Published

17 May 2024

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CFP Energy

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HMRC launch Consultation on UK CBAM

On 21 March the UK Government published the 'Consultation on the introduction of a UK Carbon border adjustment mechanism' asking industry stakeholders for feedback on the proposed import tax on carbon emissions embedded in defined goods.

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Stakeholders have until 13 June 2024 to respond and can further contact HMRC to participate in roundtable discussions and sector specific informal events. If your organisation imports or exports the following goods through the UK, it is vital that you understand the incoming regulations.

UK CBAM will add import taxes to the following goods that are imported and sold in the UK: aluminium, cement, ceramics, fertilisers, glass, hydrogen, iron & steel.

To access a team of experts who can help you prepare for UK CBAM, contact us here.

The consultation follows an announcement on 18 Dec 2023 that the UK will introduce a Carbon border adjustment mechanism (CBAM) from January 2027. It will be coordinated with other carbon leakage measures, including free allocation under the UK Emissions Trading Scheme (UK ETS), with the intention of creating a level playing field between domestically manufactured products and imports.

The UK ETS is a domestic carbon compliance market where operators in GHG-intensive sectors have to purchase UK allowances (UKAs) equivalent to their CO2 emissions.

By introducing the CBAM, the UK follows  the EU which introduced a CBAM in October 2023 – currently a reporting-only phase with carbon costs due to be introduced from 2026.

Other economies such as Canada, USA and Turkey are also considering similar policies.

Last year, the British public was asked to provide feedback on a CBAM’s role in ‘Addressing carbon leakage risk to support decarbonisation’ in the UK and as mechanism that could replace free allocation within the UK ETS.

The Scope of UK CBAM

CBAM Import

The UK CBAM will target products from the aluminium, cement, ceramics, fertilisers, glass, hydrogen, iron & steel sectors and only apply to imported goods released for sale on the UK market.

This scope differs from the EU CBAM, which excludes glass and ceramics but includes electricity.

The ultimate goal is to target products from all sectors covered by the two schemes.

A provisional list of products has been published in Annex A of the consultation.

Two categories of emissions will be accounted for as part of CBAM.

  • Direct emissions accumulated during the production process
  • Indirect emissions that are related to the production of electricity used in the production of precursor goods and complex goods, where further manufacturing results in a new product

Applicable emissions from nitrous oxides and perfluorocarbons, as within the UK ETS, will also be exposed to the tax but expressed in carbon dioxide equivalents (CO2e).

The emissions embodied in goods will be determined on the basis of global average emissions values, weighted by production volumes of embodied emissions intensities of the UK’s main trading partners and applied as default values when import reports are processed on the registry.

Who Holds CBAM Liability?

UK CBAM

After completion of the customs import process, the person responsible for the release of the goods into the UK becomes liable for the tax.

The UK Government currently is proposing aluminium value threshold of £10,000 for total imports over a period of 12 months. The point of obligation applies from when one of two cases is met:

  • The importer predicts the £10,000 threshold to be surpassed (prospectively) within a scheme year
  • The threshold has been passed (retrospectively)

 

CBAM Accounting period

EU CBAM

The first accounting period will be annual from 1st January 2027 - 31st December 2027.

The first deadline for submitting a CBAM report and payment for the first accounting period (i.e. 2027) will be the 30 May 2028.

From 2028, each accounting period will be per-quarter per-year. By end of this period liable persons (or their tax agent) will have to submit a CBAM report and pay for their liabilities.

Rolling annual compliance cycle from 2028:

Accounting period ends Returns and payments due
31 March 30 April (30 June for 2028)
30 June 31 July
30 September 31 October
31 December 31 January

Table 1: Timetable for returns and payments (Source: CFP Energy/HMRC

For 2028 the quarterly deadline may be pushed to 30 June to give importers more time between the annual report for 2027 and the first quarterly report for 2028.

CBAM Fees

The effective UK carbon price applied by the CBAM will be known as the “UK CBAM rate”.

The UK CBAM rate will be applicable per tonne of embodied emissions attributed to CBAM goods.

The government proposes having an individual UK CBAM rate for each of the seven sectors of goods in scope of the CBAM and that these rates will be set by the government at the beginning of each quarter

The UK CBAM rate will be based on the average UK ETS Auction price in the preceding quarter to which the goods were imported, adjusted for free allocation and any other support that sectors receive.

This cost must be paid for one month after the end of each accounting period (see table above) using an online system. The system will determine how much the importer must pay based on the weight-per-tonnes of imported goods.

Importers will be eligible for fee reductions if a carbon price (“the overseas carbon price“) was already paid in the country of production.

Unlike its European counterpart, the UK CBAM does not have a transitional period, leaving importers immediately exposed to reporting and carbon pricing from 2027.

The EU scheme allows for the purchase and holding of CBAM certificates for current or future compliance, while the UK CBAM will function on a "buy to comply” basis, with full payments due every quarter.

Legal and Penalties

While entities will be legally liable to register on the UK CBAM registry, HMRC also provide the right to forcefully register liable persons where they have been identified.

HMRC have further proposed that liable persons will have to keep tax import records for a minimum of 6 years and make these available to the authorities upon request.

The level of penalty for non-compliance with CBAM obligations is yet to be determined but will likely closely resemble penalties applied for tax evasion and non-compliance in the UK ETS.

Next Steps

HMRC have announced they will launch a CBAM online service where entities will register and later on submit returns and payments.

Further consultations are expected over the course of 2024, which will include decisions on the list of products in scope (See provisional list in Annex A).

Once the detail of the scheme is clarified and assuming the CBAM rate remains linked to UKA auction prices, importers who want early CBAM cost certainty could look to purchase UK Allowances as a hedge against future CBAM costs.

With over 15 years trading experience in carbon compliance markets, CFP Energy can help importers understand the impact of CBAM on their business and put in place solutions to help manage future CBAM Costs.

Contact our team, here.

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