the UK would introduce a UK CBAM by 2027.

Scope

As expected, the CBAM will apply to ‘CBAM goods’ covered by a specified list of commodity codes in the following sectors:

• aluminium
• cement
• ceramics
• fertiliser
• glass
• hydrogen
• iron & steel

The government has drafted an initial list of commodity codes for inclusion and set out in Annex A of the consultation. This list of goods will be kept under review. However, the principle to be applied is that only goods whose production would be within the scope of the UK ETS if produced domestically will be considered for potential inclusion within scope of the UK CBAM. However, the government has decided that scrap imported goods within the aluminium, glass and iron and steel sectors will not be within scope.

The UK CBAM will apply both to the import of “complex goods” and “precursor goods”. Accordingly, it will be necessary to calculate the emissions associated with the manufacture of precursor goods included in the production of complex goods for the purposes of calculating the total UK CBAM liability where complex goods are imported.

Charge

The UK CBAM will be a charge on the emissions embodied in relevant imports into the UK that take place on or after 1 January 2027. However, the CBAM will not be payable until after the end of an accounting period. The government proposes that the first accounting period will run for 12 months and cover imports of CBAM goods from 1 January to 31 December 2027. From 2028, the government proposes that accounting periods become quarterly. A liable person will be required to submit a CBAM return and pay the liability at the end of each accounting period.

The government proposes that the tax point – the time that CBAM liability arises (and which determines the rate of tax) - will be either:

• where a good is subject to customs control, the date on which the good is released into free circulation (where a CBAM good is imported and processed into a non-CBAM good before it is released into free circulation, the government proposes that the liability will be based on the CBAM good before it was processed), or
• where there are no customs controls, the date on which the CBAM good first enters the UK.

A person will not need to register or account for CBAM if the total value of their CBAM goods passing a tax point falls below a minimum registration threshold of £10,000 over a rolling 12-month period. The total value should be calculated with existing methodologies used for customs. A person meeting the threshold will be required to be registered for CBAM, either from the date they expect to meet the threshold or from the date they meet it, whichever is earlier. It proposes that their liability for CBAM starts from this date.

The government proposes that the liable person for the CBAM charge will be either:

• where there are customs controls, the person responsible for the goods when they are released into free circulation (ie normally the importer of the CBAM goods, or
• where there are no customs controls, the person on whose behalf the goods are moved to the UK.

Calculation of liability

The rate payable on CBAM goods will be set by the government. The government proposes that there will be seven rates of tax – one for each sector. It proposes that the UK CBAM rates will be determined by a set methodology and updated by the government on a quarterly basis, reflecting the UK’s moving carbon price under the UK ETS. The UK CBAM rate will be applicable per tonne of embodied emissions attributed to CBAM goods.

The government proposes that when the liable person submits their return, the CBAM liability will be calculated by multiplying the total emissions emitted per type of good by the relevant UK CBAM rate, minus the carbon price payable overseas. Embodied emissions will include both direct emissions (ie emissions related to the production processes) and indirect emissions (ie emissions related to the production of electricity consumed during the production of CBAM goods).

In terms of calculating the emissions, the government proposes that it will provide a dual approach. The liable person will either:

• provide information about the emissions associated with their CBAM goods, verified by an independent verification body, or
• apply default emissions values which the government will publish – these will be based on a global weighted average of UK imports for the relevant sector.

This initial dual approach will be applied for at least an initial period of 2027 to 2030. Default values will be published by the government in advance. Actual embodied emissions data will need to be independently verified to prevent fraud and maintain the integrity of the CBAM. To ensure equitable treatment with goods produced in the UK, the government proposes that the existing principles of verification used for the UK ETS will also be applied to the UK CBAM, including the requirement to have an agreed emissions monitoring plan and site visits.

The government proposes that the UK CBAM liability will be reduced (potentially to zero) if the embodied emissions in the CBAM goods were subject to a carbon price overseas that was greater than or equal to the UK CBAM rate for that sector. It appears that this will also cover other overseas carbon pricing where goods are indirectly imported into the UK via other jurisdictions.

Administration

If a person meets the registration threshold for the CBAM, they will have 30 days to notify HMRC of their obligation to register. A liable person will be required to submit a CBAM return and pay the liability at the end of each accounting period. This will include submitting nil returns where there is no CBAM charge to pay (for example, where there was a sufficiently high carbon price on their goods overseas to offset the UK CBAM charge).

Further information on the administration of CBAM is set out in detail in Chapter 8 of the consultation.

Comment

Responses to the earlier consultation revealed broad support for some form of UK CBAM with approximately 70% of respondents supporting the use of domestic measures to mitigate carbon leakage, with broad support for the CBAM. However, the administration of the CBAM, both for affected businesses and government, will be complex and burdensome, especially given its reach into not only imports of primary materials, but also goods incorporating such materials and the precursor goods incorporated in those “complex” goods.

It is particularly noteworthy that the UK has chosen not to follow the EU model of CBAM certificates. However, as the consultation notes, this would have required the development of additional new administrative elements for government and importers and added complexity to the CBAM. However, by tying the UK scheme more closely to an import duty, it is unclear whether this will give rise to WTO problems for the UK scheme which the EU scheme may avoid (even though the document states that it will be applied to “UK imports in line with our WTO obligations”.

More generally, the document notes that the best solution to carbon leakage is an international one. “With 90% of the global economy committed to net zero by 2050, the UK is championing a number of initiatives to advance global decarbonisation, including through support for adoption of carbon pricing globally. In the long term these initiatives can reduce differences in carbon pricing globally, but that will take time. In the meantime, while disparities remain, differential carbon pricing between trading partners can create material carbon leakage risks.”

The consultation is open for responses until 13 June 2024 which should be sent to cbampolicyteam@hmrc.gov.uk