The UK government took a significant step towards implementing its own Carbon Border Adjustment Mechanism (CBAM) this week, publishing a draft of the legislation that outlines how the carbon tax will apply from January 2027. The document is now being submitted to an open consultation for technical feedback until 3 July 2025 before the final draft.
This development signals the government's commitment to ensuring UK businesses are not facing unfair competition from countries with less stringent carbon pricing or are tempted to move their operations overseas while ramping up its decarbonisation efforts.
Following in the footsteps of the EU's CBAM - which entered its transitional phase in October 2023- the UK's version will create new compliance obligations for approximately 10 000 businesses. Based on our initial analysis of the document released on April 24th, here are five key takeaways that UK businesses need to be aware of:
1. The government is moving at pace
The swift publication of draft legislation demonstrates the government's commitment to implementing CBAM on schedule. With a planned start date of 1 January 2027, businesses now have over 18 months to prepare their systems and processes. This early release gives stakeholders time to understand the requirements and provide feedback before the legislation is finalised.
2. 10,000 UK businesses affected
Any UK business importing more than £50,000 worth of covered goods annually will be subject to CBAM requirements – an estimated 10,000 companies across the country. The mechanism will initially apply to carbon-intensive imports including:
Steel
Aluminium
Cement
Fertilisers
Hydrogen
While the threshold matches the one proposed during the first consultation introducing the UK CBAM, the number of companies in scope is significant, including both medium-sized companies and large corporations.
To determine whether a company falls within the threshold, two tests are recommended:
Forward looking (do I think I will exceed the threshold in the next 30 days?)
Backward looking (have I exceeded the threshold in the last 12 months?)
Example:
Backward-looking test (past 12 months):
Q2 2024: £18,000 of covered imports
Q3 2024: £12,000 of covered imports
Q4 2024: £11,000 of covered imports
Q1 2025: £14,000 of covered imports
Total for past 12 months: £55,000
Forward-looking test (next 30 days):
Expected covered imports in next 30 days: £22,000
Even if the example company had not exceeded the threshold in the past 12 months, this single month's planned imports would trigger CBAM obligations under the forward-looking test.
→ In both cases, the example company needs to register for CBAM with HMRC and prepare a return for tax liability.
3. Default values likely to be punitive
The draft legislation confirms that importers will be allowed to use default values to report their emissions. Default values will also apply when they cannot provide verified carbon emissions data for their product. However, these default values are expected to be set at the high end of emissions ranges and will be published closer to CBAM coming into force.
This approach, similar to the EU's announced markup on default values, creates a strong incentive for importers to obtain actual emissions data from overseas suppliers, as using default values will likely result in significantly higher CBAM payments than if using actual verified emissions data.
4. Frendlier timeline
The reporting timeline will follow two different approaches:
First year (2027): Annual reporting for the first accounting year (1 January 2027 to 31 December 2027) with payments due after 5 months (31 May 2028).
Subsequent years (from 2028): Businesses will have a two-month window following each quarterly period to submit their CBAM returns to HMRC and make corresponding payments.
The quarterly submission timeline has been extended from the one-month window initially proposed in the first consultation, giving businesses more time for data collection. The tax bill will be calculated based on quarterly rates published by the government at the beginning of each quarter from 1 January 2027.
This reporting structure aligns with many existing tax reporting cycles, potentially simplifying administrative integration, though businesses should note they will need efficient processes to gather the necessary emissions data within these timeframes.
5. Potential exemption through ETS linkage
Perhaps most interestingly, the draft legislation includes provisions that could exempt EU or other imports from UK CBAM if reciprocal arrangements can be negotiated to link emission trading systems.
This suggests the government is open to alignment with the EU system for instance where feasible, potentially reducing duplicative compliance burdens for businesses trading across the UK-EU border. However, this depends on political negotiations between the two parties.
What should businesses do now?
With less than two years until implementation, businesses that may be affected should begin preparing by:
Assessing whether they exceed the £50,000 threshold for covered goods
Engaging with international suppliers about emissions data collection
Reviewing import processes to ensure they can capture the necessary information
Building potential CBAM costs into financial forecasting