In the 2025 Budget, the UK government introduced a Carbon Border Adjustment Mechanism (CBAM), effective from 1 January 2027, with returns due in May 2028 for 2027 and thereafter on a quarterly basis. CBAM will apply a carbon price to imported high carbon products, aligning them with UK standards to prevent emissions simply being relocated abroad and to support genuine global reduction efforts.
This article covers some considerations for businesses to prepare for CBAM obligations.
Understanding the scope of CBAM
CBAM will cover UK imports in aluminium, cement, fertiliser, hydrogen, and iron and steel sectors that face carbon leakage risks. The minimum registration threshold for CBAM goods is £50,000 over a 12-month rolling period.
CBAM will take into account both the direct emissions incurred during the manufacturing of the imported CBAM goods and the emissions from relevant precursor products higher up the value chain. Indirect emissions will not be included until 2029, as part of continued support for the Energy Intensive Industries Compensation Scheme, which is managed by the Department for Business and Trade (DBT). The DBT will share further details about scheme eligibility in 2026.
CBAM exemption applies to CBAM sector goods imported for non-business use, those with UK place of origin, returned goods, UK precursor goods and those imported into the UK under temporary admission. It is important to note that the imported scrap products in the aluminium and iron and steel sectors, identified by their commodity codes, will be excluded from the scope of CBAM.
Key processes on CBAM payments
Liable persons must register with HMRC and file an annual tax return for January 1 to 31 December 2027, due by 31 May 2028. Starting on 1 January 2028, returns and tax payments will be required on a quarterly basis, due two months after each period. The liable persons may designate tax agents to represent them in submitting CBAM returns. However, a tax agent is not permitted to register for CBAM on behalf of the liable person, and no legal responsibility will be assigned to the tax agent.
Calculation of CBAM liability and any applicable Carbon Price Relief (CPR)
Liable persons can use either independently verified emissions data or default values for CBAM goods. From 2027, the government will set and publish one default value per product, with confirmed calculation methods; alternative approaches may be considered after 2027. Those using actual data must work with producers to obtain verified emissions figures, including those from precursor goods used in complex CBAM products.
The CBAM rate is set per tonne of Co2e emissions in CBAM goods, matching the net carbon price paid by UK producers under the UK Emissions Trading Scheme (ETS). Each sector’s rate is adjusted based on Free Allowances (FAs) received, using an average over specific years when the sector had domestic emissions. This calculation updates annually with a reduction factor as FAs are phased out. The UK government will announce CBAM rates quarterly starting 1 January 2027, with a trial rate released in Quarter four 2026. If the UK ETS price changes, the CBAM charge adjusts accordingly.
The CBAM liability may be reduced if the liable party provides documentation showing a qualifying carbon price was paid abroad for emissions in imported CBAM goods. Only approved schemes, such as taxes, emissions trading, or equivalent CBAMs like the EU's, are eligible for this adjustment. CPR emissions data must be verified by an organisation accredited by a full member of the Global Accreditation Cooperation Incorporated and a signatory to its Multilateral Recognition Agreement.
For the time being, companies conducting trade between the UK and EU must manage both CBAMs. This involves meeting reporting obligations and understanding how carbon pricing will affect their imported products.
Penalties to be mindful of
HMRC will provide support and information to assist businesses with the new CBAM rules. The existing enforcement actions and penalties will remain in effect, addressing matters such as non-disclosure of CBAM liability to HMRC, failure to submit a CBAM return, non-payment of CBAM, inaccuracies in CBAM returns or supporting documentation provided to HMRC, non-disclosure of relevant tax avoidance schemes and repeated tax avoidance, as well as failure to comply with information requests.
HMRC will additionally impose a general penalty for not meeting specific CBAM requirements such as failure to report address or business changes due to death, incapacity, or insolvency.
Next steps
While the CBAM regime is being established in the EU and UK, a few other jurisdictions are looking to introduce similar systems. So, CBAM compliance management will continue to be relevant for exporters, traders, and importers in the UK and internationally; and businesses must assess their preparedness by reviewing their own processes and contractual positions with their suppliers or Freight forwarders. Accurate data management and assurance of data on carbon, weight, etc with the value chain is the key to meet compliance on CBAM. In the longer term, as CBAM mechanisms evolve, businesses may be required to review and update their supply chain strategies to ensure compliance with evolving regulations, cost implications and market dynamics.
