The UK government will introduce a new carbon border adjustment mechanism (CBAM) on 1 January 2027 that will affect businesses importing certain goods into the country. It will require businesses to capture data on the carbon emissions of goods and products imported into the country and pay duty on them.
Whilst 2027 may appear a long way off, businesses are urged to review their IT systems and processes now to ensure they can capture the data needed on carbon emissions to meet CBAM requirements. For some businesses that will mean upgrading or implementing new IT and data capture technology and procedures.
UK CBAM is effectively a tax on imported goods with a high carbon production footprint designed to eliminate what is called ‘carbon leakage’ that undermines efforts by the UK government to limit global warming.
Carbon leakage occurs when production is moved to other countries with differing levels of decarbonisation, pricing and regulation. Countries around the world are exploring similar carbon border taxes, with the EU introducing a scheme in October 2023.
UK CBAM will apply to aluminium, cement, fertiliser, hydrogen and iron and steel, with glass and ceramics now confirmed as falling outside of the regulations.
Unlike the EU CBAM that requires European companies to calculate the exact emissions and distance travelled, the UK CBAM will adopt default values of emissions on goods and services that will, it is hoped, make it a much simpler for businesses to implement.
Whilst the UK CBAM will add yet further complexity for businesses, it has been largely welcomed by manufacturing businesses as it will create a level playing field ensuring UK businesses are not undercut by cheaper products from countries with less stringent environmental protections.
How will it work?
Whilst the final detail the UK CBAM has yet to be fully confirmed, the responses to the consultation issued in 2023 provides us with a reasonably clear idea.
We can expect the UK CBAM to extend to Scope 1 emissions, those direct emissions from production, and Scope 2 emissions, involving energy use and emissions from suppliers.
It means that businesses falling into the regime will need to be able to capture both the emissions from the products they import and emissions throughout the entire supply chain of that product.
Importers will need to capture and report annually and pay the CBAM amount within five months of the reporting period for the year 2027. From 2028, the proposal is for the reporting period to be quarterly with one month after the period to file the CBAM return and pay the liability.
There is a proposed threshold of £50,000 per annum which will be based on the value of the CBAM goods in the last 12 months, but there will also be a look forward test (similar to the VAT registration threshold test).
With the UK CBAM adopting default values on carbon emissions, it is unlikely that independent verification of carbon emissions associated with products will be needed. However, UK businesses are expected to be able to choose to use independently verified emissions data if the duty paid is lower. The government is considering the viability of changing to an actual emissions basis at some point in the future, so there may be increased costs for businesses down the line.
Further detail is expected to be published by the government in 2025 and Hillier Hopkins will provide further updates. Hillier Hopkins can also help your business understand your exposure to UK CBAM and the data that will need to be captured.
For more information contact our expert Ruth Corkin at ruth.corkin@hhllp.co.uk
