UK CBAM: consultation response

Alongside the October 2024 Budget, the government published a response to its March 2024 CBAM consultation confirming that the UK will introduce a UK carbon border adjustment mechanism (CBAM) with effect from 2027. 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. However, the response document confirms that the government has restricted the scope of the proposed CBAM by removing glass and ceramic products, at least initially.

The UK CBAM will be a charge on the carbon emissions embodied in relevant imports into the UK that take place on or after 1 January 2027. The first accounting period will run for 12 months and cover imports of CBAM goods from 1 January to 31 December 2027, with the first returns and payments due by 31 May 2028. From 2028, the government proposes that accounting periods become quarterly.

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, confirmed in December 2023 that the UK would introduce a UK CBAM by 2027 and published a consultation document in March 2024 setting out details of the proposal.

The new government has since had time to reflect on responses to that consultation and has now responded.

Scope

It was originally proposed that the CBAM would apply to ‘CBAM goods’ covered by a specified list of commodity codes in the following sectors: aluminium; cement; ceramics; fertiliser; glass; hydrogen; and iron & steel.

That list has largely been retained, albeit that the government has decided not to apply the CBAM to glass and ceramic products from the outset. Whilst these sectors generally meet the criteria for falling within the CBAM, the government has concluded that, these sectors are generally less emissions intensive that the other sectors and has also listened to concerns around the feasibility of including glass and ceramic products. As such, the government will continue to work with the industry to address these concerns before considering the inclusion of these sectors at a later date.

The sectoral scope will be kept under review beyond 2027 to ensure that the CBAM remains effective to mitigate carbon leakage.

The detailed list of products subject to the CBAM will be based off customs duty commodity codes. 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 inclusion within scope of the UK CBAM. Despite significant feedback on the specific codes within scope (suggesting that they were both too wide and too narrow), the government has decided to follow the initial list of commodity codes set out in Annex A of the March 2024 consultation. Generally, this used the list of products within the EU CBAM as a starting point. This list of goods will be kept under review.

The government has confirmed that scrap imported goods within the aluminium and iron and steel sectors will not be within scope. The government considers that that the use of scrap products, either at the end of their useful life or as ‘offcuts’ with no productive use, has a net benefit on emissions. The use of such products as input materials reduces the need for additional production, and is, by definition, low carbon. Therefore, the carbon leakage risk posed by such goods is low.

CBAM liability

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.

The UK CBAM will apply to both direct emissions and indirect emissions, including those emissions embodied in any relevant precursor goods:

• Direct emissions are emissions related to the production processes of CBAM goods. This includes emissions from the production of heating and cooling consumed during the production processes, irrespective of whether the heating or cooling was produced on or off site
• Indirect emissions are emissions related to the production of electricity, which is consumed during the production of CBAM goods irrespective of whether the electricity was produced on or off site

The UK CBAM will take a dual approach for determining the emissions embodied within imported goods. The person liable to pay the UK CBAM will be able to either:

• Use data on the actual emissions embodied in the goods
• Use default values as determined by the UK government.

The government will use a single default value for each CBAM product as proposed in the consultation document. This suggested that they would be set in line with global average embodied emissions weighted by the production volumes of key UK trading partners. The response document simply states that the government will confirm the methodology and publish default values in advance of the introduction of the UK CBAM in 2027. However, the response does acknowledge views from some respondents that the default values should be jurisdiction specific and, post 2027, will consider the feasibility of moving to an alternative approach.

Actual embodied emissions data will need to be independently verified to prevent fraud and maintain the integrity of the CBAM. The response recognises concerns around the complexity and cost of calculating actual emissions and “will work with businesses to keep administrative burdens to a minimum”. The government intends to limit the requirements to providing high level emissions data and for the checking of the detail to be left to the independent verifier. However, the response document rejects the suggestion that the government should receive emissions data directly from overseas installations.

CBAM rate

The rate payable on CBAM goods will be set by the government. The response confirms that there will be separate rates of tax 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).

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. This will also cover other overseas carbon pricing where goods are indirectly imported into the UK via other jurisdictions.

There was much concern evidenced in responses to the consultation over the ability of importers to acquire details of the overseas carbon prices and with determining the financial feasibility of an import in the absence of that information. The response document confirms that the UK will only reduce the UK CBAM by reference to explicit overseas carbon prices. Further details and guidance is to be published in advance of 2027. In addition, the response notes that the government is “committed to reducing the administrative burden on liable persons where possible, including through the consideration of the use of suitable arrangements or agreements with other jurisdictions where appropriate to reduce burdens such as those associated with supplying overseas carbon pricing information that the goods had been subject to”.

Administration

A person will need to register and account for CBAM if the total value of their CBAM goods passing a tax point is £50,000 over a rolling 12-month period. This is an increase from the originally proposed limit of £10,000. However, the government expects that this increased registration threshold should still catch over 99% of imports, whilst removing 80% of otherwise registrable businesses, significantly reducing the overall administrative burden. 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.

The response confirms 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.

If a person meets the registration threshold for the CBAM, they 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). However, the first accounting period will be 12 months and returns and payments will only be due 5 months after the end of that period (31 May 2028). From January 2028, it is proposed that accounting periods will be quarterly with a transition to returns and payment due one month later.

The response document confirms that the tax point – the time that CBAM liability arises (and which determines the rate of tax) - will (subject to certain exceptions for outward processing and returned goods relief) 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.

Comment

The response document has largely confirmed that the UK will press ahead with the proposal for a UK CBAM, albeit in a restricted form which does not apply to glass or ceramic products.

It is particularly noteworthy that the UK has chosen not to follow the EU model of CBAM certificates. However, as the original consultation noted, 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 the UK has engaged extensively with international partners through the WTO).