Understanding the UK CBAM and Its Impact on Businesses

Introduction

In an effort to address climate change and create a level playing field for industry, carbon pricing mechanisms are becoming an increasingly common feature of environmental regulation. One such mechanism is the Carbon Border Adjustment Mechanism (CBAM), introduced by the European Union and now being considered in similar form by the United Kingdom. The UK’s version of CBAM aims to reduce carbon leakage, support domestic manufacturers, and ensure that imported goods are subject to the same carbon costs as those produced locally. As businesses prepare for its implementation, understanding how the UK CBAM works and what it means for compliance is essential.

The Rationale Behind Carbon Border Adjustments

Carbon leakage occurs when production is shifted to countries with less stringent environmental regulations, leading to no overall reduction in global emissions. This undermines the effectiveness of local carbon pricing policies and can disadvantage businesses operating in countries with more ambitious climate goals.

To address this, carbon border adjustments place a carbon price on imported goods from sectors with high emissions. The goal is to ensure that these imports reflect the true environmental cost of their production, encouraging cleaner production methods globally and safeguarding domestic industries from unfair competition.

Key Features

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