At Budget 2025, the government announced it will legislate in Finance Bill 2025-26 to introduce a Carbon Border Adjustment Mechanism (CBAM) from 1 January 2027, and that the inclusion of indirect emissions will be delayed until 2029 at the earliest. This follows several rounds of consultation on the detailed policy design and implementation of CBAM.
In April 2025, the government published draft primary legislation for technical consultation. More information about technical changes made to the primary legislation since the consultation can be found in a supporting policy update.
On 30 October 2024, the government published its response to the consultation entitled ‘Introduction of a UK carbon border adjustment mechanism from January 2027’.
1. Carbon leakage
The UK is taking rapid action on industrial decarbonisation to meet net zero. This includes the use of carbon pricing through the UK Emissions Trading Scheme (UK ETS).
As not all jurisdictions are moving at the same pace, and many countries do not yet have domestic carbon pricing mechanisms, a risk of carbon leakage is then created.
Carbon leakage is the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation.
Carbon leakage can undermine efforts to reduce global emissions and curtail private investment in decarbonisation – compromising efforts to limit global warming to 1.5°C.
2. Carbon Border Adjustment Mechanism (CBAM)
The government will introduce CBAM on 1 January 2027.
This will ensure highly traded, carbon intensive products from overseas face a comparable carbon price to that paid by UK manufacturers, so that UK decarbonisation efforts lead to a true reduction in global emissions rather than simply displacing carbon emissions overseas.
3. Sectors and products initially in scope of CBAM
CBAM will apply to specific imports to the UK from the aluminium, cement, fertiliser, hydrogen and iron & steel sectors, given they are at risk of carbon leakage.
Within these sectors, CBAM will only apply to specified imported ‘CBAM goods’. These goods are determined by the product level scope of CBAM and are identified by commodity code as listed in Annex B of the ‘Government Response to the introduction of a UK CBAM Consultation’.
The glass and ceramic sectors will not be in scope of CBAM from 2027 as originally proposed (in December 2023).
At Budget 2025, the government set out that it recognises that refineries play a role in energy security and the UK’s industrial base, and will publish a Call for Evidence on the fuel sector. The government is also considering the feasibility and impacts of including refined products in CBAM in future.
The sectoral and product level scope of CBAM will be kept under review beyond 2027 as new evidence comes to light to reflect changes to carbon leakage risk as well as methodological and technological advances.
4. Calculating CBAM liability
Figure 1: Calculating CBAM liability
5. Relevant imported emissions
CBAM will apply to direct emissions embodied in imported CBAM goods, including those emissions embodied in relevant precursor goods at a point further up the value chain.
The inclusion of indirect emissions within scope of CBAM will be delayed until 2029 at the earliest. This is to reflect continued support for the Energy Intensive Industries (EII) Compensation Scheme.
The Department for Business and Trade is responsible for the EII Compensation Scheme, and will set out further details about eligibility in due course.
6. Determining embodied emissions
The liable person can choose to use either independently verified actual emissions data or default emissions values.
From 2027, the government will proceed with a single default value set per product. The government will confirm the methodology to be used for their calculation and publish default values in advance of the introduction of CBAM.
Post-2027, the government is considering the viability of moving to an alternative approach for default emissions values.
Further detail and guidance will be published in advance of the commencement of CBAM on the use of actual emissions data.
7. Setting CBAM rate
CBAM rate will be applicable per tonne of embodied emissions attributed to CBAM goods and will be comparable to the carbon price faced in the UK by domestic producers, net of reductions.
As a result, CBAM rate will reflect the UK ETS and Free Allowances.
The primary legislation confirms that the CBAM rate calculation will be based on a sectoral average of emissions covered by Free Allowances over a baseline period, adjusted annually by a ‘reduction factor’ to reflect the phase out of Free Allowances under the UK ETS.
Figure 2: calculating CBAM rate
8. Adjusting for overseas carbon prices
CBAM liability can be reduced if the embodied emissions in the imported CBAM goods are subject to a deductible carbon price overseas and the importer provides evidence of this.
Only deductible carbon prices will be accounted for in this adjustment. Deductible carbon pricing schemes are those which place a price directly or indirectly on emissions in the form of a tax, an emissions trading scheme, or another CBAM.
Further detail and guidance will be published in advance of commencement of CBAM.
