UK CBAM: What we know so far and what the government needs to consider

The EU launched its Carbon Border Adjustment Mechanism (CBAM) in 2023 to create a level playing field for emitters regardless of where they are based. With the launch, the EU demonstrated that such a policy can be implemented, proving its doubters wrong. Other countries are now exploring similar options, with the UK aiming to launch a similar policy in 2027. This insight discusses how a UK CBAM might look and what considerations the UK government will have to take into account when designing it. The exact specification will affect traders, including in the commodity markets.

This is Part 2 of a two-part insight series on UK CBAM. Part 2 presents what we know so far about the UK CBAM and what the government will need to consider now when finalising the design of a UK CBAM. Part 1 assessed the importance of the EU and the EU CBAM region covering the EU, Switzerland, Iceland, Norway and Liechtenstein as a trade partner for the UK and discusses why a UK CBAM is now high on the UK government’s policy agenda

Key characteristics of the UK CBAM: What we know so far

The UK CBAM is in the consultation phase, with major changes still possible. Based on existing government communications, it is possible though to get an idea of what the government is aiming for. The following table compares what we know so far about the UK CBAM with the EU CBAM.

Aligning the UK ETS with the EU ETS would be best for businesses but might not be what the government wants

Reducing or even eliminating carbon leakage to jurisdictions with lower carbon costs should be a major consideration when designing the UK CBAM, but supporting trade with the closest trading partners should also be a priority.

The UK’s decision to leave the EU was to a large extent driven by the desire to “take back control”, or in other words, being able to set its own rules. However, regulatory divergence from the EU has potential upsides and downsides. On the one hand, it allows the UK government to develop policies specific to UK needs, though on the other hand it introduces trade frictions.

This is not only true for financial services or, say, veterinary standards, but also climate and environmental policies, including the UK ETS and UK CBAM. The UK is not alone in that – other non-EU countries have had to strike the right balance for themselves as well.

Numerous non-EU countries are aligned with the EU CBAM

For example, since 2020, the Swiss ETS has been aligned with the EU ETS, allowing Swiss and EU emitters to use allowances from both trading schemes for compliance purposes. Larger, more liquid markets are generally more efficient than smaller markets. By design, the carbon price on both schemes is the same. To align, the scope of the Swiss ETS had to be broadened to include the aviation and power sectors. In January 2025, the Swiss government introduced further reforms, including new national and sectoral emission targets and the phase out of free allowances in the aviation sector, to reestablish alignment with the revised EU ETS (see above). As a result, imports into other CBAM countries from Switzerland are generally not covered by the EU CBAM regulations. However, the Swiss government decided against joining the EU CBAM and launching its own CBAM despite the fact that free allowances will gradually be withdrawn in the industrial sector as they will be on the EU ETS, potentially putting domestic industry at a disadvantage. This could change in the future. It also means that goods imported into Switzerland from a non-CBAM country cannot be re-exported into the CBAM area without meeting EU CBAM regulations. Meanwhile, neighbouring Liechtenstein joined the EU CBAM at launch.

As a member of the EEA, Norway has gone one step further than Switzerland and has been participating in the EU ETS since 2008 as part of its involvement in the EU Single Market. Norway decided against participating in the EU CBAM from its launch, but in October 2024 the government announced that it would join the EU CBAM at a later, yet undefined stage to further align its climate and trade policies with the EU. This will protect Norwegian businesses from carbon leakage risks and will make it easier to re-export goods imported from a non-CBAM country to another CBAM country in the future.

We expect the UK government to study these arrangements closely when designing its ETS.

UK-EU relations will shape the design of a future UK CBAM

Paying a carbon price on the UK ETS (even if the same as on the EU ETS) and having a UK CBAM would not in itself eliminate the need to fully comply with EU CBAM regulations. As argued above, only joining or aligning with the EU ETS would eliminate the need to comply with EU CBAM regulations.

In late-January it was reported in the UK media that the UK government was contemplating aligning the UK ETS with the EU ETS. If true, this would allow businesses to purchase allowances in both markets, driving down the cost for UK and EU-based businesses.

It would also exempt UK-based businesses from having to comply with EU CBAM regulation and exempt CBAM-based businesses from UK regulations, supporting trade and economic growth. However, to make this a permanent arrangement, the UK would have to agree to ‘dynamically align’ its policies with those in the EU. Whether the UK government is prepared to do so remains to be seen. Should the UK government agree to do so, it could then decide to join the EU CBAM (as Norway plans to) or tailor its UK CBAM to the country-specific circumstances. The greater the divergence from the EU CBAM, the more difficult it would be to re-export goods imported from a non-EU CBAM country to an EU CBAM country. It will be for the UK government to decide what the appropriate trade off ought to be.

For businesses in the commodity markets, 2025 should provide clarity on how the UK CBAM will evolve, including whether the UK government will be prepared to align its own arrangements with that of the EU. As set out above, this is mainly a political decision. With the UK and EU keen to cooperate more closely again in light of geopolitical tensions, there is now a greater possibility of this happening than only a few months ago.

If you would like to learn more about the EU CBAM, including the latest policy developments and what these might mean for your business, join our next CBAM Webinar on 30 April.