The UK government has published indicative calculation metrics for its incoming Carbon Border Adjustment Mechanism (CBAM), 16 October, demonstrating a significantly lower cost burden than under the EU’s own CBAM model.
HMRC has published the guidance on its official webpages in the form of “illustrative rates” for in-scope sectors, including steel, calculated using the UK CBAM methodology on latest UK Emissions Trading Scheme (ETS) data.
The UK’s CBAM framework takes a simplified approach as compared to the EU system – where the EU CBAM demands that importers trace the emissions embedded in their goods back at high CN-code level specificity, or face highly punitive origin-dependent default value costs, the UK’s version of the carbon leakage instrument instead adopts sector, or global averages for its calculation values.
Calculating UK CBAM liabilities works as follows: an importer assesses their initial liability in reference to either verified actual emissions values, or a globally averaged product-specific default value, then multiplies that liability by the “CBAM rate”. Following HMRC’s publication of the UK CBAM default values, and illustrative rates, importers can assess their potential liabilities with much greater confidence – the government has also committed to publishing 2027’s first quarter rates before year’s end.
The ‘CBAM rate’
The CBAM rate adjusts importer liabilities to mirror what domestic producers pay to the UK ETS, which – due to the historical ‘free allocation’ of UK Allowances (UKAs) to industrial operators – involves establishing a coverage ratio of free allocation supply, to demand, for UK operators.
The EU CBAM establishes this using a benchmark approach, translating the EU ETS’ various steel-producing benchmarks (representing the top 10% of EU installations) to the product level to calculate free allocation adjustments specific to the production process of each imported good. For example, hot-rolled coils have a different benchmark reduction from cold-rolled coils, or other steel product categories, in line with the EU’s actual emissions performance for each production process. These EU CBAM benchmarks are then further split by production route (e.g blast furnace vs electric-arc furnace, further split by scrap or DRI), and even have separate listings for when using process-specific ‘actual’ values, or assumption-based defaults.
The UK’s simplified approach instead looks at an entire sector – such as steel – and assesses the proportion of emissions reported by that sector’s operators, and how many of those emissions were covered by free allocation. This value is then multiplied by the relevant UK ETS price average, to establish the ‘CBAM rate’.
HMRC’s “illustrative rate” has been published at GBP9.69/t.
Default Emissions Values
The UK’s default values – published alongside the illustrative CBAM rates – come as something as a surprise to UK market participants, who were largely expecting a single, globally averaged default value per sector.
Instead, the UK government has published product-specific default values down to the CN code level – at higher granularity than the EU, in some cases – though the values are averaged across all trading partners, at odds with the EU’s country-specific approach.
The UK’s default values are themselves “based on EU data” – presumably the EU’s default value dataset – adjusted using “trade-weighted” averages to “reflect the composition of UK imports,” excluding EU origin data. According to the government’s associated communications, this is line with “the commitment expressed by the UK and EU to link their emissions trading schemes, which will result in EU-origin goods being exempt from UK CBAM,” and should help the default value averages better reflect the emissions profiles of origins that are more likely to use them, likely due to the established maturity of EU verification practices.
The below table illustrates the emissions variance across CN/Commodity Codes for core steel products between the UK and EU systems. It is important to note that the emissions spreads within categories are largely due to variance in CN code in the non-origin-specific UK dataset, while emission spreads in the EU’s system are due to country-specific listings for each CN code. Groupings by product category are for illustrative purposes, and include only those CN or commodity codes under each 4-digit heading (excl. agglomerated iron ore).
| Product Category | CN/Commodity Code | UK CBAM DV (tCO2e/t) | EU CBAM DV (tCO2e/t) | Comment |
| Agglomerated iron ore | 26011200 | 0.494 | 0.090 – 1.610 | Highest EU = Russia |
| Pig iron | 7201xxxx | 1.331 – 2.698 | 1.110 – 7.920 | Highest EU = Indonesia |
| DRI | 7203xxxx | 1.149 | 0.450 – 4.200 | Highest EU = India |
| Semifinished (slab/billet) | 7207xxxx | 2.803 – 4.752 | 0.130 – 8.230 | Lowest BF route DV (Canada) = 1.330 t CO2e/t |
| HRC | 7208xxxx | 2.582 – 4.675 | 0.140 – 8.230 | Lowest BF route DV (USA) = 1.400t CO2e/t |
| CRC | 7209xxxx | 1.584 – 4.511 | 0.140 – 8.250 | Lowest BF route DV (USA) = 1.440t CO2e/t |
| HDG | 7210xxxx | 2.391 – 3.537 | 0.140 – 8.250 | Lowest BF route DV (USA) = 1.440t CO2e/t |
| Rebar | 7214xxxx | 2.518 – 3.867 | 0.130 – 8.230 | Lowest BF route DV (Canada) = 1.330 t CO2e/t |
| Wire rod | 7213xxxx | 1.529 – 4.396 | 0.140 – 8.230 | Lowest BF route DV (Canada) = 1.330 t CO2e/t |
Source: HMRC, European Commission
ETS linkage, and methodological frictions
A UK-EU summit is scheduled for November, and media reports that an ETS linkage agreement has already been reached ahead of the discussions. Market participants hope that this would result in reciprocal CBAM exemptions when trading between the two jurisdictions, but methodological discrepancies between the respective carbon leakage instruments raise questions, especially where UK CBAM costs fall well below EU CBAM projections.
