Environmental Impact Data

Series

10. UK Carbon Border Adjustment Mechanism (UK CBAM)

Part 10 of 12

Overview. The United Kingdom is introducing a CBAM aligned with the UK Emissions Trading Scheme (UK ETS). Like the EU CBAM, the UK CBAM seeks to prevent carbon leakage by imposing a carbon cost on imports of carbon-intensive goods. It ensures parity between domestic producers regulated under the UK ETS and foreign exporters.

1) UK CBAM Scope

  • Sectors: Cement, iron & steel, aluminum, fertilizers, hydrogen, electricity (initial list aligned with EU CBAM).
  • Entities: UK importers, required to submit quarterly reports and purchase CBAM units.
  • Geographic: Imports entering the UK market, regardless of origin.

2) UK CBAM Pricing

UK CBAM certificate prices are tied to the average UK ETS allowance price, not the EU ETS. This ensures consistency with the domestic carbon pricing system.

3) UK CBAM Formula


CBAM Units Required = (Embedded Emissions × Quantity) – Credit for Foreign Carbon Price Paid

CBAM Cost (£) = CBAM Units Required × UK ETS Price

Definitions:

  • Embedded Emissions: Direct + indirect CO2e per ton of product.
  • Quantity: Volume of imported goods (tons).
  • Foreign Carbon Price: Recognized carbon pricing mechanism abroad; deducted from CBAM liability.
  • UK ETS Price: £/tCO2e, set weekly by UK authority.

4) Worked Example – Imported Aluminum

Scenario: A UK importer purchases 50,000 tons of aluminum ingots from Country Z.

  • Embedded emissions = 6.0 tCO2e/ton.
  • Quantity = 50,000 tons.
  • Foreign carbon price = £15/tCO2e.
  • UK ETS price = £70/tCO2e.

Step 1: Total embedded emissions.


Total Emissions = 6.0 × 50,000 = 300,000 tCO2e

Step 2: Adjustment for foreign carbon price.


Adjustment factor = (UK ETS – Foreign) / UK ETS
                  = (70 – 15) / 70
                  = 0.7857
Adjusted Emissions = 300,000 × 0.7857 ≈ 235,710 tCO2e

Step 3: CBAM cost.


CBAM Cost = 235,710 × £70 ≈ £16.5 million

Result: The importer must pay ~£16.5 million in CBAM units.

5) Worked Example – Cement Import

Scenario: Importing 100,000 tons of cement.

  • Embedded emissions = 0.75 tCO2e/ton.
  • Quantity = 100,000 tons.
  • No foreign carbon price applied.
  • UK ETS price = £70/tCO2e.

Calculation:


Total Emissions = 0.75 × 100,000 = 75,000 tCO2e
CBAM Units = 75,000
CBAM Cost  = 75,000 × £70 = £5.25 million

Result: The importer pays £5.25 million in CBAM units.

6) Compliance Framework

  • Quarterly reports of imported volumes and verified embedded emissions.
  • Default values may be used if primary data unavailable (defaults are conservative).
  • Annual reconciliation and surrender of CBAM units by importers.
  • Penalties for under-reporting or late surrendering of CBAM units.
Key takeaways.
  • UK CBAM mirrors EU CBAM but ties to UK ETS price, not EU ETS.
  • Calculation: (Embedded emissions × Quantity) minus credit for foreign carbon price.
  • Worked examples show high financial stakes (tens of millions for aluminum and cement).
  • Robust emissions data collection is critical to avoid defaults and penalties.

Note: The UK CBAM is expected to phase in alongside reforms to the UK ETS, ensuring alignment of domestic and import carbon costs.