The long anticipated introduction of the EU’s Carbon Border Adjustment Mechanism (CBAM) has arrived and came into effect in full on 1 January 2026 following a two year transitional phase.
This article explores what the EU’s new Carbon Border Adjustment Mechanism means for UK businesses, the lack of UK exemption, and how the forthcoming UK CBAM may shape future trade and carbon pricing.
From 1 January 2026, under the EU’s CBAM, importers must purchase and surrender CBAM certificates equivalent to the embedded emissions - direct and indirect, adjusted for any free allocation phase-out under EU ETS and any carbon price already paid in the origin country.
The EU will begin recording emissions which are linked to the import of specific products. Currently, CBAM covers imports in six key sectors: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity, encompassing a range of specific goods and precursors at high risk of carbon leakage. Through CBAM, EU importers are required to purchase CBAM compliant certificates to reflect how the carbon is embedded in their production. Companies will have to wait until September 2027 to purchase these certificates to showcase their 2026 emissions before submitting them to the EU.
Despite efforts from the UK government to strike an agreement between the UK and the EU for an ‘exemption’ from CBAM for UK companies, the EU has confirmed that, at present, the UK will not be exempt from CBAM. The UK will continue to be subject to CBAM until there is a formal link between both carbon trading systems which is estimated to take more than a year to formalise.
Since the rejection of the agreement, UK government has stated that linkage between the two schemes remains a priority to avoid charges on c. £7 billion of exports.
However, the UK government is due to introduce a UK CBAM on 1 January 2027 so that carbon intensive products from overseas face a comparable carbon price to that paid by UK manufacturers. The UK CBAM will apply to specific UK imports including from the aluminium, cement, fertiliser, hydrogen and iron & steel sectors. Within these sectors, the UK CBAM will only apply to specified imported ‘CBAM goods’ and will include indirect emissions – these are emissions caused by a company indirectly coming from where the energy it purchases and uses is produced. However, the Autumn Budget 2025 saw the delay of the inclusion of indirect emissions within the UK CBAM until 2029 at the earliest. Further details and specifics of the UK CBAM are awaited, with HMRC due to publish detailed guidance ahead of 2027.
According to the government’s update of 19 May 2025, cooperation between the UK’s Emission Trading Scheme (ETS) and the EU’s CBAM would shield businesses from the carbon tax that would have resulted in an estimated £800 million being paid into the EU budget. However, the government is yet to release any details on the interplay between the schemes and the interaction of the UK’s ETS and anticipated CBAM with the EU’s CBAM is unclear.
A formal link between the UK’s ETS and EU’s CBAM might be advantageous and see the elimination of additional carbon levies, the demand for UK exporters is still likely to reduce as a result of the differences in ETS prices. If the price of emission permits match, there will be no further charges - historically the price of the UK’s emissions permit has fallen below the EU’s which means that importers will be required to buy EU permits to make up the shortfall which means that the demand for UK exports may fall.
However, it's yet to be seen how the UK’s CBAM, and possibly the current UK ETS, will affect the costs of the EU’s CBAM and whether the introduction of a cooperative cross-border carbon trading initiative will result in a reduction in cost for the domestic industry or even a complete mitigation of the cost. The introduction of a similar UK CBAM scheme will no doubt lessen the financial impact of the EU CBAM to a certain extent, the gross impact of which will largely depend on the trade deficit between the two trading bodies.
In summary, CBAM clearly marks a seismic shift in the EU trade policy and is notably one which UK businesses and trades cannot afford to ignore. As no exemption has been secured and the links between the ETS and CBAM remain on the horizon, it's undoubtedly an unsteady time for UK traders. However, whilst challenges loom, proactive UK businesses can turn compliance into competitive advantages by leveraging transparency, innovation and sustainability to secure their place in Europe’s evolving carbon economy.
For further information, please contact our energy and resource management team.
