The carbon border adjustment mechanism (CBAM) is just another tariff on imported materials, many of which are essential inputs for UK industry but are no longer made in the UK.

By Catherine McBride OBE

About the Author

Catherine McBride is the CEO of the Great British Business Council. Catherine McBride is an economist specialising in trade. Catherine served on the UK’s Trade and Agriculture Commission from 2021 to 2024, scrutinising the UK’s trade agreements with Australia, New Zealand and the CPTPP. She received her OBE for her work explaining economics and trade to both politicians and the public. Before working in trade policy, she was a derivatives trader covering global commodity markets from London. Catherine has written several think tank papers on economics, trade, and taxes; authors her own Substack, Catherine McBride’s Substack; writes for Briefings for Britain, Global Britain, and The Critic; and appears regularly on TV, radio, and podcasts. The following paper is an updated version of her recent paper for the GWPF entitled CBAM: Market-based or Market Bust; covering the most recent information about the EU’s and UK’s versions of CBAM.

About the Publisher

The Great British Business Council was established to enhance public and political understanding of the advantages a thriving business community provides to the UK’s security, standard of living, and wellbeing. It aims to support British firms and small businesses by promoting well-crafted, practical, evidence-based policy reforms that foster enterprise and innovation. It is independent of any political party, as it hopes that all parties will consider adopting the straightforward, practical policy suggestions it proposes.

The GBBC is funded by private donations from concerned citizens who want the UK to thrive economically, as it once did.

If you would like to join us or donate to our cause, please contact us at: [email protected] or follow us on LinkedIn, X, Facebook, YouTube, Instagram, and Bluesky.

Previous reports from the Great British Business Council

• Premeditated Industrial Destruction: How the UK destroyed its industry and the path to reverse this
• Unconditional Surrender! The EU Reset is bad for British taxpayers, British youths and British business

Contents

• Executive summary
• Introduction
• Chapter 1. Externalities and common solutions
  • Common solutions to negative externalities
  • Balancing economic activity and externality solutions
• Chapter 2. Emissions Trading Schemes
  • What are Emissions Trading Schemes?
  • Who gets the money raised by an ETS?
  • Which industries must buy emissions allowances?
  • Air Travel – a slightly more market-based emissions market
  • Other international emission schemes
  • The UK ETS vs the EU ETS
• Chapter 3. Carbon emission tariffs – CBAM!
  • What is a Carbon Border Adjustment Mechanism?
  • The Conservative and Labour CBAM proposals
  • The EU’s CBAM
  • EU Article 9 discounts
  • EU CBAM calculations
  • Emissions default values – according to the EU
  • Comparative advantage without joining the EU’s ETS and CBAM
  • The UK’s current and previous CBAM proposals
  • Which CBAM and ETS should businesses prepare for?
• Chapter 4. UK production of commodities covered by CBAM
  • Alternative CBAM commodity choices
  • Aluminium
  • Fertilisers
  • Iron and Steel
  • Cement
  • Hydrogen
• Chapter 5. Alternatives to CBAM
• Chapter 6. Conclusions
• Annexe 1: How UK ETS, CPS, and CCL charges are calculated

Executive summary

• It appears the UK is getting a Carbon Border Adjustment Mechanism (CBAM), whether it needs one or not, even though neither the current EU CBAM nor the proposed UK CBAM will protect UK industry. In fact, both will increase costs for downstream users of imported steel, aluminium, and fertilisers. But they will not protect the UK’s valuable chemical, ceramic, or glass industries.
• Both the UK and EU have Emissions Trading Systems (ETSs) and CBAMs, but they differ significantly in price and operation. The UK Prime Minister still wants the UK to join the EU’s ETS and CBAM, even though this would increase import prices for UK industry. Meanwhile, the UK’s HMRC is still planning to start the UK’s CBAM program from January 2027.
• The UK CBAM is based on imported value and has a single product default value for all import suppliers, while the EU CBAM is based on weight and has a different emission default value for every major exporting country and each CBAM product at the 10-digit HS code level.
• The UK’s ETS price is around 20% cheaper than the EU’s ETS price. Joining the EU’s ETS will push up carbon prices for all UK manufacturing and construction industries.
• The UK has largely stopped producing the products covered by both the UK and EU CBAMs. Imposing a CBAM now will only harm upstream manufacturers that rely on these imports to make higher-value goods.
• Both the UK and EU CBAMs are designed to equalise the carbon cost of domestically produced goods with the carbon costs of imported goods, but this only works if the goods are still produced domestically at a competitive price.
• Neither the UK nor the EU CBAMs compensate for the other environmental taxes and levies applied to UK manufactured products.
• A CBAM will not compensate manufacturers for the UK’s higher commercial gas prices, which include the Climate Change Levy and Carbon Price Support. In September 2026, UK gas prices are 8.5 times higher than US natural gas prices. This differential has doubled since the closure of the Strait of Hormuz.
• The UK’s Jackdaw gas well was ready to start production in 2026, but the Labour government withdrew its approval and delayed re-approving it to stop the Green Party winning a by-election.
• UK carbon taxes have only increased domestic production costs, making UK companies less competitive internationally and forcing many to close or relocate their manufacturing plants out of the UK. The UK has replaced domestic production with imported goods, many of which are made in countries that primarily rely on coal for energy.
• Of the five proposed CBAM commodities, only the UK’s cement industry and budding hydrogen industry could possibly benefit from CBAM protection now, as the majority of cement and hydrogen used in the UK is still produced domestically.
• A CBAM will not make UK production of either cement or hydrogen more efficient as long as the UK continues to have expensive industrial electricity and imposes high emissions taxes on these industries. Instead, a CBAM could provoke a trade war with the UK’s most important import suppliers.
• Glass and ceramics, two commodities previously proposed for CBAM protection by the former Conservative government, could have benefited from CBAM protection. But lower energy costs would benefit glass and ceramic producers far more. The Labour government is offering £120 billion in support to prevent these industries from closing, but another glass manufacturer went into liquidation as we were writing this paper. The Government compensation scheme cannot make up for the UK’s gas prices, which are now over 8 times the US natural gas price.
• Neither the UK’s nor the EU’s CBAM will cover chemicals other than those used to make fertiliser, even though the UK no longer makes these products. Meanwhile, INEOS has announced that it is closing its Acetyl plants in Hull because of the high gas and carbon taxes in Europe, making it impossible to compete with imported chemicals from the US and China.
• Increasing taxes on activities that produce externalities is the least effective way to reduce the externality, if that is the aim. Taxes rarely stop the externality, and governments have a vested interest in keeping the externality going while collecting revenue from the supposed virtuous intention of reducing it.
• Emissions Trading Schemes are not ‘market solutions’ to CO₂ emissions, as only the government can issue allowances: effectively mandatory licences to emit Greenhouse Gases (GHG)_, but sequestration companies that are genuinely reducing CO₂ cannot monetise their emission reductions on the ETS market.
• Most UK manufacturing industries must buy ETS allowances; many receive some free allowances from the government, while service industries are exempt. This is effectively the government ‘picking losers’ – industries whose products will be replaced by imports.
• Any emissions trading system should include a product’s expected lifespan in its emissions calculations. Currently, aluminium used to make a plane wing that could last 30 years is taxed at the same rate as aluminium used in a drink can that will last for about 30 days.
• Scrap both the ETS and CBAM entirely, and instead, accelerate innovation using tax deductions for more efficient plant and equipment. Much of the UK’s low industrial competitiveness stems from its outdated factories, blast furnaces, smelters, refineries, and power plants. Taxing their emissions has left companies with insufficient cash flow to invest in plant and equipment upgrades.
• If low-emission technologies become cheaper, more productive, and more reliable than existing technologies, businesses and consumers will adopt them voluntarily. The principal policy objective should therefore be to reduce the cost of innovation and investment in order to reduce emissions.
• Reducing CAPEX costs is key to both improving competitiveness and accelerating innovation. Competitive markets make it easier, cheaper, and faster for competitors to deploy innovations leading to lower emissions.
• It will always be in a manufacturer’s interest to operate as efficiently as possible. It will always be in a country’s interest to have efficient industries by accelerating innovation, efficiency, and technological transition, simply by reducing costs and burdens.

Introduction:

The current UK government is divided in its attitude to emissions trading and carbon tariffs on imported goods: one side of the government wants the UK to join the EU’s Emissions Trading System (ETS) and its Carbon Border Adjustment Mechanism (CBAM), while the UK’s Revenue and Customs department (HMRC) is still publishing policy papers about the UK’s own CBAM proposal that is meant to start in January 2026, just 3 months away.

This paper reviews the UK’s current CBAM proposal, the previous government’s proposals, and the EU’s CBAM, comparing how the schemes are calculated, how they would affect the essential import materials of the UK’s most important industries and whether the UK needs to join the EU’s scheme to protect its exports to the EU.

This paper also analyses the industries covered by both the EU’s and the UK’s proposed CBAM; in most cases, UK carbon taxes have already led these industries to close or offshore their production. Introducing a CBAM now will only increase costs for downstream commodity users, generally much larger industries and important exporters, whose products will be made less competitive internationally by the CBAM’s impact on their input materials.

Finally, the paper discusses more effective free-market solutions to reduce industrial GHG emissions while improving productivity through innovation and lower CAPEX costs. Encouraging innovation and investment in new, more efficient plant and equipment is an effective way to lower emissions and is likely to yield better results than protecting inefficient equipment and production methods with carbon tariffs on imported materials. This is especially true for carbon taxes on imported materials that are necessary inputs for the UK’s larger and more valuable downstream industries.

