Title: CBAM Overview: Inside the Carbon Border Adjustment Mechanism Resource URL: https://instituteofsustainabilitystudies.com/insights/lexicon/cbam-overview-inside-the-carbon-border-adjustment-mechanism/ Publication Date: 2025-03-25 Format Type: Blog Post Reading Time: 8 minutes Contributors: Bronagh Loughlin; Source: Institute of Sustainability Studies Keywords: [Sustainability, International Affairs, Carbon Border Adjustment Mechanism, UK Emissions Trading Scheme, Carbon Leakage] Job Profiles: Public Policy Analyst;Policy Advisor;Economist;Chief Sustainability Officer (CSO);Policymaker; Synopsis: In this blog, Communications and Content Lead Bronagh Loughlin explains the UK's CBAM and its implications for businesses and sustainability. She breaks down how the CBAM works, the sectors it covers, the emissions reporting and levy calculation process, and how it differs from the EU’s version. Takeaways: [Unlike the EU CBAM, the UK Carbon Border Adjustment Mechanism (CBAM) will apply a carbon levy to imports from high-emission sectors, including ceramics and glass, starting in 2027., Importers must report both direct and indirect emissions for covered goods, promoting broader carbon accountability., Unlike the EU's certificate-based model, the UK CBAM uses a quarterly levy based on the UK ETS price, adjusted by sector., Only explicit foreign carbon pricing is credited under the UK system, excluding indirect subsidies or incentives., Businesses importing over £50,000 worth of CBAM goods annually must register and comply with reporting and levy requirements.] Summary: The UK’s Carbon Border Adjustment Mechanism (CBAM), set for implementation in 2027, aims to prevent carbon leakage and promote fair competition by applying a carbon levy on certain imported goods. These include aluminium, cement, fertilisers, hydrogen, iron, steel, and uniquely, ceramics and glass. Imports from these sectors will face a carbon cost equivalent to what would apply under the UK’s Emissions Trading Scheme (ETS) if the goods were produced domestically. The CBAM mandates that importers report both direct (Scope 1) and indirect (Scope 2) emissions. A quarterly levy, rather than a certificate system as used in the EU CBAM, will be calculated based on prevailing UK ETS carbon prices and adjusted for sector-specific conditions. If a valid carbon price has already been paid in the country of origin—such as through a tax or emissions trading—this amount will be deducted. Indirect mechanisms like energy subsidies will not be credited. The UK CBAM features a compliance threshold of £50,000 in annual imports, significantly higher than the EU’s €150 threshold. Importers must register, submit quarterly emissions data, and maintain documentation to support compliance. The UK system does not include electricity imports, a key difference from the EU model, which also operates on a faster implementation timeline with a transitional phase ending in 2026. The mechanism supports the UK’s net-zero 2050 goals and aims to encourage international producers to decarbonise while protecting domestic industries. Revenue from CBAM will be directed toward climate and green technology investments. Businesses are encouraged to begin emissions tracking and adjust procurement strategies in anticipation of this regulatory shift, as broader sustainability reporting requirements, like those under the Corporate Sustainability Reporting Directive (CSRD), become increasingly stringent. Content: ## Introduction The United Kingdom is poised to introduce a Carbon Border Adjustment Mechanism (CBAM) in 2027 to mitigate carbon leakage and promote sustainable trade. With nearly half of the nation’s emissions attributable to imported goods, policymakers have recognised the urgency of ensuring that domestic industries compete on a level playing field while advancing corporate decarbonisation. ## Definition of the Carbon Border Adjustment Mechanism The UK CBAM is a regulatory instrument designed to impose a carbon price on specified imported goods, reflecting the greenhouse-gas emissions generated during their production. By mirroring the carbon pricing provisions of the UK Emissions Trading Scheme (ETS) for relevant domestic industries, the mechanism seeks to discourage the relocation of industrial activity to jurisdictions with less stringent climate policies. ## Rationale for Introduction ### Preventing Carbon Leakage The principal aim of the CBAM is to prevent carbon leakage by subjecting high-emission imports to a carbon price equivalent to that applied to UK-produced goods, thereby reducing the incentive for