From 2027, goods imported into the UK from countries with a lower carbon price than the UK will have to pay a levy. This levy, known as a carbon border adjustment mechanism (CBAM), will initially apply to imports of iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement. 

The CBAM will ensure that products from overseas are subject to a comparable carbon price to those produced in the UK. This will reduce the risk of carbon leakage in the affected sectors. Carbon leakage is defined as the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation. 

The charge applied by the CBAM will depend on the amount of carbon emitted in the production of the imported goods. This will be adjusted if any carbon price has already been applied in the country of origin. For example, imports from the EU will have been subject to carbon pricing through the EU emissions trading system. 

The news comes off the back of a consultation that took place in spring 2023. In its response to that consultation, ICAEW supported the introduction of a UK CBAM but focused on reducing the administrative burden on businesses wherever possible. 

Ed Saltmarsh, ICAEW Technical Manager for VAT and Customs, said: 

“The carbon levy is a positive and essential step in decarbonising the UK economy and levelling the playing field between imported and domestic goods. However, it will bring significant administrative challenges for affected businesses, which will have to measure and verify embedded emissions on relevant imports. 

“This levy will be the biggest change to UK trade policy since Brexit, and the next few years will require substantial preparation by businesses. Government must prioritise close consultation with industry to provide clarity on the details and to ensure the administrative burden is minimised while ensuring the levy achieves its aim of decarbonising the economy.” 

The proposed introduction of the UK CBAM follows the EU CBAM, which entered its transitional phase on 1 October 2023. The EU CBAM is currently due to take full effect with financial implications for importers into the EU from 1 January 2026. It remains to be seen whether the UK CBAM will also have a transitional period where only reporting of emissions is required, with no associated levy.  

The design of the UK CBAM will be consulted on further in 2024. Separately, the Department for Energy Security and Net Zero has published a consultation on UK emissions trading scheme (ETS) markets policy. This is being reviewed to ensure the UK ETS remains fit for purpose by maintaining stable and effective market conditions that will continue to incentivise decarbonisation in the traded sectors. 

Further reading: 

• New UK levy to level carbon pricing - GOV.UK (www.gov.uk)
• Summary of responses and government response to the UK carbon leakage consultation.docx (publishing.service.gov.uk)
• Factsheet: UK Carbon Border Adjustment Mechanism - GOV.UK (www.gov.uk)

Learn more: 

• Join ICAEW for a webinar about what the EU's carbon border adjustment mechanism will mean for UK businesses exporting to the EU on 13 March 2024 at 12:00. Book your place