7) How Does UK CBAM Differ from EU CBAM?

Two Different Systems#

UK and EU CBAM systems share the same goal of preventing carbon leakage but implement it differently. The EU system started transitional reporting in October 2023 with financial obligations from January 2026. The UK system starts full implementation in January 2027 with no transitional period.

The EU operates CBAM as a certificate trading scheme with market-based pricing. The UK operates CBAM as a direct tax administered by HMRC with Treasury-set prices. Both cover the same six sectors: cement, steel, aluminium, fertilisers, hydrogen, and electricity.

Structure Difference: Tax versus Trading#

The EU system works through certificate purchase and surrender. Importers buy CBAM certificates from national authorities at prices mirroring EU ETS allowance auction prices. Certificate prices fluctuate weekly based on EU ETS market conditions. Importers surrender certificates annually to cover embedded emissions in goods imported.

The UK system works as a carbon tax on imports. Importers calculate embedded emissions and pay tax to HMRC based on sectoral domestic prices set quarterly by the Treasury. These prices reflect UK ETS auction prices, sectoral emissions profiles, free allocation levels, and Carbon Price Support rates. Payment accompanies quarterly returns similar to VAT.

The practical difference: EU CBAM involves buying tradable certificates and managing inventory. UK CBAM involves calculating tax liability and paying HMRC. EU pricing is market-driven and volatile. UK pricing is administratively set and more predictable.

Timeline Difference#

The EU transitional period from October 2023 through December 2025 requires quarterly reporting with no financial obligations. This gave importers and suppliers two years to build data systems and understand requirements before financial obligations began in January 2026.

The UK has no transitional period. Financial obligations start immediately in January 2027. Companies importing CBAM goods to the UK must be ready for full compliance from day one with no practice phase.

This means UK importers have less preparation time than EU importers had. The final quarter of EU transitional reporting is due 31 January 2026, giving one year to prepare for UK implementation.

Threshold Differences#

The EU threshold is 50 tonnes annual net mass per importer across all CBAM sectors. Importers below this threshold are exempt from obligations. This exempts approximately 90% of importers whilst keeping 99% of emissions in scope.

The UK threshold is £50,000 annual import value. This is fundamentally different because it is based on customs value rather than mass. For high-value products like specialised alloys, the UK threshold is lower than the EU threshold. For low-value products like cement, the UK threshold is higher.

Neither threshold applies to electricity or hydrogen imports which are measured in different units than mass.

Pricing Differences#

EU certificate prices track EU ETS allowance prices weekly. Recent prices have ranged €60-100 per tonne CO₂. Prices fluctuate based on market supply, demand, energy costs, and policy expectations.

UK sectoral domestic prices are set quarterly by the Treasury. These prices reflect UK ETS prices plus Carbon Price Support (£18 per tonne on fossil fuel electricity generation), adjusted for sectoral characteristics and free allocation levels. UK ETS prices have diverged from EU ETS since systems separated.

UK and EU prices will probably track similarly because both reflect carbon pricing levels but will not be identical. Differences of 10-20% are likely based on UK versus EU ETS price divergence and UK Carbon Price Support.

What This Means for UK Businesses#

UK exporters to the EU face EU CBAM now. EU customers need emissions data from UK suppliers for quarterly reports through December 2025 and for certificate purchases from January 2026. UK CBAM does not change UK exporter obligations to EU customers.

UK importers from third countries face UK CBAM from January 2027. They must register with HMRC, obtain emissions data from suppliers, calculate embedded emissions, and submit quarterly returns with payment.

UK businesses trading both directions face both systems. Exporting to EU triggers EU CBAM obligations (through EU customer requirements). Importing from non-EU countries triggers UK CBAM obligations (direct compliance). Different reporting systems, different timelines, overlapping data requirements.

EU businesses exporting to the UK will face UK CBAM from January 2027 unless UK and EU agree mutual recognition. Currently no such agreement exists. This means EU producers already paying EU ETS costs will pay UK CBAM charges on exports to UK.

Calculation and Data Requirements#

Both systems require the same underlying emissions data. Direct emissions from production processes, indirect emissions from electricity consumption, and precursor material emissions. Calculation methodologies are substantially similar because both derive from ETS monitoring approaches.

Default values are published by both authorities when actual data is unavailable. Whether UK defaults will equal EU defaults is unknown. Treasury may set UK defaults based on different considerations than the Commission uses for EU defaults.

Verification requirements differ. EU CBAM requires mandatory third-party verification for actual emissions data from 2026. UK verification requirements are not yet finalised. HMRC may accept operator declarations or may require verification similar to the EU.

The same emissions data collected for one system can be used for the other. Companies should build unified data collection processes rather than maintaining separate systems for UK and EU reporting.

Enforcement Differences#

EU enforcement is administered by 27 national competent authorities, each with different procedures and penalty approaches within the framework of €10-50 per tonne for unreported emissions. Appeals follow national administrative law in each member state.

UK enforcement is administered by HMRC using standard tax penalty frameworks. Penalties follow established HMRC structures for late notification, late submission, inaccuracies, and late payment. Appeals follow HMRC’s standard tribunal process.

UK businesses familiar with HMRC processes may find UK CBAM enforcement more predictable than navigating 27 different EU national systems. EU businesses familiar with ETS administration may find EU CBAM more intuitive.

Potential for Mutual Recognition#

Could UK and EU agree to recognise each other’s carbon pricing systems and exempt bilateral trade from CBAM? This would require formal agreement through the Trade and Cooperation Agreement or separate arrangement.

Arguments for mutual recognition include trade facilitation, technical similarity of systems, and avoiding double carbon costs. Arguments against include sovereignty concerns, competitive dynamics, and political relationship complexities.

No mutual recognition currently exists or is under active negotiation. Companies should plan for both systems remaining separate rather than expecting alignment.