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A Carbon Border Adjustment Mechanism (CBAM) is a mechanism implemented by governments to account for the carbon cost of producing imported goods, with the ultimate aim of reducing greenhouse gas emissions and supporting global progress towards net zero.

Goods produced in different countries can be subject to different regulatory regimes. Some countries, such as the UK, apply regulations to make sure that domestic producers take steps to mitigate and reduce the carbon emissions they produce.

In December 2023, the UK Government announced the UK would implement a CBAM. It will consult on the design of a UK CBAM during 2024. Based on the Government’s announcements, UK CBAM will be similar to EU CBAM but there are differences in terms of timescale and scope.

How is the UK reducing its carbon emissions?

Under the Climate Change Act 2008, the UK has set targets for national emissions reductions up to ‘net zero’ emissions in 2050. Reaching net zero means total greenhouse gas emissions would be equal to the emissions removed from the atmosphere.  The Government has set out strategies and policies which seek to decarbonise sectors in line with these targets.

To reduce emissions of carbon dioxide in line with climate change commitments, the UK applies a carbon price to certain domestic products to reflect the amount of carbon dioxide emitted during production. This is done through the UK Emissions Trading Scheme (ETS). This replaced the EU Emissions Trading System from 1 January 2021, following the UK’s withdrawal from the European Union (EU), The ETS scheme limits the volume of emissions produced each year from industrial activity, by charging businesses that emit significant amounts of carbon dioxide.

Why isn’t emissions trading enough to reduce carbon emissions?

Emissions trading schemes risk simply moving production of carbon intensive goods to new locations or “pollution havens”, where producers may be subject to less stringent regulations. This is commonly referred to as “carbon leakage”, as although production may have moved, the same volume of emissions is still produced.

What is a Carbon Border Adjustment Mechanism (CBAM)?

A CBAM aims to ensure equal treatment of domestic and imported goods by applying a charge to carbon emitted during the production of imported carbon-intensive goods, such as aluminium, cement, iron and steel. Its aim is to prevent carbon leakage.

Are there design challenges to a CBAM?

CBAMs require information on emissions embedded in products to be collected, reported and verified so that the applicable carbon tariff can be applied by customs authorities when the goods are brought into the country. This process can create administrative costs in the exporting country. Any economic impact is likely to be concentrated in countries and regions where carbon-intensive industries are concentrated.

To be consistent with world trade rules, CBAMs must be designed to not treat imported goods less favourably than the same goods produced domestically. CBAMs must also consider any charge already applied to goods in the exporting country, to avoid imported goods being charged twice for their carbon emissions.

What implications does the EU CBAM have for the UK?

The first CBAM in the world was the EU CBAM, which is currently in a transition period and will be fully operational from 1 January 2026.

EU CBAM has implications for the UK. If a charge has already been paid under the UK ETS, any difference between that charge and a higher EU CBAM charge would be payable. The reporting obligations will apply to imports from the UK even if no charge is required. The economic impact of those obligations within the UK is uncertain. There is also uncertainty as to how EU CBAM will apply to Northern Ireland under the Windsor Framework.

EU CBAM does not apply to exports from non-EU countries that participate in the EU ETS or have an ETS linked to the EU ETS (Norway, Iceland, Liechtenstein and Switzerland).  

Global cooperation

The Government has said carbon leakage is best solved by working together at the global level, rather than by adopting unilateral CBAMs, but that work takes time. A recently launched ‘Climate Club’, co-founded by Germany and Chile, represents an attempt to pursue global cooperation on carbon leakage.

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