This paper does not question whether CO₂ is beneficial or detrimental to the environment, but rather whether paying for externalities, such as CO₂ emissions, through carbon taxes, an Emissions Trading Scheme (ETS) or adding a Carbon Border Adjustment Mechanism (CBAM) to imported goods achieves its intended aims of reducing emissions or whether these measures have become just another tax and are detrimental to UK industry and the UK economy.

Chapter 1. Externalities and common solutions

An externality occurs when a market transaction affects people or communities not involved in the transaction. Externalities can be positive or negative, and a single externality may be positive for some people, but negative for others.

Most economists agree that negative externalities should be reduced, but disagree on how to do so effectively. There is currently a trend toward imposing taxes on them, but this rarely deters the behaviour that caused the externality. Instead, the tax becomes a useful revenue stream for governments, which get used to the additional income, so they have a vested interest in keeping the externality going despite claiming that they are trying to stop it.

While people rarely complain about positive externalities and often take them for granted without realising they are a windfall from someone else’s effort or transaction, they rarely accept negative externalities as part of life. Negative externalities generally create a case for the government to either regulate the activity; tax it to make it more expensive and, presumably, less popular; or use alternative methods to prevent it from causing the negative externality.

Externalities can flip from negative to positive. For instance, when a neighbouring house is renovated, neighbours suffer the negative externality of construction noise and traffic disruption, but they may also benefit from a positive externality when the house is finished if the renovation increases house values on the rest of the street.

Similarly, whether an externality is positive or negative depends on the affected party. For example: the construction of a new airport, together with a highway or train line for air passengers to reach and depart the city, would have a positive externality for people living near the highway or train line, as they would benefit from improved connections to the city centre. However, people living under the new airport’s flight path would suffer a negative externality: increased noise pollution. Whether an externality is positive or negative often depends on the attitudes of the parties involved.

Common solutions to negative externalities

1. Taxes

In the UK, many activities are taxed to reduce externalities. For example, taxing drivers who drive into central London to discourage traffic congestion; taxing cigarettes to lower healthcare costs; and adding carbon taxes to electricity production to make electricity more expensive, so people use less of it and reduce greenhouse gas emissions from electricity production.

At least that is the theory.

In April 2001, the UK introduced the Climate Change Levy (CCL) on businesses for gas and electricity consumption on a per-kWh basis.¹ This was supposedly to reduce the externality of CO₂ emissions and encourage UK businesses to use less energy and become more efficient. The EU subsequently introduced the Emissions Trading Scheme (ETS) in 2005, and then the UK added its Carbon Price Support (CPS) carbon emissions tax in 2013. All were meant to curb industrial CO₂ emissions. However, energy is essential for industry. So although the taxes caused UK emissions to halve since 1990; unfortunately, the manufacturing share of the UK economy did as well. UK manufacturers have just moved their production to countries without carbon taxes.

We shouldn’t be surprised by this result; taxes on externalities generally don’t work and end up serving only as a source of government revenue. For instance, the Fuel Duty Escalator was introduced in 1993 and explicitly linked to environmental goals.² The duty was intended to increase annually at a rate above inflation to discourage fuel consumption and reduce carbon emissions from internal combustion engine (ICE) cars. Consequently Petrol Duty became an essential part of HMRC’s revenue.

Now the government has legislated that all new cars must be EVs by 2035, but EV’s don’t use petrol or diesel, so the government is introducing a pay-per-mile road tax for Electric Vehicles (EVs) and plug-in hybrids, called the Electric Vehicle Excise Duty (EVED). The Fuel Duty Escalator was designed to encourage people to drive less and lower emissions. But now that EV use will achieve this aim, fuel duty will continue under a new name, because it has become indispensable to government revenues.

The new EVED duty will start in April 2028 and will be priced at 3p per mile for EVs and 1.5p per mile for plug-in Hybrids, and the OBR expects it to raise £1.1 billion in its first year of operation.³ The OBR also expects the new tax to reduce EV sales by 440,000 vehicles by 2031. Ironically, the tax designed to discourage ICE vehicles and promote EV use is now being replaced by a new tax that is predicted to discourage EV use.

Some environmental taxes introduced to discourage activities that produce negative externalities have often generated their own externalities when people avoid paying them. For example, fly-tipping is endemic in the UK due to the costs and regulations associated with legally disposing of construction waste and other unwanted household items.⁴ There were 1.15 million fly-tipping incidents in England in 2023/24, up 6% from the year before, costing local councils over £13.1 million to clear.⁵

2. Prohibitions

If the mission is to remove a negative externality, prohibitions are more effective than taxes when rigorously enforced. Examples include bans on leaded petrol, smoking in enclosed public places, and child labour. However, this imposes a cost on the government, which must enforce the ban but receives no financial benefit unless it imposes substantial fines for violations. Thus, the government tends to prefer taxes to prohibitions. Governments generally prefer the revenue stream and political gain from ‘virtuous’ taxation rather than the cost of enforcing more effective prohibitions that do a much better job of eliminating the externality.

3. Regulations

Regulations sometimes work if, like prohibitions, they are rigorously enforced. For example, the U.S. Environmental Protection Agency introduced greenhouse gas emissions standards for passenger vehicles and light trucks for models manufactured from 2023 to 2026. The standards reduce emissions from 202 grams of CO₂/mile in 2023 to 161 grams of CO₂/mile in 2026.⁶ These are expected to prevent 3 billion tons of GHG emissions through 2050 if the limits are met.

Similarly, the American Innovation and Manufacturing Act of 2020 requires an 85% reduction in hydrofluorocarbon (HFC) use by 2036.⁷ HFCs are used in refrigeration, air conditioning, aerosols, fire suppression, and semiconductor manufacturing. HFCs were developed as a replacement for CFCs, which had the unfortunate externality of depleting the ozone layer. However, HFCs are synthetic greenhouse gases with high global warming potential. Thus, the solution to one externality has produced another and must now be phased out.

4. Promoting alternative goods or processes

Another way to reduce negative externalities is to promote or subsidise alternative activities so they are cheaper and thus preferable to the activity that produces the negative externality.

The most obvious example is the UK’s subsidies of up to £3,750 for the purchase of a new EV priced under £37,000 as well as preferential company car tax rates and other discounts, including reduced congestion charges and parking fees for EVs. ^8,9 These subsidies are designed to make driving an EV cheaper than an ICE vehicle, but if electricity is more expensive than petrol, or if people lack off-street parking or access to fast charging facilities, the initial financial incentive to buy an EV is largely lost.

5. Emission allowances and tariffs

In the case of greenhouse gas emissions, several countries have adopted a semi-market-based system in which companies with high CO₂ emissions can buy permits for their emissions, effectively a licence to pollute. In a true market, individuals or companies that own businesses or land that sequesters carbon dioxide would sell these emission permits. Unfortunately, in the UK’s and the EU’s Emissions Trading Schemes (ETSs), the national government is the only qualified seller of emission certificates and collects the revenue raised by the ETS; hence, this is accurately referred to as a carbon tax.

The UK’s and EU’s ETSs are pseudo-markets because the UK and EU governments mandate purchases and control the number of allowances they auction, intending to raise prices over time by reducing the number of allowances they allocate. The UK and EU governments also lower costs for some industries by giving out ‘free allowances’ to those they want to protect or keep operational in the country. As we have seen in the UK and the EU, many businesses that aren’t protected or given free allowances simply relocate their factories to jurisdictions without carbon taxes. Companies that do so will often also benefit from lower wages, lower employee obligations, and fewer other environmental restrictions.

The UK has made offshoring production even more attractive by introducing a tax on electricity generated from hydrocarbon fuels. Not only do UK businesses have to pay Climate Change Levies on their energy use and purchase emissions allowances on the ETS market, but the UK also made its electricity more expensive than other EU countries in 2013 by the addition of a tax on electricity generated using hydrocarbons, called the Carbon Price Support (CPS). This tax is passed on to electricity users through higher prices. It was designed to reduce coal-fired electricity by ensuring a minimum carbon price for UK power generators. The last coal-fired electricity generator closed in 2024, but the tax has remained in place and will not be removed until April 2028. CPS liability is the amount of CO2 emitted per unit of fossil fuel used, multiplied by the CPS rate, which the UK Treasury sets annually.¹⁰

Offshoring manufacturing to carbon-tax-free countries is known as carbon leakage. To combat this ‘carbon leakage’, the EU has introduced a new tariff based on the greenhouse gas emissions of imported materials. This tariff is called the Carbon Border Adjustment Mechanism (CBAM). The UK Government also proposes introducing a CBAM from January 2027, and the Labour Government has recently published a policy update on the Conservative Government’s proposed CBAM.¹¹ Both the current Labour and the former Conservative Governments believe a CBAM on imports would protect UK industries that must purchase emission allowances on the UK’s ETS market and compete with imported goods produced in countries without carbon taxes.¹²

At the same time, another part of the current Labour Government has also proposed that the UK should join the EU’s ETS and CBAM, even though the EU ETS is more expensive and the EU CBAM is more complicated. This will be discussed in more detail in Chapter 4.^13,14

6. Promoting investment in efficient equipment and innovation

The most effective way to reduce an externality is to encourage innovations that eliminate it, and to encourage industries and manufacturers to adopt them. If low-emission technologies become cheaper, more productive, and more reliable than existing alternatives, businesses and consumers will adopt them voluntarily.

