The UK CBAM journey: Assessing the Government’s response to its consultation of March 2024

In late October, the UK Government published its response to the consultation on the introduction of a UK carbon border adjustment mechanism (CBAM), confirming that UK CBAM will launch on January 1, 2027. The CBAM aims to ensure that importers of emission-intensive goods pay a price for the Greenhouse Gas (GHG) emissions embedded in their production that aligns with what domestic producers pay.

The response summarised feedback from various stakeholders, including trade associations, UK importers, manufacturers, and academia, while providing the Government’s stance on certain key issues (others are yet to be decided). Among the issues that have become clearer from the response are sector coverage, verification, default value setting, monitoring, CBAM rate setting, the minimum reporting threshold and the preparation period. Overall, despite a transfer of power from a Conservative to a Labour Government between the consultation call and its response, the Government changed very little from its initial plans.

Below, we highlight and assess the main insights that arise from the response. Our primary concern remains that the UK Government is not (sufficiently) responding to the challenges that will result from diverging from the design of EU CBAM. See our submission to the consultation.

Sector Coverage

The UK Government response makes clear that it has dropped its initial proposal to impose fees on emissions embedded in ceramics and glass, due to their relatively lower emissions intensity and various practical concerns.

The UK CBAM will include aluminium, cement, fertiliser, hydrogen, and iron and steel. This approach matches the EU CBAM, except for electricity (for which the UK CBAM is irrelevant because the UK imports electricity only from the EU). Aligning the scope of the UK and EU CBAMs simplifies compliance for foreign producers exporting to both markets, as the basic information requirements of the two CBAMs will be very similar, even if they have to prepare separate emissions calculations for the UK and the EU.

For ceramics and glass, the information would have been useful only for selling in the UK and firms may have preferred to withdraw from the UK market rather than collect/prepare the information.

The UK will keep the list of products under review and updated post-2027, indicating a potential later inclusion of the ceramic and glass sectors. Wherever the UK includes sectors not included by the EU, it is possible that firms will stop exporting to the UK due to the additional administrative burden imposed by the UK CBAM.

Verification

The Government plans to allow verification of exporters’ data on their emissions through independent verifiers approved by the International Accreditation Forum (IAF), and it also mentions considering mutual recognition. However, it is critical to align the emissions reporting requirements of the UK's CBAM with those of the EU. This alignment would alleviate the cost of seeking two verifications for producers who supply both regions. This can be done unilaterally by the UK merely by declaring that a verification certificate with respect to EU requirements will also suffice for the UK. If firms do not serve the EU, they could present a certificate with respect to the UK requirements.

Mutual recognition by the EU and UK of each other’s verifications would be more advantageous because UK firms selling in the EU could use local verification and UK-focused verifiers would have a substantially larger market for their services. However, in the Trade and Cooperation Agreement between the European Union and the United Kingdom negotiations the EU strongly resisted mutual recognition of certification in goods. Therefore, our advice is not to let the aim of mutual recognition derail simple unilateral alignment.

A delay in achieving such alignment could pose significant issues. Given that the UK market for CBAM goods is notably smaller than the EU's, international producers are likely to prioritise obtaining EU verification. If UK-specific verification processes are deemed too costly or complex, producers may find compliance unprofitable, harming trade relationships and potentially undermining the effectiveness of the UK CBAM if the trade is diverted to dirtier sources.

Default values

When importers cannot provide verified emissions data, the Government will use default values for emissions intensity. The UK Government intends to calculate these as a global average weighted by the production volumes of key UK trading partners (a set that is, as yet, undefined). The global average will be calculated for each product and apply to all countries. This practice will remain in place from 2027 to 2030.

The use of production volumes to construct a single default value is potentially problematic if some countries produce significant volumes of goods but export little to the UK, while others export more but have lower production volumes.

In addition, using uniform default values across countries could underestimate emissions because emissions intensities vary significantly by country. For instance, the emission intensity of ferro-nickel (CN code 72026000) ranges from 4.49 tCO2e/t in Brazil to 9.76 tCO2e/t in Serbia, as shown in the work done by the Commission Research Centre (JRC). Therefore, this approach would encourage “dirtier” firms to rely on these values instead of disclosing real data.

Given that the proposed approach requires data on the national emission intensities of key UK trading partners, it seems more reasonable to apply national defaults for these countries. Where national data is unavailable, using a production-weighted average from main trading partners is probably be the appropriate approach.

More discussion can be found in our previous paper, Default values in the UK CBAM could hinder its climate ambitions.

Monitoring

The Government has acknowledged concerns about measuring the net mass of exported goods but has yet to offer any new proposals to address this. Although the initial plan requires businesses to demonstrate the net mass of their CBAM goods, we recommend enhancing this approach by implementing firm-level monitoring and enforcement. This firm-level monitoring is likely to go beyond physical checks at the border, offering a more robust mechanism for ensuring compliance and accuracy in reporting.

UK CBAM rate setting

The Government plans to set the UK CBAM rate on a quarterly basis to align the cost of emissions in imports with domestic producers under the UK Emissions Trading Scheme (ETS). A quarterly reference period is too infrequent to track the ETS market price accurately. This infrequency risks potential discrimination charges, especially during periods of domestic ETS price volatility.

