Carbon Border Adjustment Mechanism

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 mitigate and reduce the carbon emissions they produce. A CBAM ensures that imported products face equivalent carbon costs.

In December 2023, the UK Government announced that the UK would implement a CBAM. Following consultation, the UK CBAM is set to go live from 1 January 2027. Based on the government’s announcements, the UK CBAM will be similar to the EU CBAM but there are differences in terms of timescale and scope. Plans to link the emissions trading schemes of the UK and the EU (see below) should allow “mutual exemptions” for goods traded between the two.

How is the UK reducing its carbon emissions?

Under the Climate Change Act 2008, the UK set targets for national emissions to be reduced to ‘net zero’ 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 aim 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. 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 is emissions trading alone not 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” because although production may have moved, an equally carbon-intensive volume of emissions will likely still be produced. In some cases, moving production to locations with less stringent regulations may result in greater emissions.

What is a Carbon Border Adjustment Mechanism?

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 a 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 not to treat imported goods less favourably than the same goods produced domestically. CBAMs must also consider any charge already applied to goods in an exporting country, to avoid imported goods being charged twice for their carbon emissions.

What are the plans for the UK CBAM?

The UK Government proposed a Carbon Border Adjustment Mechanism (‘UK CBAM’) in 2023, with plans for this to be operational from 1 January 2027. The Finance Act 2026 made provision for UK CBAM in law, granting HMRC powers to run and enforce the mechanism, and setting the framework for further secondary legislation.

UK CBAM will make importers of carbon-intensive goods liable to pay the difference in carbon price between producing these goods outside the UK and producing them within the UK.

What implications does the EU CBAM have for the UK?

The first CBAM in the world was the EU CBAM. Following a transition period, EU CBAM has been fully operational since 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 is payable. The reporting obligations apply to imports from the UK even if no charge is required. 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 that is linked to the EU ETS (Norway, Iceland, Liechtenstein and Switzerland).

The UK and the EU are negotiating an agreement to link the UK ETS and the EU ETS. If successful, EU CBAM would no longer apply to the UK once any such agreement is in place. However, divergence between the two CBAMs may still be relevant, as it may affect the behaviour of other trading partners.

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 this work takes time.

Further reading

• Commons Library briefing, The UK's plans and progress to reach net zero by 2050
• Commons Library briefing, Northern Ireland Protocol: The Windsor Framework
• Commons Library briefing, The UK emissions trading scheme