The principal policy objective should therefore be to reduce the cost of innovation and investment while increasing the rewards for successful emissions-reducing technologies. This is the opposite of taxing emissions, which reduces the money available to manufacturers for investment in research and development and new equipment. Studies show that competitive markets make it easier, cheaper, and faster for competitors to deploy innovations and decarbonise faster than regulated markets.

For example, the average internal combustion engine car in 2025 is more than twice as fuel-efficient as one in 1975. The average fuel efficiency of a 1975 car was just 13 miles per gallon (MPG), but it is now 28 MPG.¹⁵ This figure includes cars, SUVs, and pickups. The modern ICE car also produces 95% less CO, 90% less NOx, 99% fewer hydrocarbons, and 99% fewer particulates than a 1975 car. Encouraging drivers to upgrade to the latest ICE vehicles would significantly reduce fuel consumption and harmful emissions, and may well be an easier ‘sell’ than EV mandates, which force drivers and company fleets to convert to EVs. Forced conversion to EVs is especially difficult if drivers regularly travel long distances or don’t have off-street parking and easy access to cheap, fast charging.

Encouraging upgrades to modern ICE cars also avoids placing excessive strain on the UK’s electricity grid. The recent summer of record temperatures in 2026 forced the UK to increase its gas electricity generation to cope with increased air conditioning use, negating any CO₂ reduction from drivers converting to EVs. If all UK drivers had converted to EVs, the country would have ground to a halt. Fuel-efficient ICE cars would not have put this pressure on the electricity grid and would have been cheaper for the economy; to cope with the extra demand, NESO was forced to pay 20 times the price for imported electricity in June 2026 than it paid in June 2025.¹⁶

Similarly, industrial machinery, plant, and equipment have become more fuel-efficient and safer, and produce fewer emissions. Innovation drives energy efficiency, which lowers costs and, serendipitously, emissions. Reducing business costs is key to both improving competitiveness and accelerating innovation.

One way to encourage this is by tax deductions or tax rate cuts for investments in the latest, most efficient plant and equipment, which accelerates decarbonising innovation. Much of the UK’s lack of industrial competitiveness stems from its outdated factories, old blast furnaces, smelters, refineries, and power plants. High carbon taxes and high industrial electricity and fuel costs have left UK companies with insufficient cash flow to invest in upgrades; replacing the taxes with tax rate cuts for new equipment investments would reduce emissions while boosting GDP.

It will always be in a manufacturer’s interest to operate as efficiently as possible. And it will always be in a country’s interest to have efficient industries.

Balancing economic activity and externality solutions

Apart from complete prohibition, the methods listed above don’t prevent externalities from occurring, although some help reduce them. But unless an alternative process or method is readily available, prohibition would also prevent consumers from benefiting from the activity, thereby creating another externality. Examples of effective prohibitions include banning leaded petrol, smoking indoors, and child labour, which all worked because effective alternatives were available: unleaded petrol, smoking outdoors, and mechanised production.

However, the government cannot prohibit all CO₂ emissions, as this would prohibit: most manufacturing industries; 34% of UK electricity production; 78% of UK domestic heating; 80% of UK cars; 96% of UK vans; 99% of UK trucks; and almost all nitrogen-based fertilisers. So, the negative externality to the UK population of lost goods and services and lost jobs and incomes would be immense, far exceeding the cost of the externality. This is why reducing CO₂ emissions has been so difficult.

The economy cannot function without hydrocarbon-based energy, manufacturing, food production, transport, and heating. Therefore, we cannot simply ban greenhouse gas emissions. But taxing emissions and emissions trading schemes haven’t worked either – at least, they haven’t worked if the intention was to lower global emissions (see Figure 1, below). However, they have pushed up UK prices of energy, manufactured goods, food production, transport, and heating, and have helped industrialise China and other developing Asian economies. Although unintended, development and rising incomes in Asian countries have done more ‘global good’ than cutting CO2 emissions would have.

Unfortunately, much of the purported emissions reduction has merely shifted emissions from the developed world to the less developed world, as is evident in Figure 1 below. There has also been considerable greenwashing, with companies in developed countries purchasing ‘carbon credits’ from purported owners of fictional forests in South America.

Figure 1: Global CO₂ emissions by country

Chapter 2. Emissions Trading Schemes

What are Emissions Trading Schemes?

Emissions trading schemes are systems in which firms that emit CO₂ or other greenhouse gases during production are required by their governments to purchase allowances for each ton of CO₂ they emit, either through a government-run auction or in the secondary market. The government caps total emissions by limiting the number of CO₂ allowances it issues each year.

Any firm whose production is covered by the Emissions Trading Scheme (ETS) must measure and report its greenhouse gas emissions for the year. An independent auditor must verify this. The firm must then surrender allowances equal to its actual emissions. Each allowance equals 1 tonne of CO₂e (carbon dioxide equivalent). If firms do not surrender enough allowances, they will be fined and must buy the required allowances on the market. This imposes considerable costs on companies, not only for purchasing allowances but also for measuring, reporting, and auditing their emissions.

Who gets the money raised by an ETS?

Revenue from the UK’s ETS auctions goes into the UK Treasury’s general funds. There is no legal obligation to allocate the funds to climate programs. However, the UK ETS scheme only raised £2.2 billion in 2023/24 and is forecast to raise £3.6 billion in 2024/25. The UK gave away about 38% of its ETS allowances for free in 2023 to support carbon-intensive industries. The UK government currently subsidises environmental initiatives by much more than the ETS raises.¹⁷ The UK spends between £45 and £50 billion per year on environmental and Net Zero-related schemes, ranging from new nuclear and renewable electricity subsidies to the Warm Home Plan.^18,19

Some ETS schemes require that the proceeds from the sale of emission allowances be used for environmental purposes. For example, an EU directive requires that 100% of auction revenue from allowances be allocated to low-carbon or energy-efficiency purposes. This was increased from 50% in 2023. EU directives are not regulations, but EU member states must transpose them into domestic legislation in a way that achieves the directives’ objectives and complies with them. The money raised by the ETS auctions in the EU is collected by the Member States, who get to keep about 90% of it, with the rest paid to EU funds.²⁰ For example, in 2023, the EU ETS raised €43.6 billion, of which about €38.6 billion was kept by EU Member States, and the rest went into the EU Innovation Fund and its Modernisation Fund.²¹ The EU allocates 43% of its allowances free of charge to industries at risk of carbon leakage, such as chemicals, cement, steel, aviation, and aluminium. These free allowances are being phased out from January 2026 to 2034 as they are replaced by the EU’s Carbon Border Adjustment Mechanism.

Which industries must buy emissions allowances?

Not all industries and activities are covered by ETS schemes. Emissions from energy use and industrial processes are generally covered, whereas emissions from administrative, office, and general business operations are not.

In the UK, power generation from coal, gas, oil, and biomass plants is covered by ETS, as are emissions from the production of steel, cement, ceramics, chemicals, pulp and paper, and aluminium. However, Energy Intensive Industries (EIIs) that produce steel, aluminium, cement, glass, chemicals, fertilisers, paper, plastics, ceramics, and industrial gases receive partial compensation for indirect ETS and Carbon Price Support (CPS) costs that are passed on through their electricity costs. EIIs can also receive a 92% discount on the main CCL rate if they have signed up to a Climate Change Agreement (CCA), which requires companies to have an auditable emission reduction target. But EII status does not exempt companies from paying their ETS, CPS, or CCL for their direct emissions.

To apply for compensation, EEI companies must manufacture in an eligible product sector, and the price impact of the UK ETS and CPS on the business’s electricity costs, as a proportion of its GVA over a 5-year average, must be more than 5%.²²

In the UK, domestic flights and flights to EEA countries are covered by the ETS, while the UK ETS will cover domestic shipping for vessels over 5,000 gross tonnes from July 2026, but not international shipping. In the EU, domestic and intra-EEA flights, as well as flights to the UK and Switzerland, are covered by the ETS. The EU ETS now also covers domestic and international shipping.

The UK ETS scheme does not cover service industries, but the electricity and heating they use are subject to ETS payments; the associated costs are passed on to consumers.

CO2 emissions payments are costly for businesses, not only because they must buy ETS allowances but also because they must measure, monitor, and audit production emissions. For many small and medium-sized enterprises, compliance costs are as significant as ETS charges. For large and very large non-domestic users, who use 20,000 to 70,000 kWh and 70,000 to 150,000 kWh annually, ETS payments are an enormous expense.

Lifespan emissions, not production emissions

Most ETS schemes only consider the emissions from the initial production of a good and not its potential life span, so the emissions from aluminium that could be used in a building that will last for 50 years, or in a plane that will last for 30 years, are charged the same ETS per tonne as the emissions from making an aluminium drinks can that may last for a few months at most. Similarly, aluminium that can be recycled a dozen times will be charged for the emissions generated by each recycling process, even though recycling saves resources and is generally considered to be good for the environment and should be encouraged.²³

Primary aluminium emissions are about 10 tonnes of CO₂ per tonne of primary aluminium produced, depending on the grid electricity mix, as 85% of the emissions from primary aluminium production come from the electricity used in its production.²⁴ In contrast, recycled aluminium emits only about 1 tonne. However, someone needs to have made the aluminium before it can be recycled.²⁵

Air Travel – a slightly more market-based emissions market

The UK ETS applies to domestic flights and to flights from the UK to the EU, EEA, and EFTA countries (Norway, Iceland, Liechtenstein, and Switzerland). Return flights from these locations to the UK are subject to the EU ETS. Airlines operating UK-EU routes must monitor their emissions and purchase allowances from the UK and the EU.

