22 December 2023 UK Government announces adoption of Carbon Border Adjustment Mechanism (UK CBAM)
On 18 December 2023, in their response to the consultation on policy measures to address the risks of carbon leakage, the United Kingdom (UK) Government announced that a UK Carbon Border Adjustment Mechanism (CBAM) will be implemented by 2027. In March-June 2023, the UK Government consulted on the adoption of policies to address "carbon leakage risk to support decarbonisation." The Government sought views on the nature and extent of carbon leakage risk to UK industry, and the potential design and implications of policies to address such risks. For an overview of this consultation, see EY Global Tax Alert, UK Government launches consultation on a carbon border adjustment mechanism and other measures, dated 30 March 2023. In announcing a UK CBAM by 2027, the UK Government has indicated that additional consultation will take place on the design and mechanics of the UK CBAM in 2024. Nonetheless, some key details have been released about how the mechanism will be constructed, as outlined below. As with its EU equivalent, the UK CBAM will apply a tariff on imports of emission-intensive products, based on the embedded emissions of these imports. The UK CBAM will be a customs-orientated regime, with liability being placed on the importer of record for products in scope. One key area where the UK CBAM will seemingly diverge from the EU CBAM is the use of emission certificates. Although the EU CBAM requires reporters to purchase and surrender CBAM certificates, the UK Government appears to have ruled this out for the UK regime. The UK Government has committed to implementing the UK CBAM "by 2027." No further detail has been provided at this stage regarding any potential transitional periods or a phased introduction of the regime. The EU CBAM is currently in a transition phase until 1 January 2026, when it becomes fully operational. The envisaged scope of the UK CBAM diverges from its EU equivalent. Though both will cover iron and steel, aluminum, cement, hydrogen and fertilizers, the UK CBAM will also include ceramics and glass. Notably, the UK CBAM is not expected to cover electricity. The exact goods covered under these sectors will remain unclear until a full list of products is published, however we do know that the UK will aim for "comparative coverage" with the UK Emission Trading Scheme (UK ETS). The UK CBAM will be applied to Scope 1, Scope 2 and select precursor product emissions in imported products. As with the EU CBAM, Scope 3 emissions will not be initially included in the UK CBAM. In line with the EU CBAM, explicit carbon prices paid in other jurisdictions will be considered when calculating the price to be paid under the UK CBAM. As with the EU CBAM, it is not known which carbon prices will be accepted under this mechanism. The application of the UK CBAM will be linked with the UK ETS. Also on 18 December, the UK ETS Authority announced two consultations seeking views on how to improve the UK ETS. One of these consultations focuses on free allocations under the UK ETS, which will have a direct impact on the cost impacts of UK CBAM. It is expected that, as with the EU CBAM, the introduction of financial impacts under the UK CBAM will likely be aligned with availability of free allowances under the UK ETS. Although details of the UK CBAM have not been finalized and will be consulted on in 2024, there are a number of steps business can take now to start their preparations, leveraging the lessons learned from preparations for the EU CBAM, such as:
Document ID: 2023-2123 | |
