Implications of the carbon border adjustment mechanism
Climate change is a global problem that needs cross-border, collaborative solutions.
In practice, however, the international response has been a patchwork of climate regulations spread across various, individual jurisdictions. This has meant that businesses based in countries with less stringent approaches towards emissions reduction potentially have a competitive advantage, particularly when it comes to carbon-intensive products, such as building materials.
This article considers how the EU and UK Carbon Border Adjustment Mechanisms (CBAMs) are intended to level the playing field, what implications they have for UK construction and real estate, and how businesses in those sectors can best prepare for their introduction.
Emissions trading schemes and carbon leakage
The EU and UK emissions trading schemes (ETS) were implemented to reduce greenhouse gas (GHG) emissions by incentivising their domestic industries to de-carbonise. Both the EU and the UK ETS work by requiring businesses operating installations in certain energy-intensive sectors (including the production of cement, steel, iron, aluminium and aluminium), to acquire and then surrender emission allowances equivalent to the GHG emissions from their installations every year. Although a small number are allocated for free, most emission allowances are auctioned and, if a business holds more emission allowances than it requires, it may sell its surplus allowances to another business that requires them.
UK strategy has been to reduce the total amount of allowances available on the market (and, in particular, the total amount of free carbon allowances) for businesses. For example, 2024 saw a reduction in the number of carbon allowances for companies to buy in the UK to 69 million, which is 12.4% fewer than in 2023. This is part of a policy to reduce carbon allowances by 45% from 2023 to 2027. Accordingly, prices for tradeable carbon allowances have gone up as market supply has constricted. Furthermore, the UK is intending to broaden the range of industries affected by UK ETS to include, for example, energy from waste and waste incineration in 2028.
A similar approach of reducing allowances whilst broadening the industries affected has been adopted in the EU, where the EU ETS is a key aspect of the EU’s Fit for 55 strategy, the EU target of a reduction of emissions by 55% based on 1990 levels by 2030.
Higher costs for industries in one jurisdiction may drive commercial activities across borders. For the EU and the UK, the increased costs for in-scope businesses associated with purchasing emission allowances have seen overseas competitors undercut them and led to some relocating operations abroad. This outcome undermines ETS, as it does not reduce GHG emissions but, instead, displaces them elsewhere. This is known as carbon leakage.
The steel sector has been particularly affected by carbon leakage. This industry is heavily exposed to competition from countries with weaker environmental regulations, which have been able to import steel more cheaply. Some manufacturers have also sought to offshore their production to reduce costs, as with ArcelorMittal which has reduced its presence in France and Denmark but increased it in India.
The EU CBAM and the UK CBAM
So, how do you tackle a problem like carbon leakage? CBAM is a tool designed to apply a cost to carbon intensive imports from countries with weaker environmental protections (for example, those without an ETS). The principle is protective, ensuring that domestic businesses should not become less competitive as they reduce carbon emissions. Both the EU and the UK are in the process of introducing CBAMs.
The section below examines some of the key differences between the EU and UK CBAMs.
Transitional phase
EU CBAM
1 October 2023 - 31 December 2025.
UK CBAM
There is no planned transitional phase for UK CBAM.
EU CBAM
EU importers of carbon-intensive goods (“Authorised CBAM Declarants”) must report on both direct and indirect emissions from production and the carbon price due in the country of origin. Reports must be made. quarterly.
UK CBAM
N/A.
EU CBAM
Mandatory where in-scope import shipment’s value exceeds the de minimis of EUR 150.
UK CBAM
N/A.
EU CBAM
EUR 10 – 50 per tonne of unreported embedded carbon will apply.
UK CBAM
N/A.
Main regime
EU CBAM
Currently, 1 January 2026 onwards. However, the EU Comission is proposing to delay the start until 1 February 2027.
UK CBAM
1 January 2027 onwards.
EU CBAM
Authorised CBAM Declarants must buy CBAM certificates. The certificate prices will be based on the weekly average auction price of EU ETS carbon allowances.
UK CBAM
UK importers who are responsible for the goods on the UK market will be liable.
EU CBAM
EU importers will declare the emissions embedded in their imports and surrender the corresponding number of certificates.