Long-haul flights between the UK and non-EU routes are not subject to UK ETS obligations, although they may be subject to CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation) requirements.²⁶ The International Civil Aviation Organisation (ICAO) administers this carbon-emission offsetting scheme and requires airlines to offset growth in their emissions against their 2019 baseline. National regulators enforce this, such as the UK Environment Agency in the UK. CORSIA requires Airlines to calculate the difference between their current emissions and their 2019 emissions and buy offsetting carbon credits from Approved Offset Programs, such as the UN Clean Development Mechanism (which allows industrial countries to fund emission-reduction projects in developing nations to earn carbon credits²⁷), VERRA (Verified Carbon Standard)²⁸, Gold Standard (founded by the WWF)²⁹, or the American Carbon Registry (US Non-Profit) and Plan VIVO (UK NGO).³⁰

Other international emission schemes

The US has no federal ETS. The US federal system relies on Environmental Protection Agency regulations and subsidies for environmental initiatives.³¹ However, California implemented its own Cap-and-Trade system in 2013, which covers power plants, large industrial facilities, and fuel distributors and accounts for about 85% of California’s emissions. California gives away about half of its allowances to utilities and industry, and auctions the other half. California must use 35% of its cap-and-trade revenues to benefit disadvantaged communities, with the remaining 65% allocated to clean transportation and energy efficiency.

Washington State has also launched a Cap-and-Trade system modelled on California’s. Twelve Northeastern and Mid-Atlantic states have formed a Regional Greenhouse Gas Initiative (RGGI) to cover CO₂ emissions from large power plants.³² The RGGI auctions almost all of its allowances.³³

Other countries also have ETS schemes of a sort, but the allowances are mainly free. This somewhat defeats the purpose of an emissions trading scheme, although it does require companies to measure and monitor their emissions, which adds costs to production. For example, China has introduced an ETS, but almost all of its allowances are allocated for free; it plans to gradually shift to an auction system. South Korea’s ETS has about 90% free allowances, while New Zealand has also introduced an ETS but provides free allowances to emissions-intensive, trade-exposed industries.

The UK ETS vs the EU ETS

In March 2002, when the UK was an EU member, the Blair government launched a voluntary national UK Emissions Trading Scheme and played a pivotal role in designing the EU-wide mandatory system launched in 2005. After leaving the EU in 2020, the UK established its own ETS in 2021.³⁴ In 2025, the Starmer Government announced that the UK would rejoin the EU’s ETS even though it is more expensive and covers more sectors than the current British ETS.

The UK ETS

The UK’s ETS is smaller, covering fewer than 600 industrial sites. Of these, 385 received some amount of free allowances.³⁵ Ninety-five received no free allowances in 2026 but have in the past, while UK electricity generators, some waste incinerators, Combined Heat and Power units and industrial boilers have never qualified for free emission allowances and must cover all their emissions by buying allowances at the Government’s auctions or on the secondary or ICE futures market. The UK’s total allowances are capped at 77.4 million in 2026, down from 92 million in 2024. Each allowance equals 1 tonne of CO₂ equivalent.³⁶ The first allocation period, 2021 to 2026, had a total cap of 712 MtCO₂e, but for 2027 to 2030, the total allocation has been reduced to 224 MtCO₂e. The UK ETS Authority governs the UK’s scheme.³⁷ The UK allocates free allowances to companies facing international competition from manufacturers based in countries with less stringent emissions regulations.³⁸

The UK’s ETS auction price on 26 November 2025 was £57.03 per tonne. Since leaving the EU and establishing its own ETS, the UK price has generally been lower than EU prices. This reflects the UK’s deindustrialisation since the introduction of the Climate Change Act in 2007. However, since the announcement that the UK could join the EU scheme, the UK’s ETS price has increased from an average of £45.78 per tonne in April 2025 to £57.42 per tonne in November 2025, and to a high of £68.26 per tonne in January 2026.³⁹ The current December 2026 futures price has fallen back to £55.53 per tonne, as of June 2026.⁴⁰ The UK ETS auctions are held every fortnight, with companies bidding for 2,074,500 allowances. ETS auctions require UK companies to pay HMRC between £200 and £280 million each month, reducing their capital for investment and disrupting their cash flows. The ETS has become another tax on businesses; it increases production costs, which companies pass on to consumers.

The EU ETS

In contrast, the EU ETS covers over 16,000 stationary industrial sites in the EU and the EEA, 1,600 aircraft operators, and 2,600 maritime operators.⁴¹ The EU issued 934.5 million allowances for stationary installations, maritime and aviation operators. This is the number after the reduction for unused allowances still in circulation and the Market Stability Reserve’s automatic supply adjustment.⁴² The EU issued no free allowances to maritime and aviation operators in 2026, but issued 481 million free allowances to stationary installations in 2025 (the most recent published numbers). Consequently, the EU’s ETS price was over €90 per tonne in January 2026, but fell back to €76.94 per tonne on 5 June 2026.⁴³ EU Member States allocate their free allowances to their industries in accordance with EU regulations set by the EU Commission.⁴⁴ Free allowances may be granted to industries susceptible to import competition from countries without an ETS or with a lower ETS price. The industries covered include Steel, Cement, and Chemicals, which receive 100% free allowances, whereas less-exposed sectors receive a smaller proportion of allowances, down to 30% in 2026, and this will fall to zero in 2030. The EU will phase out its free allowances from 2026 to 2034.

Despite the UK’s faster allowance reductions, UK ETS prices have remained below those of the EU ETS, and the spread between them is highly volatile. For example, the EU’s ETS auction price was over €90 per tonne in January 2026, equal to about £79.21, so about 17% above the UK price of £67.55, but in March the EU ETS auction price was 64% higher than the UK auction price at €69.12 (£59.80), while the UK price was just £36.38. In May, the EU price was €73.85 per tonne (£63.83), 30% higher than the UK price of £49, but by the end of July, the differential was back at 17% with the EU auction price at €80.93 and the UK price at £59.26.⁴⁵ If the UK were to join the EU’s ETS, it would push up prices for all UK companies that are required to purchase emission allowances, as shown in Figure 2 below:

Figure 2: UK ETS and EU ETS Auction Prices 2026

Using the auction prices at the end of July 2026, joining the EU’s ETS would increase the carbon costs of UK-produced basic products like aluminium, iron and steel, cement, glass, and bricks by 17%. Many of these producers still benefit from free allowances, but if the UK joined the EU’s ETS, its free allowance policy would have to mirror the EU’s.

The companies that bought the 2,074,500 allowances, spending between £200 and £280 million each month, would, under the EU’s ETS, have spent £240 to $340 million each month, or £2.9 to £4 billion each year. It is impossible to understand why any government would want to increase costs for businesses by raising carbon taxes and import costs at a time when most UK businesses are already struggling with low demand and higher costs, including higher wages, employment taxes, and greater employee rights.

One of the industries most affected is construction. Building materials production is emission-intensive, but the materials produced last for tens, hundreds, and, in the case of cement, thousands of years. The cost of producing construction materials would increase, driving up the cost of housing and infrastructure, as shown in Figure 3 below:

Figure 3: Increase in construction materials under the EU ETS price

Chapter 3. Carbon emission tariffs – CBAM!

What is a Carbon Border Adjustment Mechanism?

A Carbon Border Adjustment Mechanism (CBAM) is a tax imposed on imported goods that attempts to equalise the carbon taxes paid by domestic producers with those paid on goods produced in countries with lower or no carbon taxes. This is done to ensure that a country’s domestic industries are not undercut by carbon-tax free imported goods and to discourage ‘carbon leakage’ when domestic manufacturers move their production out of the ETS area.

If a CBAM is to achieve its intended purpose of discouraging carbon leakage, it should take effect as soon as the ETS scheme begins, as the two are designed to operate in tandem. Implementing a CBAM many years after the imposition of an ETS creates the problem the EU and the UK now face: domestic industries have already moved outside the ETS, leaving domestic consumers with little choice but to buy imported goods and materials, regardless of their emissions intensity. So the CBAM does not combat an externality, nor does it protect domestic industries; it just makes imported materials more expensive.

CBAM payments are based on the ETS price per tonne of emissions that would have been produced had the imported good been manufactured domestically. However, they do not compensate for other environmental regulations that also increase domestic production costs. In many cases, these regulations have played a greater role in closing UK manufacturing than the ETS, as discussed later in this chapter.

The Conservative and Labour CBAM proposals

The previous Conservative government proposed introducing a CBAM in 2027 on seven products: iron and steel, aluminium, cement, glass, ceramics, fertiliser, and hydrogen. The current Labour government has revised the proposed CBAM, which will still be introduced in 2027 but will apply only to five commodities: aluminium, cement, fertilisers, hydrogen, and iron and steel.⁴⁶ Both proposals plan to exempt small importers of these goods, but all companies that import them will need to record the weight, country of origin, and production method of all CBAM imports to demonstrate to HMRC that the value of the imported goods is below the £50,000 threshold. This type of compliance incurs costs in itself, which bureaucrats often overlook when they impose complex taxes. The £50,000 threshold applies to the value of the imported goods, not the value of the CBAM payment, so both proposals will affect importers of expensive products such as aluminium more than importers of cheap ones, such as cement.

Although producing these CBAM commodities can emit substantial greenhouse gases, there is little point in applying a CBAM to imported products unless there are competitive domestic producers. UK production of all of the proposed CBAM products has declined following the introduction of the UK’s ETS, CPS, and CCL, as well as its other environmental regulations. However, UK aluminium and steel production has almost ceased, while UK producers of the fertiliser ingredient ammonia have closed, so the fertiliser industry relies entirely on imports.

