The UK government is considering reforms to its upcoming Carbon Border Adjustment Mechanism (CBAM) to expand the instrument’s scope, and better align its rules to the EU’s own CBAM model, according to an official presentation seen by Dow Jones Energy.
Based on industry feedback, the government splits possible “future CBAM reform” into two groups: one focusing on scope expansion, and another on reforms to the existing UK CBAM methodology.
The UK’s CBAM framework takes effect from January 2027, charging carbon costs on the emissions embedded in UK steel imports, in-line with what domestic producers pay to the UK Emissions Trading System (ETS). The EU introduced its own CBAM at the start of 2026, with ‘payments’ – via CBAM certificate surrender – due in September 2027.
While the specific values for calculating UK CBAM liabilities are as yet unknown, the UK CBAM methodology – which adopts a single sector value for all CBAM default emissions value, and benchmark/rate metrics – suggests its costs will be significantly lower than the EU’s version.
One of CBAM’s primary mechanisms for increasing supply chain transparency to the EU’s desired level is its punitive default emissions values, which generate high carbon costs should importers fail to report and verify the emissions across their supply chains. For example, Indonesian-origin hot-rolled coil imported under the EU CBAM on default values results in carbon costs that can exceed the price of the base import itself.
Indeed, the EU’s default values for CBAM are generally high, even before “punitive” mark-ups between 10-30% are added. If the UK adopts a single global average value for its CBAM default rate, it risks giving advantageous treatment to the most polluting of origins, eliminating any incentive to report, verify, and improve their emissions portfolio where their ‘actual’ values are above the defined global average. This could see the UK become an attractive “dumping ground” for higher-carbon steel products as steel and wider climate protectionism expands globally, especially vis-a-vis the EU and its stricter CBAM protections.
Eligible CBAM deductions for carbon prices already paid are also deducted from the CBAM emissions volume under the EU system, but deduct directly from the price in the UK framework, generally facilitating lower UK CBAM costs due to the cheaper UK ETS price.
Negotiations between the UK and EU have been ongoing to link their respective ETS frameworks, with media reporting that a final agreement has been reached in advance of summit discussions announced for November. Policymakers have suggested that a UK-EU ETS merger could facilitate exemptions to each jurisdictions’ CBAMs – though it seems dubious that EU authorities would permit full CBAM exemptions for UK exports to the EU, if there were to be significant cost misalignments between the two systems.
Sources close to the matter state that cost-discrepancy issues have been raised multiple times with the UK’s CBAM policymakers, but that authorities have been slow to respond to highlighted issues.
While evidently at a very initial consideration stage, the government’s presentation shows that it is now considering aligning the UK CBAM to the EU version at a later date, citing a potential switch to the EU’s product-specific “benchmarking” approach to calculating CBAM rates (as opposed to the existing single sector rate based on sector free allocation coverage); a switch to country-specific default emissions values (replacing the global sector average); and the introduction of default values for carbon price relief deductions.
Importantly, these potential methodological changes were not expected any time soon, and certainly not for the initial year of the UK CBAM’s operation.
These changes would remedy many of the misalignments between the UK and EU systems, and could better facilitate merger-based exemptions between the UK and EU CBAM’s down the line. The government’s mention of scope expansions to CBAM – to new products, sectors, and indirect emissions values – would also align with EU efforts, as EU authorities actively legislate to extend CBAM protections to downstream manufacturing by 2028.
Some – like the International Institute for Sustainable Development (IISD) – have argued that the launch of Carbon Border Adjustment Mechanisms globally across like-minded jurisdictions could assist in the creation of low-carbon trading clubs to fight climate, and overcapacity-based pressures, via mutual exemptions between CBAM frameworks. If that is to be the case, then these systems will have to approximately align in both ambition and methodology, or risk becoming little more than an administrative afterthought.
Author: Benjamin Steven
