The UK Government set out some high-level detail of its proposed carbon border adjustment mechanism (CBAM) in an announcement made on 18th December. Much of the detail remains to be determined, with a consultation expected later in 2024 on design and delivery of the mechanism.
Although there are some similarities, as it stands there are some key areas of divergence with the EU’s CBAM, the transitional period for which started on 1st October 2023:
Timescales: The UK Government’s stated intention is to “implement” the UK CBAM by October 2027. The EU’s transitional period runs up to end 2025, with the full scope of the CBAM Regulation entering into force on 1st January 2026. After that time, EU importers must
- be authorised to import CBAM goods;
- declare annually the quantity of CBAM goods imported into the EU in the preceding year and their embedded greenhouse gases (GHGs); and
- surrender CBAM certificates to cover the declared emissions.
UK producers have already expressed concern that the difference in implementation timescales could risk a flood of high-emission products coming onto the UK market once the EU CBAM is fully operational, damaging UK industry and net zero ambitions. The detail of any transitional period in the UK – if there is to be one – has not yet been provided. Under the EU CBAM, a number of incremental reporting deadlines have been set up to December 2024, with default values provided to assist in the initial stages of data gathering.
Scope: Both the EU CBAM and the proposed UK CBAM will cover aluminium, cement, fertiliser, hydrogen and iron and steel. In addition, the EU CBAM extends to electricity; and the UK CBAM looks set to include ceramics and glass, opening up areas of potential divergence. The full sectoral scope of the UK mechanism along with the detail of the exact goods to be covered under each sector will be subject to further consultation. The EU Regulation also requires the EU to consider expanding the scope of the CBAM to cover all goods currently covered by its Emissions Trading System (ETS) by 2030.
Operation: Whilst the exact operation of the UK mechanism and its reporting requirements are not yet clear, one further area of difference is the way in which the charge on importers will be applied. Both mechanisms link costs to their respective ETS, but the UK mechanism looks set to use a levy on importers, whereas the EU mechanism is based on the surrender of CBAM certificates.
Once fully in place from 2026, EU importers of goods covered by the CBAM will be required to purchase CBAM certificates, the price of which will be calculated depending on the weekly average auction price of EU ETS allowances expressed in € per tonne of CO2 emitted. Under the UK CBAM, a levy will be applied depending on the gap between the carbon price in the country of origin (if any) and the carbon price that would have been applied if it had been produced in the UK.
The further UK consultation in 2024 is also expected to cover the criteria for recognition of carbon prices in other countries.
Alongside the CBAM announcement, the UK Government also expressed an intention to put voluntary product standards in place alongside the CBAM to help businesses promote low carbon products to consumers. There is no timescale for this work as yet, and it is not clear at this stage whether the promised UK framework to measure the carbon content of goods will align with or diverge from the current EU carbon content methodologies and standards.
Michael Nicholson, Head of UK Environmental Policy at IEEP UK, commented:
“It is encouraging to see that both the EU and the UK are aiming to prevent carbon leakage through the introduction of their respective carbon border adjustment mechanisms. There remains the potential for divergence between the two, not least in the scope of the mechanisms and the timescales for introduction. A joined-up approach would provide greater certainty for industry and avoid the creation of unintentional gaps that could frustrate policy aims.”
Photo by Patrick Hendry on Unsplash.