The only result of applying a CBAM now would be higher costs for downstream users of imported input materials, who would pass these costs on to consumers, who cannot avoid paying the CBAM. UK car and aircraft part producers that rely on exporting their goods must match international prices, so the CBAM will reduce their profitability.

Meanwhile, other products required to purchase UK ETS allowances but not on the CBAM list, such as power generation from gas and biomass, ceramics, glass, pulp and paper, chemicals, and industrial gases, are not protected from competing goods made in countries without ETS or carbon taxes. Nor are complex products with many components, often produced in multiple countries and by various methods. Complex products, such as cars and household appliances, make it difficult, if not impossible, for importers to calculate the end product’s total emissions and determine whether those emissions occurred in countries with carbon taxes. This is why the government is not proposing to apply a CBAM to complex products, but without a CBAM to offset the ETS costs of domestically produced goods, these manufacturers will also be driven out of business in the UK, as many other companies have been.

Under the EU Reset, the Starmer government agreed in the Common Understanding that it would join the EU’s ETS market. One of the conditions of joining the EU’s ETS is that the UK would also be required to join the EU’s CBAM. This is apparently in order to create a ‘Level Playing Field’ for UK exports, but the UK does not even make some of the goods covered by the EU’s CBAM. Instead, it will add to the cost of UK imports. However, as Andy Burnham’s government is still proceeding with this Reset, this paper explains the EU’s CBAM first, followed by the UK’s CBAM.

The EU’s CBAM

The EU Commission fully launched its commercial carbon tariffs known as the Carbon Border Adjustment Mechanism (CBAM) in January 2026, having published its CBAM benchmarks and default values for carbon charges. The EU’s CBAM began in Oct 2023, but importers were not required to purchase and surrender CBAM certificates; they were only required to begin monitoring, recording, and reporting their import emissions.⁴⁷ The EU’s CBAM includes indirect emissions from the electricity used to produce some products. The EU will also begin phasing out its ETS free allowances from 2026 to 2034. The EU CBAM will cover only simple goods made from: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity used in their production. It will exclude complex goods for now and has set an import threshold of 50 tonnes of CBAM goods. Small importers who import less than this amount do not need to pay the CBAM, but they must verify the amount imported, which will require added compliance costs and record-keeping.

The EU CBAM threshold is 50 tonnes for all CBAM imports except hydrogen and electricity, and it is cumulative across all CBAM products. Consequently, it affects importers of heavy but cheap goods such as cement more than importers of lighter, expensive ones, such as aluminium. For example, at €112 per tonne (£96/tonne), an EU importer of Portland cement would have to pay the EU CBAM after importing just 50 tonnes, worth only €5,600. However, a UK cement importer would need to import more than 520 tonnes before reaching the UK’s £50,000 CBAM threshold.

The EU’s CBAM charge will be the EU ETS price multiplied by the difference between the imported good’s embedded emissions and those of the EU’s most efficient producer of that good among the 27 EU Member States, even if producers in the EU Member State importing the good have much higher emissions. The EU benchmark emissions will be reduced as the EU removes its free allowances by 2034. The EU uses either actual verified emissions or default emissions for each product and country. The EU’s default values for CBAM goods other than fertilisers will increase by 10% each year, starting at 110% in 2026, then 120% in 2027, and 130% from 2028 onwards. This is meant to encourage importers to use actual verified emissions rather than default values. We discuss this in greater detail later in the chapter. The EU is also proposing to reduce the CBAM amount by any carbon taxes paid in the country of manufacture.

The country-specific default values have been published, which vary by 8-digit HS code and by country of production.⁴⁸ Default values differ substantially across countries based on typical emissions and how the product is manufactured, although they do not consider the energy source used and the associated emissions. For many UK exports, the additional cost of the CBAM would be minimal compared to the value of the product because CBAM charges are calculated based on weight and the emissions released during production per tonne of finished product, rather than on the value of the finished product. For example, some high-value aluminium products would have CBAM costs of less than 1% even when CBAM is fully applied, which won’t be until 2034. At present, the CBAM is charged at just 2.5% of the total to account for EU free allowances. However, for low-value homogeneous goods such as cement, the EU’s CBAM would be high compared to the value of the imported goods. The worst situation will be for goods the UK no longer makes but still needs as key materials for more valuable upstream manufacturing, as these products will have a CBAM added to their price if they are not made in the EU.

EU Article 9 discounts

The UK is one of just 3 countries currently being reviewed by the EU for a reduction in the total CBAM costs under Article 9 of Regulation (EU) 2023/956, which allows an authorised CBAM declarant to claim a reduction in the number of CBAM certificates to be surrendered if a carbon price has been effectively paid in a third country. This legislation is not yet finalised, but the UK, South Korea, and South Africa are the only three countries with ETS programmes under consideration by the EU. Article 9 would further reduce the amount that UK exporters would be expected to pay, and make joining the EU’s expensive ETS scheme unnecessary.⁴⁹

For a non-EU or EEA country to be eligible for a reduction in CBAM charge under Article 9 of the CBAM regulations (EU) 2023/956, its domestic carbon prices must be: defined in law; be a monetary amount paid as a tax, levy, or fee for emission allowances; it must have been paid, not a free allowance, a credited allowance, or an accessed allowance; the scheme must be legally binding, not voluntary; the exporter must have detailed proof of payment; and the allowance must be attributed to a specific good. The UK’s ETS already meets all these requirements, so it should be eligible for a discounted CBAM rate. There is no need to join the EU’s ETS.

It is claimed that the UK should join the EU’s ETS because it would exempt UK exports from the EU’s carbon tariffs (the CBAM). In fact, joining the EU’s CBAM is a mandatory part of joining the EU’s ETS agreement, specified in Section 1.3, ‘Level Playing Field Benefits’, shown below:

The agreement to link the United Kingdom and the Union’s greenhouse emissions trading systems would have to satisfy the conditions set out in Article 2(6) of Regulation (EU) 2023/956 establishing a carbon border adjustment mechanism (‘CBAM regulation’).

However, this will not level the playing field or increase UK exports to the EU. As we explained previously, it will raise the price of all UK goods, negating any CBAM savings. The EU’s ETS is more expensive than the UK’s and covers more industries; joining it would raise carbon prices across all UK industries, regardless of whether they export to the EU. The EU’s ETS and CBAM cover goods that the UK no longer produces in any quantity and generally imports from the EU rather than exports to it. The EU’s ETS also includes some industries not currently covered by the UK’s ETS, most notably international shipping, which will push up import prices for both UK manufacturers that have to import input materials and UK consumers, who will pay more for imported finished goods.

EU CBAM calculations

The CBAM charge the EU adds to an import is the EU’s CBAM certificate price, which is set quarterly, multiplied by the net emissions per tonne during the production of the imported good. Net emissions cover only emissions subject to CBAM (other emissions are ignored) and are the difference between the imported goods’ emissions and the EU’s benchmark emissions, multiplied by the CBAM phase-in amount. The EU’s benchmark emissions are those from the most efficient EU installations that produce the same good and use the same production process. The benchmarks are straightforward for simple chemical products such as hydrogen and fertiliser, but more complicated for steel or aluminium products, where the production process can make a big difference to emissions. Effectively, the CBAM is a charge on the difference between the imported good and the EU’s most efficient producer, after adjustment to reflect the proportion of EU production that still receives free allowances.

If net emissions are negative because the imported good has lower emissions than the EU benchmark after adjustment for free allowances, then net emissions are set to zero, so no CBAM will be charged. This is the case for HS 25070080 Kaolinic Clays, where the UK default emissions for 2026 are 0.308 tCO2e/t, while the EU benchmark emissions are 0.666 tCO2e/t. This example is interesting because Kaolin is one of the few EU CBAM products where the UK exports more to the EU than it imports from it. In 2025, the UK exported 542,240 tonnes of Kaolin (HS250700) to the EU, but imported just 12,990 tonnes. The UK government should not be pressured by Kaolin exporters to align with the EU’s ETS, despite their large net exports, as Kaolinic clay CBAM charges will be zero.

Emissions default values – according to the EU

The EU has published its CBAM default values for 119 countries, which are its main trading partners, and a default value for everyone else.⁵⁰ The spreadsheets cover about 350 individual CBAM goods, listed by 6- or 8-digit tariff codes. The EU apparently hopes that exporters will calculate the exact emissions associated with their products, but this is a complicated process, and importers dealing with a variety of goods will probably opt for the default values. Specialist producers of a single product will benefit from being able to prove their actual emissions, especially if they are below the EU Benchmark.

To further discourage imports of high-emission goods, the EU has increased the total country default emissions by 10% in 2026, and will increase them by 20% in 2027 and 30% in 2028 and onwards for most products except fertiliser and fertiliser chemicals, which will only be increased by 1%. The EU is also reducing its CBAM reduction factor as it removes free allowances, so there will be no free allowances by 2034. The table below shows how this will work.

The example used is anhydrous ammonia, an essential ingredient in fertiliser production. The US is currently the UK’s major and cheapest supplier. It supplies about a third of UK imports. If the UK joins the EU’s CBAM, it would increase the cost of US anhydrous ammonia by 34% in 2026, rising to 59% in 2034. This calculation assumes that the EU’s CBAM certificate price (set quarterly) remains constant. This would obviously not be true – it will increase as the EU reduces the number of allowances it auctions and ends free allowances.