UK CBAM
An import levy will be applied to those goods which fall into the sectors covered by the UK CBAM. The levy will cover both direct and indirect emissions, as under the EU CBAM. However, UK importers which fall under the regime will not be required to purchase or surrender certificates. Instead, the UK government will set the price for the levy based on the UK ETS market prices.
EU CBAM
If EU importers can demonstrate that a carbon price was already paid during production, the equivalent amount can be deducted.
UK CBAM
UK CBAM will allow importers to set off against carbon prices paid in production.
EU CBAM
Import shipment value of EUR 150. It's also proposed to introduce a mass-based de minimis of 50 tonnes mass. The proposed change to the mass requirement is recent (26 February 2025) and the EU estimates it will exempt 90% of importers from the regime.
UK CBAM
GBP 50,000 (over a rolling 12 month period or in the previous 30 days).
EU CBAM
Aluminium, cement, fertilisers, electricity, hydrogen, iron and steel, and aluminium. (NB. The full list of goods covered is in Annex I of the EU CBAM Regulation).
UK CBAM
Aluminium, cement, fertilisers, hydrogen, and iron and steel sectors.
(NB. Glass and ceramics may be included in future.)
EU CBAM
The penalty for Authorised CBAM Declarants will be EUR 100 per tonne of imported goods for which an importer has not surrendered allowances.
For non-Authorised CBAM Declarants (ie undeclared importers), the penalty could be three to five times this amount.
UK CBAM
HMRC will enforce penalties as the CBAM will in effect operate as a tax. There will be civil penalties and there will likely be a criminal penalty introduced for fraudulent evasion of CBAM.
EU CBAM
By 2030, CBAM is expected to extend to all product groups covered by EU ETS.
UK CBAM
It is likely UK CBAM will follow the EU CBAM and expand over the new few years.
Implications for UK businesses
The EU and UK CBAMs could have significant implications for the UK’s construction, infrastructure and real estate sectors.
In the 12 month-gap between the end of the EU CBAM transitional phase and the commencement of UK CBAM, there is a risk of the UK being flooded with cheap, but high-emission, building materials, such as aluminium, cement, and iron and steel, from manufacturers seeking to avoid the obligation to buy certificates under EU CBAM. Businesses that have made commitments to delivering projects sustainably will need to be on guard to ensure that they do not compromise these principles when faced with the option to purchase cheaper, but less sustainable, building materials.
Thereafter, it's likely that the cost of building materials will increase in line with the increase in the cost of imports from countries without their own ETS or equivalent. This could lead to higher overall project costs and mean that cost estimates need to be revised.
Businesses may need to reassess their supply chains to avoid uncertainty associated with the introduction of CBAM, including sourcing from domestic suppliers where possible. The introduction of CBAM may drive innovation in new, low carbon, products and processes. Businesses that strike first in this space and invest in new, alternative, green technologies, and encourage suppliers to do the same, will be better prepared to mitigate the impact of CBAM when it does come into force.
What should UK businesses do to prepare for both UK and EU CBAMs?
To prepare for the UK and the EU CBAMs, UK businesses which import, or purchase imported, products should consider:
- Scope. Determine if you use materials within the scope of EU or UK CBAM.
- Audit. Assess the carbon footprint of the materials to understand how that could translate into CBAM costs.
- Data. Obtain and record accurate data from your suppliers on carbon, such as: commodity codes of goods; countries of origin; direct emissions from fuel combustion, waste gas and process emissions; and indirect emissions from electrical energy.
- Supply chain optimisation. Review your suppliers and their carbon footprint. There may be more sustainable, and cheaper, alternatives that could reduce your costs when CBAMs do come into force. This may include domestic suppliers or EU based suppliers who have adapted to the new CBAM and reduced their carbon footprint accordingly.
- Legal and financial risk. If you're importing products, you'll be exposed to penalties for inadequate reporting on carbon data. Consider integrating contractual conditions with your suppliers to help protect yourself, making sure to cover the accuracy of carbon data.
- Fluctuations in price. You'll also need to be alive to the risk of fluctuations in the carbon price, as it's likely that the levy will reflect changes in the market price for carbon allowances. For the moment, this is trending upwards, so the cost of a high carbon footprint in supply chain arrangements is likely to get more expensive as time goes on. This risk needs to be priced into projects that rely heavily on carbon intensive imports.
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