UK Announces Scaled-Back Carbon Border Adjustment Mechanism Focused on Key Sectors

The UK government has unveiled a revised version of its Carbon Border Adjustment Mechanism (CBAM), narrowing its scope to five high-carbon industries in a bid to reduce carbon leakage and promote decarbonization. Set to be implemented on January 1, 2027, the mechanism will now impact only the aluminium, cement, fertiliser, hydrogen, electricity, and iron and steel sectors.

Targeted Industries for CBAM
Initially, the CBAM was intended to cover a broader range of sectors, including glass and ceramics, but the UK government has decided to exclude these industries due to their lower carbon emissions and reduced risk of carbon leakage. By focusing on sectors with higher carbon footprints, the government aims to create a more targeted approach that addresses industries with the largest environmental impact. The selected sectors—aluminium, cement, fertiliser, hydrogen, electricity, and iron and steel—account for a significant portion of global emissions and play a critical role in the UK’s industrial base.

Carbon Pricing Framework and Adjustments
Under the CBAM, the UK will impose a carbon price on imported goods based on their carbon content, considering both direct and indirect emissions. The government will establish a default emissions value for each product, which will apply when verified emissions data is unavailable. The CBAM rates will be adjusted quarterly based on the UK Emissions Trading Scheme (ETS) price, incorporating carbon price support and free allowances. Even if goods have already been subject to carbon pricing in their country of origin, they will still be subject to the CBAM in the UK.

Support for Small and Medium-Sized Enterprises
To shield small and medium-sized businesses from excessive burdens, the UK government has raised the CBAM threshold to £50,000 per year. This move ensures that businesses below this threshold will not be disproportionately affected by the mechanism. Additionally, the government is implementing strict enforcement measures, including criminal penalties, to deter evasion of the CBAM.

International Collaboration and Industry Engagement
The UK plans to establish an industry working group to engage with the affected sectors and ensure the smooth implementation of the CBAM. Furthermore, the government intends to collaborate with other nations to ensure that global exporters comply with the new carbon pricing measures, fostering a level playing field for all market participants.