Following the introduction of the Carbon Border Adjustment Mechanism (CBAM) within the EU, the UK is set to introduce its own regulations. They will assist with achieving decarbonisation goals and improve sustainability standards. Doing so will hugely affect many businesses within the UK and any co-existing supply chains involved.
What is the CBAM?
The CBAM is where carbon-intensive materials, such as aluminium, steel, fertiliser, concrete, hydrogen, and electricity, are imported and subsequently tracked. Additional tariffs are potentially applicable.
The CBAM represents an evolutionary statement towards carbon usage. It heavily contributes to the aim of making the EU the first “green continent.” It seeks to steer mass production of carbon away to lesser restrictive areas within the world. On the other hand, commodity prices inflate due to increased restrictions of imported goods within the EU.
When does the UK plan to implement its own CBAM?
The UK government published a factsheet in December 2023, intending to implement the UK CBAM by January 2027. The structure and delivery of the proposal were subject to a consultation that began in March 2024 and closed on June 13th. The outcome has yet to be announced.
The tariff for the UK’s version of CBAM will largely vary depending on the emission cost from the goods themselves. It will also involve the difference between the carbon price of its origin, and the price that would have been applied if produced in the UK.
The UK CBAM’s main points
Albeit similar to the EU CBAM, the UK’s proposal states the following:
- A carbon price will be enforced on emissions for importing industrial goods, such as aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel
- A conclusion to the list of products in scope will be the subject of the consultation, where specific commodity codes can also be found
- Liability falls on the importer of imported goods within the scope of the UK CBAM
Emissions scope
The emissions scope can be categorised as follows:
- Scope 1: Emissions that relate to the activities directly owned or controlled by an organisation are directly produced by an organisation’s operations. For example, as part of a manufacturing process.
- Scope 2: Emissions related to utility usage, such as purchased heat, electricity, steam and cooling, are produced by a third party and, therefore, labelled as indirect emissions.
- Scope 3: Emissions released as a repercussion of an organisation’s actions that occur at sources not owned or controlled by the organisation.
The UK CBAM will apply to Scopes 1 and 2 and select precursor product emissions, aligning with the UK Emissions Trading Scheme (ETS).
The UK CBAM will impose an effective carbon price on imports. It will be notably lower than the UK ETS price to account for domestic free allowances. This mechanism will function alongside the UK ETS, including its free allowances. It will ensure that imported goods face a carbon cost similar to UK-produced items. This approach aims to minimise the risk of carbon leakage.
How does the UK’s proposal differ from the EU’s CBAM?
- The UK proposal will be governed by HMRC and can be considered a tax, where payments and returns are due quarterly. In contrast, charges are settled annually with the EU CBAM via CBMA Certificates.
- The UK will suggest default values to calculate and report emissions, whereas the EU CBAM requires a specific methodology to calculate emissions.
- The UK CBAM’s proposed de minimis is significantly higher than the EU’s of €150 per consignment, being £10,000 per rolling 12-month period.
- Both the UK and EU CBAMs allow an initial credit for carbon prices to be paid on any goods received.
What should be the priority now?
If the new legislation will impact your business operations, you may want to consider reviewing your supply chains to see how the proposal will also affect them. Depending on the outcome, this will prepare you for upcoming price movements and alternative solutions.
Once Menzies receives notice regarding design and delivery updates following consultation, we will update them further on the matter.
How Menzies can help:
Menzies LLP has a dedicated team of advisors that help clients grow and manage their business. If you are looking to ensure you will meet the proposed new UK CBAM regulations, please contact one of our experts to see how we can help.
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