companies to shift operations abroad. ### Ensuring Fair Competition UK industries already incur costs under the ETS. Without a border adjustment, lower-priced imports from countries without comparable carbon pricing could undercut domestic producers. The CBAM levels the competitive field by applying an analogous cost to imported carbon-intensive goods. ### Encouraging Global Emission Reductions A carbon levy on imports creates an incentive for foreign manufacturers to decarbonise their processes. Exporters to the UK will seek to reduce embedded emissions to avoid additional costs. ### Supporting the UK’s Net-Zero Strategy The CBAM reinforces the United Kingdom’s commitment to achieving net-zero greenhouse-gas emissions by 2050 by ensuring that imported emissions are accounted for in national targets. ### Financing Green Investment Revenues generated by the CBAM will be allocated to climate initiatives, including renewable-energy projects, carbon-capture technologies, and industrial decarbonisation efforts, thereby supporting the transition to a low-carbon economy. ## Operational Framework ### Sector and Product Coverage The CBAM will initially apply to imports of the following carbon-intensive goods, which would fall under the UK ETS if produced domestically: - Aluminium - Cement - Fertilisers - Hydrogen - Iron and steel - Ceramics and glass (included in the UK CBAM but excluded from the EU counterpart) Notably, electricity imports are covered by the EU scheme but excluded from the UK’s. ### Emissions Assessment Importers must quantify and report the embedded emissions of their goods, encompassing: - Direct emissions (Scope 1): Emissions from manufacturing processes. - Indirect emissions (Scope 2): Emissions from electricity, heat, steam, and cooling used in production. ### Levy Calculation and Settlement Rather than certificates, the UK CBAM will employ a levy set quarterly by the government, based on prevailing UK ETS carbon prices and differentiated by sector. Any carbon price paid in the country of origin—provided it represents an explicit charge such as a carbon tax or emissions-trading fee—will be credited against the CBAM levy. ### Compliance and Reporting Obligations Importers whose annual CBAM-covered imports exceed £50,000 must register for the scheme. They are required to: 1. Submit quarterly reports detailing embedded emissions. 2. Remit the CBAM levy for that period. 3. Maintain comprehensive records to verify accuracy. Penalties will apply for non-compliance or misreporting. ### Integration with the UK Emissions Trading Scheme As free allowances under the UK ETS are phased out, domestic carbon costs will rise, amplifying the importance of the CBAM levy in preventing unfair competition from lower-priced, high-emission imports. ## Comparative Analysis: EU CBAM vs UK CBAM ### Implementation Timeline - EU CBAM: Transitional phase from October 1, 2023, with full implementation on January 1, 2026. - UK CBAM: Full implementation targeted for 2027, with no transitional stage. ### Sectoral Scope - EU CBAM: Aluminium, cement, fertilisers, hydrogen, iron and steel, electricity. - UK CBAM: Aluminium, cement, fertilisers, hydrogen, iron and steel, ceramics and glass (excludes electricity). ### Emissions Coverage - EU CBAM: Scope 1 (direct) and Scope 2 (indirect electricity) emissions. - UK CBAM: Scope 1 and Scope 2 emissions, including electricity, heat, steam, and cooling. ### Pricing Mechanism - EU CBAM: Importers purchase and surrender CBAM certificates linked to EU ETS prices. - UK CBAM: Quarterly levy based on UK ETS prices, with credits for explicit foreign carbon costs. ### Administrative Thresholds - EU CBAM: Applies to imports valued at €150 or more. - UK CBAM: Registration required for importers of CBAM goods exceeding £50,000 annually. ### Treatment of Foreign Carbon Pricing Both mechanisms recognise explicit carbon pricing in the country of origin. The UK CBAM permits importers to offset the foreign carbon price against the UK levy. ## Implications for Business Organisations should undertake a comprehensive review of their supply chains to quantify embedded emissions and adapt procurement strategies accordingly. Early compliance will confer competitive advantages, mitigate regulatory risk, and strengthen market position in a carbon-conscious economy. Beyond the CBAM, companies must also prepare for expanded sustainability reporting under regulations such as the Corporate Sustainability Reporting Directive (CSRD). Enrolling in CPD-certified courses on CSRD-aligned reporting can facilitate adherence to emerging disclosure standards.