Following EU, UK to Levy a Carbon Border Adjustment Mechanism

Key Points

• The UK announced that it will require importers to pay a carbon levy on certain goods imported from countries with a lower or no carbon price.
• Covered goods under the UK’s carbon border adjustment mechanism (CBAM) likely will include imports from the iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors, but the final list of covered sectors has not been determined.
• The UK CBAM’s scope and design will be finalized in 2024, with opportunities for consultation next year. The CBAM will enter into force in 2027.
• The UK announcement marks the second CBAM jurisdiction after the EU, whose first CBAM reporting obligation is due January 31, 2024.
• The UK also announced its intention to establish voluntary product standards for low carbon products.
• We recommend that potentially affected industries immediately begin to assess the impact of this new levy on their supply chains or sales to the UK, devise response strategies, and prepare an engagement plan to ensure that the ultimate design of the import levy takes full account of their interests.

On December 18, the UK announced that it will require certain goods imported from countries with a lower or no carbon price to pay a carbon levy to ensure “products from overseas face a comparable carbon price to those produced in the UK.” 

The UK carbon border adjustment mechanism (CBAM) will apply only to certain “carbon intensive” industries, including imported goods from the iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors.  Imported goods from those sectors will be obligated to pay a “comparable price” to equivalent goods produced in the UK.  The CBAM’s charges will depend on both the amount of carbon emitted from the imported good’s production, as well as the “gap between the carbon price applied in the country of origin – if any – and the carbon price faced by UK producers.” 

The announcement cites the new CBAM as necessary to mitigate risks of “carbon leakage,” whereby a higher carbon price in the UK incentivizes the flight of industry to other countries with lower or no carbon price.  Recent UK government consultations have found that 85% of surveyed respondents warned that “carbon leakage is a current or future risk to their decarbonisation efforts.”

The final scope and design of the UK CBAM—including which products the mechanism will cover—will be determined in 2024, when industry and others will have an opportunity to consult with the UK government on the contours of the framework.  The CBAM is expected to go into effect by 2027.

The UK announcement marks the second jurisdiction after the EU to implement a CBAM.  With the information currently available, the UK CBAM may diverge from the EU CBAM in several important respects. 

First, while subject to change with the measure’s finalization in 2024, the UK CBAM currently applies to a different scope of goods than those in the EU CBAM, such as ceramics and glass (but not electricity, as the EU CBAM does).  At the same time, the EU’s CBAM regulation requires the EU to consider expanding its scope in 2025 and to cover all goods currently covered under its emissions trading system (ETS) by 2030.  As such, it may be the case that the EU CBAM covers the same or even more goods than the UK CBAM when it enters into force in 2027. 

Second, the EU CBAM has a three-year transitional period that only obligates affected EU importers to report their emissions without paying the carbon levy.  It is unclear whether the UK CBAM will include a similar transitional period, or how long that transitional period may be.  Additionally, as the UK CBAM will begin in 2027 and the EU CBAM’s carbon levy will begin in 2026, UK industry has expressed concern that the delay in implementation may risk a “flood of high-emission products coming to the UK once the EU’s carbon measure is up and running.”

Third and finally, alongside its CBAM, the UK will work with industry to “establish voluntary product standards that businesses could choose to adopt to help promote their low carbon products to customers.”  The UK government will further “develop a framework which measures the carbon content of goods, that could support other decarbonisation policies in future.”  It is unclear whether these will align with or diverge from the current EU carbon content measurement methodologies and standards.  The announcement also does not specify when these standards and frameworks will be released.

Akin’s international trade and climate change practices are assisting clients understand the implications of CBAMs on their business, as well as more broadly in relation to emissions trading systems.  Clients interested in learning more about how the EU or UK CBAM affects their business, or who wish to engage in the UK consultations, are encouraged to contact the authors of this alert.