The UK government has proposed introducing new levies on the imports of certain carbon-intensive products to level the playing field between the UK and what it terms as “other less climate ambitious countries”. The design of these rules will be subject to further consultation, and are expected to take effect by the end of 2027.

Since January 2021 the UK has operated independently of the EU an Emissions Trading Scheme (ETS) to control the level of greenhouse gas emissions across various sectors. The scheme achieves this by capping the level of emissions that sectors covered by the ETS can produce. Many companies operating within these sectors must have “allowances” in place for their emissions, which may be freely allocated by the government, or purchased at auction or on a secondary market.

However, a recent consultation has noted the ETS can lead to higher imports from other countries that do not have similar carbon pricing schemes, as customers can procure carbon-intensive goods at lower prices through importing than they would do from domestic suppliers. This “carbon leakage” risks undermining the UK’s efforts to reduce emissions globally by contributing to increased emissions in other countries.

To address this issue, the government has proposed the Carbon Border Adjustment Mechanism (CBAM), which will impose levies on certain carbon-intensive goods imported from other countries. The EU has also proposed a similar mechanism. The amount charged will vary depending on how much carbon the imported good produces, and the difference in carbon “pricing” between the UK and the country in which the good was produced. Although the list of products is yet to be finalised, the government has referred to the iron, steel, aluminium, fertiliser, hydrogen, ceramics, glass and cement sectors as industries the CBAM is likely to cover. 

The aim is to ensure that relevant products sourced from overseas are subject to carbon pricing in the same way as domestically produced alternatives. The CBAM is therefore likely to be similar to other “trade remedy” measures such as anti-subsidy duties designed to tackle advantages in the cost of production that companies outside the UK may have.

The CBAM is expected to take effect by the end of 2027, following further consultation. This will determine which products will be covered and allow for engagement with countries and businesses that might be affected, to ensure compliance and minimise any negative impact on trade – challenges to the scheme in the World Trade Organization are likely.

The introduction of the CBAM comes alongside a variety of proposed changes to the UK’s ETS. The ETS Authority is consulting on potential adjustments to the current system for free carbon allowances to account for changes to carbon emissions in certain industries, and stakeholders are being invited to offer views on various potential new measures. Additionally, the government intends to establish “voluntary product standards” which companies can choose to adopt to promote low carbon products to their consumers.