The EU has introduced an extension to HS product codes used to calculate import tariffs. The first 4, 6, or 8 digits are the standard HS code, and the last two digits are EU-specific subdivisions for CBAM calculations.⁵¹ If importers cannot verify the actual emissions data associated with their imports, then the EU will apply a default emissions value for the product, its production process, and its country of manufacture. Where actual emissions data is available and verified, it can be used to determine the specific embedded emissions for a given import. If not, default values – often set at the higher end of the range – apply. It applies to all CBAM goods except electricity and provides a harmonised, country-specific, and product-specific framework for calculating embedded emissions for customs declarations.

For example, steel products will depend on whether they were produced in a blast furnace-basic oxygen furnace (BF/BOF), by direct reduced iron/electric-arc furnace (DRI/EAF), or from scrap in an EAF. The benchmark is expressed in tonnes of CO₂ equivalent (tCO₂e) per tonne of steel produced, with separate values for different production methods reflecting the differing carbon footprints of each process, and for each country of production.

This works if domestic EU suppliers offer competitively priced products compared with imported goods plus the CBAM charge. However, this is not the case in the UK, where upstream producers rely on imported base materials and ingredients. If the UK joins the EU’s scheme, it will be forced to add a CBAM tariff to inputs imported from outside the EU or to buy more expensive inputs produced in the EU. This will drive up domestic prices for finished goods in the UK and make UK exports less competitive in non-EU markets, which currently have higher growth than EU markets. The example below shows how imports of aluminium door and window frames from China, the UK’s largest supplier, would increase by 10% in 2027 and by at least 14% by 2034, assuming the EU’s emissions price remained at €73.28. This is unlikely, as the allowances auctioned will be reduced each year.

Comparative advantage without joining the EU’s ETS and CBAM

In general, the default values the EU has assigned to UK goods are lower than those it has assigned to US, Indian, and Chinese goods. For example, the EU default emissions for UK HS 252310 Grey clinker cement are 20% lower than the default emissions for US imports, 32% lower than for Chinese imports, and 34% lower than for Indian imports. This is true for most itemised default values, except for products made from iron and steel (HS73), where UK default values are generally considerably higher than those assigned to US products, although still lower than for Indian and Chinese steel products. For example, the EU’s default value for total emissions for HS73269030 Ladder and steps made of iron and steel for British exports is 66% higher than the US default emissions, but 25% lower than the EU’s default emissions for China and 53% lower than the EU’s default emissions for India.

The table below shows the substantial variation in CBAM charges for a relatively simple product used in fertiliser production: anhydrous ammonia. This calculation does not account for any Article 9 deduction for carbon prices already paid in the country of origin. It is also interesting that the EU has assigned the UK a low default emission value for anhydrous ammonia even though the UK has ceased commercial production and therefore does not export UK-made anhydrous ammonia to the EU.

The UK’s current and previous CBAM proposals

Despite the claims that the UK will ‘Reset’ its relationship with the EU, which would force the UK to join the EU’s ETS and CBAM scheme, the UK’s Revenue and Customs Authority (HMRC), updated its own CBAM policy paper on 9 September 2026, which is still intended to be in operation by 1 January 2027, less than four months away.⁵²

The main difference between the UK’s and the EU’s CBAM is that the UK’s CBAM applies to importers who import more than £50,000 of CBAM-covered materials per year, while the EU CBAM is based on weight and applies only after 50 tonnes are imported in a year. So, the UK CBAM will target more valuable imports, while the EU CBAM targets heavier products that, although emission-intensive, can be very low-value goods, such as cement. Both CBAMs will require smaller importers to keep records to prove they have imported less than the respective CBAM thresholds, which, again, will incur costs that are often overlooked by bureaucrats when they impose complex taxes.

The UK’s CBAM covers the same goods as the EU’s CBAM except for electricity and is considerably simpler, as each good has a single default value, unlike the EU’s, which has a separate default for each product and for most exporting countries. However, because the UK produces none of the ammonia, only about 5% of the aluminium, and almost none of the steel, it is surprising that the UK has followed the EU’s CBAM commodity choice to add charges to base materials but not to complex goods. The UK CBAM will also not include indirect emissions, such as those from the electricity used in producing goods covered by CBAM charges, until 2029. Like the EU CBAM, UK importers can use actual verified emissions data or a default emission value to calculate the CBAM charge. UK CBAM calculations will reflect the actual ETS cost for UK producers, adjusted for any free allowances or discounts given to UK producers.

As UK importers will be able to choose whether their CBAM charges are based on actual emissions or a default value, it seems obvious that countries with the most emissions-intensive production will opt for the default value, while less emissions-intensive producers will opt to use their actual values. If we compare the EU’s massive spreadsheet of default values for 119 manufacturing countries covering 350 CBAM goods at the HS 6- to 10-digit level, it is obvious that the UK system will overlook massive differences in emissions between countries. But it will be easy for HMRC to collect money from importers, which seems to be the point. Unlike the EU CBAM, where importers must register to buy CBAM certificates and surrender them annually, the UK CBAM will be a tax paid directly to HMRC and go into general revenue. The first UK payments are not due until the end of the 2027/8 tax year.

The HMRC policy paper also seems unaware of the devastation the UK’s carbon taxes have had on UK production of iron and steel, aluminium, and fertiliser. They claim to expect the introduction to ‘reduce the risk of carbon leakage for UK producers’, increase investment in these industries in the UK, and that UK producers have asked for a CBAM, although it doesn’t mention when they asked for this. A direct quote from the policy paper reads:

‘CBAM is expected to reduce the risk of carbon leakage for UK producers of iron and steel, aluminium, cement, hydrogen and fertiliser by ensuring that importers face a comparable carbon price to that paid in the UK by those producing the same goods, so that UK decarbonisation efforts lead to a true reduction in global emissions rather than simply displacing carbon emissions overseas. It will give UK industry confidence to invest in the knowledge that its decarbonisation efforts will not be undermined and the introduction of CBAM legislation will support this.’⁵³

The HMRC Policy Paper even expects to make money from this tax, reaching a peak of £180 million in 2028/9, without considering how it will increase costs for UK manufacturers that use imported iron, steel, aluminium, or fertilisers to produce other products. They at least appear to be aware that the amount they collect will drop by 2030, but they don’t explain why. Do they expect that even more downstream manufacturers will have moved out of the UK by 2030?

The HMRC policy paper claims this measure is not expected to have any significant macroeconomic impacts, nor any significant impact on prices for individuals, households, and families. HMRC’s reasoning is that CBAM goods are predominantly basic materials and intermediary goods, rather than final consumer goods. However, the HMRC policy paper then admits that the CBAM will have a significant impact on 10,000 businesses:

‘CBAM will have a significant impact on an estimated 10,000 businesses importing CBAM goods into the UK.’

But HMRC puts the cost to those 10,000 businesses at just £9 million for compliance and £16 million for ongoing costs. This seems a bit light, given that HMRC has also claimed that it will need additional funding to deliver CBAM of around £24 million to build the IT system and a further £31 million in ongoing compliance costs. HMRC would like us to believe that the CBAM cost and compliance of 10,000 companies will be less than half their costs.

HMRC seems more concerned with CBAM equality impacts than its business impacts. Readers of this paper will surely be relieved to know that 83% of the people affected by CBAM payments will be working-age males, 93% of whom will be white, so no reason to panic. The rest of us apparently won’t even notice CBAM payments until the price of cereals, vegetables, cars, and housing start to increase.

The UK’s CBAM charge will include direct emissions from the CBAM goods production process, indirect emissions from the carbon charges on the electricity consumed during production, and emissions from precursor goods used in the production of slightly more complex CBAM goods. However, like the EU CBAM, it does not include extremely complex goods such as cars or household appliances. It only covers complex goods such as fertilisers, whose precursor goods are also CBAM goods such as ammonia and nitric acid.

The UK’s CBAM will also apply to non-CBAM goods made using CBAM goods as a precursor, unless the precursor goods were produced in the UK. If a precursor good is made in the UK and exported before being reimported as part of a CBAM good, the emissions attributable to the UK-produced precursor can be deducted from the total embodied emissions of the imported CBAM good.⁵⁴ While this will give importers some respite from CBAM costs, it will greatly increase compliance costs and the records required. This will be an administrative burden for all companies, but especially for small and micro companies without a compliance department. Fulfilment companies specialising in CBAM calculations will likely be used instead, adding to an import company’s costs.

CBAM charges will be collected at the border, along with any applicable import duties. There will be a minimum annual registration threshold of £50,000 in the value of imported goods, not the CBAM charges, but all importers of CBAM goods must calculate and record the value of their CBAM imports to verify to HMRC that they have not imported more than £50,000 of CBAM goods. Once imports exceed the threshold, companies must register with HMRC, keep records of the goods they import, submit CBAM returns, and pay any CBAM liability to HMRC. Importers will need to either provide verified data on the emissions embodied in a CBAM good or use the government’s default emissions values. HMT will set default emissions from January 1, 2027, and, according to the updated policy paper, there will be a single CBAM rate for each CBAM product sector. Imported CBAM goods will need to be weighed to determine the CO₂-equivalent emissions per tonne.

The UK’s CBAM price will reflect the UK’s effective carbon price and reference both the ETS and the CPS, which applies to fossil fuels used to generate electricity in Great Britain. The CBAM rate will be reduced to account for free allowances available to each domestic sector. CBAM rates will be calculated and published at the beginning of each quarter, beginning in January 2027. The government has announced that it will remove the CPS carbon tax, but not until April 2028, 15 months after the introduction of the UK’s CBAM.