The Government emphasises the importance of rate certainty for importers by setting the UK CBAM price quarterly. It has not substantiated why this stability is essential for importers, especially when domestic producers are subject to the fluctuating ETS price and importers have to deal with an exchange rate that fluctuates by the second. Fixing the rate quarterly also assumes that firms’ pricing decisions are made only one quarter ahead, which is simply not the case.

To align with best practices, we suggested mimicking the EU by having CBAM permits for imports as well as ETS permits for domestic production, and advance on the EU’s approach by integrating both into a single market with a unified cap. This approach would ensure consistency and fairness in pricing across both importers and domestic producers, minimising market discrepancies. It would also eliminate a potential perversity in which energy-saving technical progress in the UK resulted in an increase in global emissions arising from UK consumption. More discussion can be found in Tamberi and Winters (2024).

The Government plans to adjust the CBAM rate to account for ETS free allowances, though details on the method are still being considered. This process is complex due to challenges in pinpointing the extent of free allowances utilised in the production of CBAM goods within plants, as free allowances are allocated by industries and most were given to the firms producing a variety of goods 1. To address these complexities, we suggested that free allowances should be gradually abolished as the CBAM is gradually introduced. This approach could simplify the rate-setting process. Also, it aligns with broader carbon pricing goals. More details can be found in our suggestions.

Minimum threshold

The Government plans to increase the value of the minimum registration threshold for CBAM goods to £50,000 over a 12-month rolling period, up from the previously proposed £10,000. This change is aimed at reducing the disproportionate burden on Small and Medium Enterprises (SMEs) and will clearly have this effect. The Government’s response argues that the threshold of £50,000 would retain over 99% of imported emissions whilst removing over 80% of potential registrations, which seems an attractive trade-off.

However, these figures are at variance with the consultation of March’s estimate for the £10,000 threshold, which emphasised that this would ‘exclude around 60 per cent of potential registrations, while retaining more than 95% of emissions embodied in CBAM goods within the scope of the CBAM.’ Excluding more firms from paying the CBAM appears to increase the volume of emissions that would be captured! However, the Government has now updated their modelling in its response and claims that the £10,000 threshold ‘would retain over 99% of emissions within scope of the CBAM whilst excluding around 60% of potential registrations.’ This means that firms with 12-month import values between £10,000 and £50,000 surprisingly contribute almost no emissions.

In our response to the original consultation we argued that we could not assess the reasonableness of the £10,000 threshold without data, which the Government declined to provide, this concern has only intensified with this sharp change in estimates in terms of captured emissions. Given the confusion, our call for transparency and access to the data is now even more urgent to ensure that the proposed policy adjustments are both evidence-based and equitable. In addition, we note that only a minority of respondents (‘over a quarter of those who answered this question’) thought that the threshold was set too low. The Government should clearly justify a change that goes against the consultation outcome.

More importantly, the minimum threshold based on value could be misleading, as the focus of the UK CBAM should be on emissions. Emissions per unit value of production vary widely across products and industries. For instance, as highlighted in our research, depending on product, £10,000 of imports could embody anywhere between 0.001 and 520.81 tonnes of carbon dioxide equivalent (see: Default values in the UK CBAM could hinder its climate ambitions). This increased threshold could further risk allowing firms to import cheaper but more carbon-intensive goods without paying the carbon cost, undermining the CBAM’s environmental objectives.

Our proposed threshold based on emissions is perfectly feasible for firms in practice: importers would use preannounced default emission values for each product to determine their total emissions and whether they are required to pay the CBAM. This would, of course, still permit some differences across firms in the emissions associated with the threshold level of sales, but they would be a great deal smaller than those resulting from a value threshold.

Preparation period

The Government intends to uphold its initial proposal of a 5-month period between the first accounting and payment stages for the UK CBAM. In contrast, the EU CBAM is conducting an information-gathering phase of over two years. To support UK importers in adapting to these new regulations, we recommended a one-year information submission period prior to full implementation.

Nevertheless, the UK may face pressure to synchronise its timeline with the EU, Aligning the UK ETS and CBAM with EU policies could prove advantageous, allowing the UK to leverage the EU’s established information phase for a smoother rollout. For instance, we recommend that the UK initiate its CBAM in 2027 at a 5% implementation rate. This would mirror where the EU is projected to be in 2027, following its start at an initial 2.5% rate in 2026.

Conclusion

Overall, in our opinion, there are some sub-optimal decisions in the Government's response, and more importantly, there is no hint of preparing to align the UK CBAM with the EU's framework. This lack of alignment could be a major lost opportunity, adding significant challenges in implementing the UK CBAM, like data collection, emission verification, and legal complexities. Ultimately, these issues could threaten to dilute the UK CBAM's impact on emission reduction and its ability to drive meaningful progress toward climate goals.

1. Free allowances are allocated to plants by industries defined at a general level in the ETS, there is no direct correspondence between these allowances and CBAM goods.