Addressing carbon leakage: EU CBAM is adopted as UK consults on future approach

United Kingdom

On 25 April, the Council of the European Union formally adopted the regulation establishing a carbon border adjustment mechanism (the “CBAM Regulation”). The CBAM Regulation is a key component of the European Commission’s Fit for 55 legislative proposals and is designed to address the risk of carbon leakage in the EU. In the UK, the Department for Energy Security and Net Zero (“DESNZ”) is currently consulting on a range of potential policy measures to mitigate carbon leakage risk, including a carbon border adjustment mechanism (the “Consultation”). We provide an overview of the EU CBAM and the proposed measures being considered by the UK Government for stakeholders to consider in advance of the consultation period closing on 22 June 2023.

The EU

The CBAM Regulation requires importers of cement, electricity, fertilisers, iron, steel, aluminium and hydrogen from third countries into the EU to submit declarations and purchase digital certificates covering the embedded greenhouse gas emissions in those goods.[1] During a transitional period from 1 October 2023 until 31 December 2025, in-scope importers will be subject to reporting obligations. From 1 January 2026 the substantive obligations apply, such as the obligation to surrender CBAM certificates. The price of the certificates will be calculated depending on the weekly average auction price of EU emissions trading scheme (“EU ETS”) allowances, and the number of certificates to be surrendered shall be adjusted to reflect the extent to which EU ETS allowances are allocated free of charge. A reduced number of certificates may be surrendered to take into account the carbon price paid in the country of origin for the declared embedded emissions.

Whilst the CBAM Regulation has now been adopted and will soon be published in the EU’s Official Journal, developments should be monitored. In particular, the CBAM Regulation provides that before 31 December 2025, the Commission shall report to the European Parliament and Council with an assessment of the possibility to extend the scope of the regulation.

The UK

In April 2022, a report by the parliamentary Environmental Audit Committee recommended that the UK Government commence work immediately on developing a comprehensive UK carbon border approach (including a CBAM) such that it can be implemented in the 2020s. The UK Climate Change Committee has also encouraged the Government to bring forward next steps on a CBAM as soon as possible and recommended that the Government consult on plans to implement a CBAM by 2030 or earlier. The Net Zero Review, led by Chris Skidmore MP, published in January 2023, advised the Government to progress its carbon leakage consultation to enable Government to implement effective mitigations from 2026. The relevant consultation is now in progress and is open for comment until 22 June 2023.


The Consultation considers a range of potential domestic policy measures to mitigate future carbon leakage risk to support decarbonisation in the UK. Key policies for potential implementation from the mid-2020s include:

  1. A carbon border adjustment mechanism that applies a carbon price on imported products to reflect the carbon emitted in their production together with any gap between the carbon price already applied in the country of origin and the carbon price that would have incurred had the product been produced in the  UK (any UK CBAM would take into account any explicit carbon prices already paid in the country where that good was produced); and
  2. Mandatory product standards which would set an upper limit on the embodied emissions of specific industrial products produced in the UK or placed on its market, prohibiting products which are more emissions-intensive than a defined limit. These standards would relate to the way products are made rather than their characteristics.

Other measures include demand side policies such as product labelling (based on voluntary product standards) and public procurement initiatives. An embodied emissions reporting system is also considered to support the implementation of the potential policies.

The Consultation notes that these measures could be deployed individually or in combination as part of a policy framework package. An illustrative timeline for how a framework of policies could be introduced is provided at Figure 3 of the Consultation and reproduced below:

Views are sought on each of the potential measures and how they might be implemented, if at all.

Next steps

Measures to address carbon leakage, such as a CBAM, will impact various entities across industry, from manufacturers and suppliers to those purchasing in-scope goods. In the UK, interested stakeholders have until 22 June 2023 to respond to the Consultation. DESNZ have also indicated that a further consultation is due at the end of 2023 in relation to the remaining free allocations in the UK’s Emissions Trading Scheme. Reporting obligations under the EU’s CBAM Regulation apply from 1 October 2023 and its substantive obligations apply from 1 January 2026. In advance of these dates, those obligated or affected by the CBAM Regulation should prepare and assess its impact.

[1] Some downstream products such as bolts and nuts are also covered. For a full list of applicable goods please see Annex I of the CBAM Regulation.