As Dow Jones Energy previously reported, the UK government is actively considering aligning its CBAM rules toward the EU’s model in future reforms, and this latest release confirms that the government is looking to move toward country-specific default values from 2029.
Importantly, the government’s statement does not mention a reciprocal exemption for UK-origin goods exported to the EU – only for EU-to-UK trade – and the EU’s steelmakers already fear that the simplified nature of the UK CBAM could result in the UK becoming a circumvention route for higher EU CBAM costs.
As an example of cost discrepancies between the two systems, the per ton default value of an Indian-origin 72083700 code hot-rolled coil imported into the UK CBAM in 2027 on HMRC’s data is 3.314t CO2e/t, which is then multiplied by the illustrative CBAM rate of GBP9.69/t CO2e to give an indicative liability of GBP32/t.
Importing the same goods under the EU CBAM methodology (on equivalent ETS price data), this calculation would alternatively require taking the EU’s marked-up default value of 5.136t CO2e/t, then deducting the adjusted free allocation benchmark of 1.302t CO2e/t, resulting in a per ton financial liability of EUR314.43/t – over eight times the cost of the UK system on latest EUR-GBP exchange rates.
Even taking the UK’s highest iron and steel default value – 9.121t CO2e/t for code 72191210 stainless coils – results in only a GBP88/t cost using HMRC’s illustrative CBAM rate. By comparison, the lowest possible default value for an origin exporting the same goods under the EU CBAM in 2027 is that of Azerbaijan, which has an EU default value of 2.570t CO2e/t for the 721912 CN code, yet still generates a liability of EUR160/t. The EU CBAM generates almost double the cost of the UK system on the UK’s highest default value CN code, despite a default emissions gap of 6.5t CO2e/t.
This is even before further deductions for Carbon Price Relief (UK), or Carbon Prices Already Paid (EU), which allow importers to subtract from their liability for carbon prices paid earlier in the production process, and similarly operate differently between the UK, and EU systems. In the EU, this deduction is made from the emissions volume, while in the UK it is deducted from the price itself, potentially offering greater reductions within the UK system.
Initial calculations informed by the UK and EU default emissions values datasets are contained in the table below, demonstrating that even the highest of HMRC’s illustrative UK CBAM default value costs are closer to the low-end of costs generated by the EU CBAM. Calculations test the illustrative UK CBAM rate against the highest UK default value within the selected CN code groupings, and compare against the highest, and lowest default value origins for that same CN code under the EU framework (at the EU’s Q3 CBAM price of Eur82). New, low-carbon listings for Azerbaijan were created in the European Commission’s summer corrections to its default value dataset, assessed against scrap-EAF route benchmark deductions, but the majority of origins generally sit well-above the UK CBAM liability assessments.
UK/EU CBAM illustrative default value costs
| Product | UK high-end DV cost (GBP/t) | Euro equivalent (Eur/t) | EU low-end DV cost (Eur/t) | EU high-end DV cost (Eur/t) |
| Agglomerated iron ore | 4.79 | 5.68 | 2.16 (Canada) | 151.72 (Russia) |
| Pig iron | 26.14 | 31.01 | 14.97 (Canada) | 685.07 (Indonesia) |
| DRI | 11.13 | 13.20 | 13.35 (USA) | 382.35 (India) |
| Semifinished | 46.05 | 54.61 | 0 (Azerbaijan) | 680.96 (Indonesia) |
| HRC | 45.30 | 53.73 | 8.17 (Azerbaijan) | 703.11 (Indonesia) |
| CRC | 43.71 | 51.84 | 5.36 (Azerbaijan) | 698.22 (Indonesia) |
| HDG | 34.27 | 40.65 | 2.79 (Azerbaijan) | 695.65 (Indonesia) |
| Rebar | 37.47 | 44.44 | 8.63 (Azerbaijan) | 703.58 (Indonesia) |
| Wire rod | 42.60 | 50.52 | 8.63 (Azerbaijan) | 703.58 (Indonesia) |
Source: HMRC, European Commission, Dow Jones Energy’s Default Values CBAM Calculator
Overall the UK CBAM appears to impose a far lower cost on embedded steel emissions than the EU system, which raises questions as to how future exemptions between the EU and UK systems would operate in practice. Certainly, the UK government seems to be moving toward alignment with the EU framework, as seen in its ETS merger initiative, stated shift to country-specific default values in 2029, and policy discussions on adopting the EU’s ‘benchmark’ approach to free allocation deductions in future methodology reforms.
Alignment could ultimately be in the UK, and EU’s best interest, as research suggests that reciprocal CBAM exemptions could assist in creating a low-carbon steel trading ‘club’ between like-minded countries, aiding efforts against both climate, and overcapacity-related pressures.
Dow Jones Energy chaired a customs panel in Belfast in early October, as part of Allied Group’s Beyond Borders Summit, focusing on potential dual market access opportunities for businesses based in NI as a result of cost discrepancies between the UK and EU CBAMs. Imports to Northern Ireland would be subject to the UK’s version of CBAM, but as confirmed by European authorities, would not be subject to the EU CBAM “where released for free circulation in Northern Ireland.”
Attendees speculated that this could potentially facilitate free transit from Northern Ireland, into the EU, at the UK’s lower CBAM cost, though the imposition of the EU’s steel TRQs via the Windsor Agreement could undermine any benefit for steel goods. Regardless, speculative importers have already been eyeing the UK’s CBAM as a potential opportunity, even before its lower cost burden was clarified, and will certainly be looking for means to land steel in the UK or EU at minimal CBAM liabilities.
Author: Benjamin Steven
