UK publishes draft law for its own CBAM: What businesses need to know

A new chapter in global carbon border pricing

From 1 January 2027, the United Kingdom intends to introduce its own Carbon Border Adjustment Mechanism. The UK government recently published the draft legislation and launched a technical consultation which is open until early July. The aim of the new system follows the European example: imported carbon-intensive goods from third countries will be subject to a price if there is no comparable carbon pricing in the country of origin. This is intended to prevent carbon leakage and protect the effectiveness of the UK Emissions Trading Scheme.

Affected sectors and scope

The UK CBAM will initially apply to five sectors: aluminium, cement, fertilisers, hydrogen, and iron and steel. The list of affected goods is defined using commodity codes listed in the annex. Some scrap products, particularly in the aluminium and iron and steel sectors, will be exempt. The mechanism only applies to imports and not to domestically produced goods. The charge will be calculated based on the amount of CO2 embedded in the goods, multiplied by the average carbon price in the UK ETS. This results in a CBAM charge that varies by sector. If a carbon price has already been paid in the country of origin, it can be credited under certain conditions. The approach mirrors the European Commission’s plan to retroactively apply CBAM costs to imports made in 2026. This creates a consistent cost structure for the period and helps avoid volatile price fluctuations.

CBAM as a tax, not a certificate-based system

Unlike the European system, the UK CBAM will be implemented as a tax, not as a certificate trading mechanism. The obligation arises when the importer exceeds an annual import value threshold of £50,000 for CBAM goods. HMRC, the UK tax authority, will be responsible for administration. The first reporting and payment obligation is scheduled for the first quarter of 2027, though the digital reporting infrastructure is still under development.

Recognition of carbon prices and free allocation

If a comparable carbon price has been paid in the country of origin, this amount can be deducted from the UK CBAM charge. This will depend on the UK government recognising the foreign carbon price as equivalent. Assessments will likely be conducted on a case-by-case basis. A key difference from the European system is the adjustment for free allowances. These so-called free allocation adjustments will be factored in by sector. The effective CBAM tax rate will therefore be reduced if the UK domestic sector received free allowances in the previous year. However, the government has signalled it may review and revise this approach after 2027.

A system in development with political leeway

The draft legislation grants the UK government extensive authority. This includes the ability to adjust tax rates, expand the scope of covered goods, and establish links with other emissions trading systems. This last point is particularly important, as both the UK and the EU have a shared interest in aligning their CBAM systems, at least technically. A meeting between UK and EU officials is scheduled for next month. If closer cooperation is achieved, this could help align carbon prices between the two systems. Currently, the UK carbon price is significantly lower than that of the EU. For importers, this means the financial burden under the UK CBAM will likely be less than under the EU system for now. Strategic questions for companies The introduction of a UK CBAM is more than a climate measure – it reflects a shift in global trade policy. The parallel development of CBAMs in both the EU and UK presents businesses with the challenge of managing two complex systems simultaneously. Different calculation methods, reporting requirements, and the risk of double charges due to unrecognised foreign carbon pricing add to the complexity. Businesses with international supply chains in carbon-intensive sectors will be particularly affected. While the EU will apply retroactive charges for 2026 imports, the UK system will only apply to imports from 2027 onwards. It is expected that other countries – such as the US, Canada, and Australia – will introduce similar schemes. CBAM is set to become a global standard.

Political dynamics and international responses

CBAM is increasingly recognised not just as a climate tool but also as a geopolitical instrument. The United States has already criticised the EU CBAM for potentially disadvantaging US exporters. Similar criticism may be levelled against the UK mechanism. The introduction of border carbon pricing measures is complicating international climate diplomacy and bringing economic interests more directly into the debate.

Conclusion

The publication of the UK CBAM draft law marks a major step forward. Businesses should begin preparing for new reporting requirements and the associated financial impacts. The parallel developments in the EU and UK show that carbon pricing is becoming embedded in international trade – and increasingly regulated as a competitive factor. Companies that act early can reduce risks and build clarity around their regulatory strategy.

Support with implementation

If you would like support in preparing for the UK or EU CBAM or need help aligning your internal processes with these developments, feel free to reach out to us at helge@kolum.earth.