9. Liable person and registration
The liable person for the CBAM charge will either be the person responsible for completing the customs declaration, or on whose behalf that declaration is made where there are customs controls, or the person on whose behalf the goods are moved into the UK if there are no customs controls.
The liable person must register with HM Revenue and Customs (HMRC) for CBAM if the value of the goods that have been imported over the preceding 12-month period, or expect to import over the coming 30 days, exceeds the minimum registration threshold of £50,000 over the relevant period.
Ordinarily, the liable person will have 30 days to register with HMRC from the day they become liable. However, in the first year of CBAM, businesses will have longer to register.
10. Payments
As CBAM will operate as a tax, liable persons will need to account for all CBAM goods that pass a tax point during an accounting period.
Following the end of each accounting period, liable persons will have to submit an online tax return and pay their CBAM liability.
The first accounting period will be annual (1 January 2027 to 31 December 2027) with payments due at the end of May 2028. Thereafter, accounting periods will be quarterly (e.g. 1 January 2028 to 31 March 2028) with payments generally due two months after the end of each accounting period.
11. Interaction with UK Emissions Trading Scheme (ETS)
The UK ETS places a price on greenhouse gases emitted by domestic producers. The UK ETS is a cap-and-trade system in which the market determines the price of allowances. Total emissions and allowances under the scheme are capped, reducing over time to incentivise decarbonisation.
Free allocation in the UK ETS is the primary carbon leakage mitigation in the UK at present. CBAM will work cohesively with the UK ETS. That includes on free allowances, where the methodology to determine CBAM rate will reflect the availability of free allowances in the domestic market. This will ensure imported products are subject to a carbon price comparable to that incurred by UK production, mitigating the risk of carbon leakage.
In December 2023, the UK ETS Authority published the Free Allocation Review to seek views on how free allocation policy could be adjusted to better target free allocations for sectors most at risk of carbon leakage. Following the government announcement to introduce a CBAM, the ETS Authority consulted on how to adjust free allocation to reflect the reduced risk of carbon leakage for CBAM sectors, and to increase the effectiveness of CBAM as a leakage mitigation policy.
The introduction of CBAM fundamentally alters the carbon leakage risk profile for CBAM sectors. By applying a carbon price to imports, CBAM ensures that the decarbonisation efforts of domestic producers are not undermined by foreign competitors in the UK market. The Authority has decided to gradually phase out free allocation over an indicative time frame of 9 years, beginning in 2027, for sectors covered by CBAM.
This phase out will occur at sub-installation level to ensure only free allocations corresponding to products where the CBAM charge will be applied are affected.
This phase out of free allocation will ensure a gradual transition for industries across the UK from free allocations to CBAM as the primary carbon leakage mitigation.
At the UK-EU Summit held on 19 May 2025, the UK and EU agreed to work towards linking their respective ETS. This will create conditions for goods originating in our jurisdiction to benefit from mutual exemptions from the respective EU and UK CBAMs, subject to compliance with the relevant provisions of the EU and UK legislation. The Government will seek to agree an ETS link as soon as is feasible.
12. Next steps
As work on the implementation of the tax proceeds, the government will continue to keep all areas of CBAM design and implementation under review and would welcome continued engagement from all interested stakeholders.
There are two established working groups for domestic and international stakeholders. For domestic stakeholders, HMRC coordinate a CBAM Joint Industrial Working Group. For international stakeholders, HM Treasury coordinate a UK CBAM International Group.
More information on technical changes to the primary legislation since consultation in April 2025 can be found at the following link: Carbon border adjustment mechanism (CBAM): Policy update - GOV.UK. Please check the parliamentary website Bills & legislation - UK Parliament for the latest version of the legislation as it may change during parliamentary scrutiny.
Following the introduction of legislation in Finance Bill 2025-26, HMRC will share draft secondary legislation for technical consultation in early 2026. This will allow interested stakeholders to review the legislation and ensure it meets the policy intent.
HMRC will publish detailed guidance ahead of 2027, which we recognise will be essential for businesses to prepare for the introductions of the tax and meet the new requirements, effective from 1 January 2027. HMRC will work closely with key stakeholders to ensure the guidance is comprehensive and easy to understand in advance of publication.
If you would like to join the CBAM mailing list to stay informed of policy developments, please email cbampolicyteam@hmrc.gov.uk.