UK and EU Negotiate ETS Linking and CBAM Alignment

The United Kingdom is moving forward with its strategy to combat “carbon leakage” and align its industrial standards with global climate goals. The British government is implementing a Carbon Border Adjustment Mechanism (CBAM), a recent tax designed to ensure that carbon-intensive goods imported into the UK face a carbon price comparable to those produced by domestic manufacturers.

This mechanism is a critical component of the UK’s broader decarbonization policy, aimed at preventing UK companies from being disadvantaged by competitors in countries with less stringent environmental regulations. By leveling the playing field, the government intends to encourage a genuine reduction in global emissions rather than simply shifting production to regions with lower standards.

The UK CBAM is scheduled to apply from January 1, 2027. The measure specifically targets five high-emission industrial sectors: aluminium, cement, fertiliser, hydrogen, and iron and steel. The goal is to mirror the carbon pricing that UK manufacturers already face under the UK Emissions Trading Scheme (ETS).

Who is Affected by the UK Carbon Border Adjustment Mechanism?

The impact of the new tax will be felt across both domestic and international supply chains. Specifically, businesses that import £50,000 or more of specified goods from the aluminium, cement, fertiliser, hydrogen, and iron and steel sectors over a 12-month period will be directly impacted. Those who utilize these goods within their own supply chains will experience indirect effects.

Overseas producers who supply these goods to the UK market will likewise be affected. These businesses may be required to provide detailed information regarding the embodied emissions within their goods or disclose the carbon prices those goods were subject to during production in their home countries.

The mechanism’s primary objective is to mitigate carbon leakage, which occurs when companies move production to countries with laxer emission constraints to avoid costs, effectively shifting the pollution rather than eliminating it. By taxing the embodied carbon of imports, the UK aims to incentivize cleaner industrial production worldwide.

Comparing the UK and EU CBAM Frameworks

While the UK is developing its own system, the European Union has already launched a similar tool. The EU Carbon Border Adjustment Mechanism is designed to position a fair price on carbon emitted during the production of carbon-intensive goods entering the EU.

The EU’s approach includes a transitional phase from 2023 to 2025, with the definitive regime beginning on January 1, 2026. Under the EU’s definitive period, importers of CBAM goods—or their indirect customs representatives—must apply for the status of authorized CBAM declarants. Those importing more than a single mass-based threshold of 50 tonnes of CBAM goods into the EU are required to obtain this status.

In the EU system, authorized declarants must purchase CBAM certificates from national authorities. The price of these certificates is linked to the auction price of EU ETS allowances, expressed in euros per tonne of CO2 emitted. For 2026, this is calculated as a quarterly average, shifting to a weekly average from 2027 onwards. Importers must declare embedded emissions and surrender the corresponding number of certificates annually, though deductions are possible if a carbon price was already paid during production.

Key Comparison of Implementation Timelines

The Role of Emissions Trading Schemes (ETS)

Both the UK and EU mechanisms are inextricably linked to their respective Emissions Trading Schemes. In the UK, manufacturers are subject to carbon pricing under the UK ETS for direct emissions. The CBAM ensures that the “carbon cost” is not avoided by importing goods from regions without such schemes.

The EU’s gradual introduction of CBAM is explicitly aligned with the phase-out of free allowances under the EU ETS. This strategic transition is intended to support the decarbonization of EU industry while ensuring that the transition to a low-carbon economy does not result in a loss of industrial competitiveness.

The coordination between these two systems is a point of ongoing interest for international trade. As both regions implement carbon pricing at the border, the methodology for monitoring, verifying, and calculating embodied emissions becomes paramount to avoid double taxation and trade disputes.

What Happens Next?

As the January 1, 2027, deadline for the UK CBAM approaches, businesses in the affected sectors—particularly those importing over £50,000 of aluminium, cement, fertiliser, hydrogen, iron, or steel—should begin reviewing their supply chain data. Understanding the embodied emissions of imported goods will be essential for compliance and cost management.

For those trading with the European Union, the definitive regime begins on January 1, 2026. Importers are urged to apply for the status of authorized CBAM declarants and familiarize themselves with the Authorisation Management Module to submit necessary applications.

We invite our readers to share their perspectives on how these carbon taxes will impact global trade in the comments section below.