On the 21st of March 2024, HM Revenue and Customs and the HM Treasury published the consultation ‘Introduction of a UK Carbon Border Adjustment Mechanism from January 2027’. The purpose of the consultation is to seek views on the proposed design, structure and administration of the UK Carbon Border Adjustment Mechanism.
Background
In December 2023, the UK Government announced within their response to the consultation ‘Addressing Carbon Leakage Risk to Support Decarbonisation’, that the UK would implement a UK Carbon Border Adjustment Mechanism by January 2027.
The UK Carbon Border Adjustment Mechanism is a policy tool intended to address the issue of carbon leakage, which will help protect the UK’s industries through ensuring the equal treatment of domestic and imported goods.
The UK Carbon Border Adjustment Mechanism shall work similarly to the EU Carbon Border Adjustment Mechanism, as a carbon price will be imposed on specific goods imported into the UK.
Overview of the UK Carbon Border Adjustment Mechanism
Scope
The initial scope of the UK CBAM, will apply to goods from the following sectors:
- Aluminium
- Cement
- Ceramics
- Fertiliser
- Glass
- Hydrogen
- Iron and Steel
Within Annex A (page 57) of the consultation, a list of commodity codes are provided. This can be used to check if a product falls within the scope of the UK Carbon Border Adjustment Mechanism.
The following questions have been posed regarding the product level scope of the UK Carbon Border Adjustment Mechanism:
- Do you agree that the list of commodity codes in Annex A an accurate reflection of the policy intent described above? Please provide supporting evidence.
- Are there any relevant commodity codes omitted or any that should be excluded? Please provide supporting evidence.
- Do you have any concerns on the feasibility of any of the commodity codes in Annex A being within scope of the CBAM? Please provide supporting evidence.
- Do you agree that scrap aluminium, scrap glass and scrap iron & steel do not pose a carbon leakage risk and should not be within scope of the CBAM? If not, please provide evidence to support your response.
How will the charge on goods be determined?
The charge imposed on goods, which fall within the scope of the UK CBAM will be named as the ‘UK CBAM Rate’.
This rate shall be ‘applicable per tonne of embodied emissions attributed to CBAM goods’. It is proposed that each sector of goods within the scope of the UK CBAM, have an individual CBAM rate and that these will be set by the UK Government at the start of each quarter.
The following methodology shall be utilised to determine the UK CBAM rate for a given sector:
Key:
ETS = The average UK ETS auction price over the preceding quarter.
CPS = Carbon Price Support rate for the current quarter.
Indirect Emissions = Emissions related to the production of electricity, that is consumed during the production of the CBAM goods regardless of whether the electricity is generated on or off site.
Direct Emissions = Emissions related to the production processes of CBAM goods (which includes emissions from the heating and cooling consumed during these processes).
Free Allocation Adjustment = The government proposes making an adjustment to the UK ETS price reference price, to reflect the existence of free allowances available to the domestic industry within that sector over the previous year. This will be known as the ‘free allocation adjustment’.
The following questions have been asked regarding setting the UK CBAM rate:
- Do you agree that the CBAM rate calculation set out a fair reflection of the price paid in the production of goods in UK? If not, please explain why not.
- Does setting a CBAM rate for each sector on a quarterly basis strike the right balance between tracking the UK ETS market price and giving importers certainty for financial planning? If not, please explain why not?
- Are there any other considerations for setting the UK CBAM rate not set out above? Please outline.
Who is liable for the UK CBAM rate?
The Government outlines that the CBAM liability will be calculated through the following methodology:
In order to calculate the emissions embodied within the imported goods, the Government has provided a dual approach which shall allow these emissions to be calculated one of two ways:
- Using default emissions values determined by the UK Government
- Using data on the actual emissions embodied within the CBAM goods. However, these emissions must be verified by an independent verification body.
It is important to note, that the CBAM liability can be reduced if the embodied emissions of the imported CBAM goods have already been subject to a carbon price overseas. However, sufficient evidence must be provided to demonstrate this, otherwise the goods shall still be charged at the full UK CBAM rate.
It is also stated that an independent third party would also need to verify any overseas carbon price, which is to be deducted from one’s UK CBAM liability.
A range of questions have been raised regarding the liability of the UK CBAM, these relate to: imported embodied emissions, emissions values for default emissions for all chargeable goods, the calculation and verification of actual embodied emissions, measurements and weights, adjusting for overseas carbon prices and indirect imports.
How will the UK CBAM be administrated?
The time when the CBAM liability occurs, shall be known as the ‘tax point’.
The tax point shall be:
- If there are no custom controls, the date the CBAM good first entered the UK
Or,
- If there are custom controls, the date on which the good is passed into free circulation
A minimum threshold for the UK CBAM has been set at £10,000 within a rolling 12-month period. Therefore, if one’s total value of CBAM goods does not exceed this threshold, then they shall not have to register for the CBAM.
For those who do exceed this threshold, a responsible person must register for the CBAM either from the date one expects to exceed this threshold, or the date it is exceeded. Whichever date is earlier, must be the date the registration occurs.
A liable person shall be determined as either:
- Where there are customs controls – the person responsible for the goods when they are released into free circulation.
- Where there are no customs controls – the person on whose behalf the goods are moved to the UK.
However, a liable person can employ a tax agent to act on behalf of a liable person.
The liable person is required to submit their CBAM return (where they shall pay the CBAM liability), at the end of each accounting period, even if there is no CBAM charge.
It is proposed that the first accounting period shall occur from the 1st of January to the 31st of December 2027. However, from 2028 onwards it is proposed that these accounting periods shall be quarterly, rather than annually.
Numerous questions have also been posed regarding the administration of the CBAM, these relate to: when the CBAM tax point arises, liable personnel, the registration process and its minimum threshold, accounting periods, returns and payments and compliance and penalties.
How can I provide my views on the consultation?
You can read the full consultation and its questions here.
All responses to the questions outlined within the consultation, can be shared here. Or alternatively, by emailing cbampolicyteam@hmrc.gov.uk.
If after reading any of the information within this article you have any questions, then please get in touch. Email info@swanenergy.co.uk.