If an importer uses verified emissions data, an eligible CBAM accreditation body must verify the emissions data under international verification standards (ISO) for the material being verified. This will create a new bureaucracy, and verification bodies will need to surveil verifiers annually and conduct a full reassessment of the verifier’s accreditation every 5 years.

Verifiers will be required to appoint a verification team with a lead auditor, and an appropriate number of auditors and technical experts. The verifier must ensure the competence of the personnel appointed to conduct the verification and appoint an independent reviewer, who is not part of the verification team, to review the verification activities and the verification opinion. The emission verification process described in HMRC’s policy paper is complicated and will likely be too expensive for most SME importers, who will instead opt to pay the higher default emission values. If anything, CBAM emission verification would just become a job-creation scheme for auditors.

Which CBAM and ETS should businesses prepare for?

Despite the September 2026 publication of HMRC’s CBAM policy update and its inclusion in the Finance Act 2026, Chapter II, Part 5⁵⁵, other Government Ministers have announced that the UK will join the EU’s ETS and CBAM. The UK-EU Common Understanding document, published in May 2025, announced that the UK and EU would work towards linking the UK ETS and the EU ETS, and that this link should create the conditions for mutual CBAM exemptions, shown below.⁵⁶

The agreement to link the United Kingdom and the Union’s greenhouse emissions trading systems would have to satisfy the conditions set out in Article 2(6) of Regulation (EU) 2023/956 establishing a carbon border adjustment mechanism (‘CBAM regulation’).

Again, in December 2025, the UK-EU Joint Statement claimed it would conclude negotiations on ETS linking by the next summit, which was postponed from July 2026 to October 2026 and may now not happen until November 2026, if at all, as HMRC has put the UK CBAM based on the UK ETS into the UK Finance Act and it is due to start in January 2027.

Although the UK CBAM, like the EU CBAM, covers declining UK industries and makes necessary imports more expensive, at least the UK ETS price is lower than the EU ETS price. So, the CBAM charge should also be lower. The EU ETS is more expensive because the EU has 10 times as many industrial companies that need to purchase ETS allowances to cover their industrial heat and electricity use. The EU’s ETS also covers domestic and international maritime transport, unlike the UK’s ETS, as well as domestic and international aviation.

The UK added domestic maritime transport to its ETS coverage in January this year (2026) but does not charge the ETS on international maritime transport. As an island, the UK imports most goods by sea. If the government agrees to follow the EU’s ETS rules, import costs will rise before any CBAM is added. This matters because, unlike the EU, the UK has no alternative land routes for imports, other than importing from the EU. The EU’s inclusion of ‘international aviation’ in its Reset documentation implies it will charge ETS in the future rather than relying on CORSIA. This will increase the cost of goods imported by airfreight. On average, CORSIA charges are less than 10% of the EU’s and UK’s ETS charges if compared on a passenger-mile basis, as CORSIA only offsets the emissions growth above 85% of the 2019 baseline and only applies to international flights between participating states.⁵⁷

Additionally, unless the UK drops all of its additional CPS and CCL charges, UK companies would be left with the worst of both worlds: paying higher electricity prices than their competitors in the EU, paying additional CPS carbon taxes, while also paying the EU’s higher ETS prices. This situation would drive the last manufacturing companies in the UK out of business. Applying a CBAM to imported materials that are no longer made in the UK will not change this.

Chapter 4. UK production of commodities covered by CBAM

The main problem with both the UK and EU CBAM is the choice of products they cover. The UK does not make fertiliser from scratch; instead, it either imports the base materials or the finished product. Similarly, the UK now produces very little virgin iron and steel or basic iron and steel products, and even imports agglomerated iron ore, but it plans to add a CBAM to them. The UK’s aluminium production dropped to almost nothing over 12 years ago, yet UK upstream production of transport machinery has continued using imported aluminium. Adding a CBAM to imported aluminium, steel and fertiliser products now that they are hardly made in the UK is madness. Below, we go through the UK’s production of each CBAM product. Adding a CBAM to cement and hydrogen does make sense, but UK production and imports of hydrogen are minimal. Surely there were more deserving industries to protect – for example, chemicals, glass, and ceramics.

It is absurd that the UK would even consider putting a CBAM on the chemicals used to make fertiliser, which are no longer made in the UK, so there is no domestic industry to protect – but is not applying a CBAM to other chemicals such as the Acetyls made by INEOS at their three Hull plants. The difficulty of competing with acetyls imported from countries without carbon taxes or expensive gas has led INEOS to announce it will close the plants. The three plants produced acetic acid (used in food preparations, textiles, and chemical synthesis), acetic anhydride (used as a pharmaceutical input to make aspirin and paracetamol, as well as explosives), and Ethyl Acetate (used to produce flexible packaging, inks, cosmetics, and paint).

The production of acetic acid and its derivatives is highly carbon-intensive: the production of 1 kg of acetic acid from methanol produces 1 to 1.6 kg of CO₂, while the production of a kilo of ethyl acetate produces 2.8 kg of CO₂. INEOS had invested £30 million to convert the hull plant to run on hydrogen to reduce its CO₂ emissions by 75%, but this could not make up for the UK’s high gas prices compared to those of the US and China, even though the UK has the potential to supply its industry with natural gas, while China is using gas generated from coal – as the UK used to do in the 1970s.

Jim Ratcliffe, Chairman of INEOS, commented: “European regulators need to wake up to the fact that the combination of high energy costs and the additional burden of unsustainable carbon taxes are destroying our European manufacturing base.”⁵⁸

Alternative CBAM commodity choices

While not ideal, the previous Conservative government proposed a CBAM that also covered ceramics and glass, but Labour’s revised CBAM proposal excludes them. This is a mistake. Ceramics and glass are two important UK energy-intensive industries in which the UK remains a competitive producer, but although they have to buy emissions allowances, they will not be protected from emission tax-free imports by either the UK or the EU CBAM.

Since 2022, at least six major UK ceramics manufacturers have entered administration or liquidation: Wade Ceramics, Johnson Tiles, Heraldic Pottery, Royal Stafford, Moorcroft Pottery, and Denby Pottery. The overwhelmingly cited reason for these closures was energy costs. Ceramic kilns are highly energy-intensive, and gas accounts for about 85% of their energy use.

Glass and fibreglass manufacturers have similar problems with high energy and carbon costs, which have also made them uncompetitive. The UK’s largest fibreglass manufacturer closed in June 2025; ironically, the factory made wind turbine blades, but the UK’s environmental policies made it uncompetitive. Clyton Glass in County Durham recently went into administration, citing high energy and raw material costs, making 290 people redundant. While competition from cheaper imports was also cited as a problem, imports are often cheaper because their energy is cheaper. If the UK also had cheaper energy, UK companies would find it easier to compete.

While UK ceramics and glass producers could benefit from CBAM protection against cheaper imports from countries without carbon taxes, it would be more helpful if the UK removed its carbon taxes on these industries and on UK fuels. But now it would appear these industries will get neither CBAM protection nor lower energy carbon taxes. If the EU reset goes ahead, they will get high carbon taxes and no CBAM protection.

The UK government, in its desperation to align with the EU, seems to have forgotten that CBAM is meant to create a level playing field between the carbon taxes applied to UK industries and those applied to imported goods in their home market. If domestic production is negligible or very small, as is the case in the UK for aluminium and steel, there is no need to impose a CBAM on imports. The EU is in a different position to the UK, because it still has large producers of its CBAM products: aluminium, cement, fertilisers, hydrogen, and iron and steel. The UK doesn’t. But still, the government has decided to apply CBAM charges to imports of goods from industries where the UK is uncompetitive, where many producers have closed or moved out of the UK, and/or where the UK is a major importer of their products, because the UK’s high ETS, CBS, and Climate Change Levy have driven UK producers out of business, while leaving ceramics and glass unprotected.

Instead, the UK is proposing to add a CBAM to the following products:

Aluminium

The UK has almost no primary aluminium smelting capacity left and produces only 5% of the aluminium it uses domestically.⁵⁹ UK aluminium imports were primarily rolled aluminium used to manufacture vehicle and aircraft parts.⁶⁰ The UK’s aluminium exports consist of 60% scrap and 25% unwrought aluminium. It is too late to add a CBAM to imported aluminium: this would only increase the cost of downstream producers of the UK’s most valuable export: machinery and transport equipment.

In 2000, the UK produced 320,000 tonnes of aluminium from three smelters. In 2009, the Anglesey Aluminium smelter in Holyhead, which produced 142,000 tonnes of aluminium per year, closed because its cheap electricity contract with the Wylfa nuclear reactor expired, and EU state-aid rules blocked the contract’s renewal. In 2012, Britain’s largest smelter, Lynemouth in Northumberland, which produced 178,000 tonnes of aluminium a year, closed because of rising energy costs and EU environmental directives, including the Large Combustion Plant Directive, which limits emissions from coal-fired power plants. The UK now has one remaining smelter, Lochaber in Fort William, Scotland. It produces just 48,000 tonnes of aluminium a year but has its own dedicated hydroelectric power supply. The UK imports all of its bauxite and alumina; converting bauxite into alumina also requires substantial power, yet alumina is not on the CBAM list. The only value added in the UK is the electricity required to turn bauxite into alumina and then into aluminium.

Adding a CBAM to aluminium imports now, after the UK’s largest producers have closed, would be a case of shutting the stable door after the horse has bolted. The UK imported 1.25 million tonnes of aluminium in 2025 for use in its aircraft parts manufacturing industry, its car manufacturing, and for aluminium drink cans, among other things.⁶¹ The first two are the UK’s largest export industries; taxing the imported aluminium they use would also raise end-product costs without lowering global emissions. While the imposition of a CBAM may help Lochaber Aluminium compete with imported aluminium, Lochaber Aluminium accounts for approximately 5% of the UK’s annual aluminium demand.

Adding a CBAM on aluminium imported to produce drink cans would impose a tax on a tax. The use of aluminium for cans has increased following the UK’s introduction this year of Extended Producer Responsibility (EPR) packaging fees and the Plastic Packaging Tax (PPT) introduced in 2022. These taxes were introduced to mitigate the externalities of waste in general, and plastic waste in particular.

The EPR fee is based on the weight of packaging placed on the market and is intended to reflect the cost to local authorities of managing waste. Aluminium’s EPR is £266 per tonne and is considerably lower than plastic’s EPR of £423 (if the plastic is more than 30% recyclable, it will also incur a PPT of £223.69). The EPR externality tax was designed to make aluminium the preferred material for consumer drink containers because it is lightweight and therefore attracts the lowest EPR per container. Adding a CBAM to aluminium imported to make cans would undermine the purpose of the EPR by making the preferred, lighter, and more recyclable aluminium containers more expensive and less attractive to drink producers.

Joining the EU’s CBAM to protect UK aluminium exports to the EU would be just as misguided as adding a CBAM to imported aluminium. The UK exported only about 400,000 tonnes of aluminium goods covered by the EU’s CBAM, and in general they are high-value goods, so that even when it is fully applied, the CBAM cost will be a small proportion of their export price. The UK’s main aluminium export is scrap aluminium for recycling, which is not covered by either the UK or EU CBAM, exporting about 624,000 tonnes in 2025 (aluminium is infinitely recyclable, and recycling aluminium requires approximately 5% of the energy used to produce virgin aluminium).⁶²

For many UK exports, the additional cost of the EU CBAM would be minimal compared to the value of the product because CBAM charges are calculated based on weight and the emissions released during production per tonne of finished product, rather than on the value of the finished product. For example, some high-value aluminium products would have EU CBAM costs of less than 1% even when the EU’s CBAM is fully applied, which won’t be until 2034. At present, the EU’s CBAM is charged at just 2.5% of the total to account for EU free allowances.

Meanwhile, the small amount of aluminium that is still smelted in the UK comes from a plant in Scotland that uses hydroelectric power, so its emissions are minimal. Not that the EU is interested in minimising emissions: despite its pretensions, the EU’s CBAM benchmark only counts the direct emissions from aluminium smelting, not the indirect emissions from the electricity used in its production, even though this can account for 70% to 80% of the emissions. In the EU’s CBAM calculations, aluminium is either Primary (K) with benchmark emissions of 1.423 to 1.493 or Re-smelted from scrap (L) with benchmark emissions of 0.091 to 0.148.

In 2024, the UK imported 1.21 million tonnes of aluminium products. The UK’s proposed CBAM will cover all imports for industrial uses but exclude consumer/household items and scrap aluminium. The UK’s CBAM would apply to 1.08 million tonnes of imported aluminium, such as plates, strips, structures, bars, and rods, used to manufacture higher-value products that are mainly exported. Applying a CBAM would increase the costs for UK manufacturers that use these products to produce the UK’s complex goods, such as aircraft parts and cars, the UK’s largest export sector. Export goods must remain internationally competitive; raising the price of their base materials will have the opposite effect.

The UK’s leading aluminium suppliers are Germany, China, and France. However, Germany has no bauxite mines and must import bauxite from Guinea, China, and Guyana to make aluminium.

Aluminium production is energy-intensive and produces 15 tonnes of CO₂ for every tonne of new aluminium produced. That said, it is readily recyclable, so this emission should be amortised across multiple product generations. Just as aluminium used in vehicles and aircraft should pay an ETS divided by the expected lifespan of the product.

But the demise of the UK’s aluminium smelters is not solely due to the imposition of an ETS. UK industrial electricity is more than three times as expensive as average US industrial electricity, and more than five times as expensive as industrial electricity in the US states of Louisiana, New Mexico, Oklahoma, and Texas, which have the lowest industrial electricity costs in the US.⁶³ Without access to bauxite or cheap power, the UK will remain reliant on importing primary aluminium. Adding a CBAM to these necessary imports would be industrially suicidal.

Fertilisers

The latest UK CBAM proposal covers imports of fertilisers and fertiliser ingredients: nitric acid; sulphonitric acids; ammonia, anhydrous or in aqueous solution; nitrates of potassium; mineral or chemical fertilisers, nitrogenous; mineral or chemical fertilisers containing three of the fertilising elements – nitrogen, phosphorus and potassium; and mineral or chemical fertilisers containing two fertilising elements.⁶⁴

The UK produces less than 30% of the fertiliser it uses each year, but it relies on imported raw ingredients, most importantly ammonia.⁶⁵ CF Fertilisers’ Billingham plant ceased ammonia production permanently in July 2023 after being temporarily idled in August 2022. This was the UK’s last major ammonia producer. Adding a CBAM to imported ammonia and imported nitric acid made from it, would increase costs for fertiliser mixers, which would be passed on to farmers and eventually raise the price of domestically produced food.

It is inexplicable that sulphonitric acids, nitrates of potassium, and mineral or chemical fertilisers containing either two or three fertilising elements are on the UK’s CBAM list of products in scope, when they are not currently produced on a large scale in the UK. Fertilisers containing two and three fertilising elements were made at the CF Fertilisers Ince site, which closed in 2023. Adding a CBAM to imported products when no alternative domestic supplier exists will necessarily increase agricultural production costs.

In 2025, the UK produced around 1.2–1.3 million tonnes of nitrogen-based (ammonium nitrate, urea, NPK blends) mineral fertilisers. Domestic production of phosphate and potash fertilisers has largely ceased in the UK, which is now reliant on imports.⁶⁶ Compared to 2000, UK fertiliser output has halved, and the product mix has shifted toward nitrogen-only and imported blends, driven by plant closures, energy costs, environmental regulation, and global market restructuring.

UK fertiliser use has fallen by 19.3% in the 10 years up to 2024. In the UK, fertiliser use typically increases arable crop yields by 30–50% and grassland productivity by 40–60% compared to unfertilised systems. Without fertiliser, most soils cannot supply sufficient nitrogen, phosphate, and potash to sustain high yields; therefore, fertiliser is critical for both food security and livestock forage production.⁶⁷ Making fertiliser more expensive than it needs to be, through the addition of an ETS or a CBAM, makes UK-produced foods more expensive.

The UK mainly imports fertiliser from the EU, North Africa, and North America.⁶⁸ Fertiliser production is gas-intensive, so fertiliser production has moved to regions with cheaper gas. CF Fertilisers closed its plant in Ince, Cheshire, in 2022, when European gas prices spiked.⁶⁹ UK ETS allowances, along with strict nitrogen-emissions regulations, have made domestic fertiliser production less competitive than imported fertiliser.

Most fertilisers are made from ammonia (NH₃) using natural gas as a feedstock. Almost all ammonia (2NH3) is produced using the Haber-Bosch process, which uses natural gas and air at high pressure and medium industrial temperature to produce ammonia. It takes about 0.9 tonnes of natural gas (methane, CH₄) to produce 1 tonne of ammonia. The process requires high temperatures (400–500°C) and pressures (>100 bar), typically generated by coal or gas combustion, although it can also be powered by electricity. Conventional production emits about two to three tonnes of CO₂ per tonne of nitrogen fertiliser, plus nitrous oxide (N₂O) emissions from nitric acid production, which can add another 0.2–2 tonnes of CO₂-Equivalent (CO₂e) per tonne, depending on abatement technology.

Unlike cement and aluminium, which last for many years, fertilisers are applied annually to land. Therefore, it could be considered appropriate to include a CBAM on imported fertilisers if farmers had an alternative domestic supplier available that is competitive in all other respects except for the cost of ETS allowances. However, only nitrogen fertiliser production remains in the UK. It is, therefore, understandable that the government is trying to protect this remaining production by applying a CBAM to imported nitrogen fertilisers, but it should not apply a CBAM to the imported ammonia needed to make nitrogen fertilisers.

In 2024, the UK imported 3.22 million tonnes of the fertilisers covered by the latest update to the UK’s proposed CBAM.⁷⁰ Almost all of which will be charged for their CO₂ and nitrous oxide emissions. Most of the UK’s ammonia imports come from the US, but they are not cheaper than UK-produced ammonia because of differences between US and UK ETS costs. The price differential stems from differences in natural gas prices and the UK’s additional CPS and CCL charges on the energy used to make ammonia. The UK should be an efficient ammonia producer, but instead we import it from the US, where gas prices were traditionally about a quarter of those in the UK; however, since Iran blocked the Strait of Hormuz, UK gas prices have risen to about 8.5 times those of the US.⁷¹

Instead of adding a CBAM to imported goods the UK doesn’t make any more, the UK should: encourage North Sea gas production and exploration; allow hydraulic fracturing for gas; and remove the additional 38% ‘Windfall’ tax on gas production, thereby lowering the cost of the UK’s domestic feedstock for fertiliser production. There is already an ETS on the energy used in combustion, and an ETS charged on the production of ammonia and nitric acid, as well as the CPS and CCL.

This is triple taxation, which adds to the UK’s high gas prices, making UK fertiliser uncompetitive with imported fertiliser. Removing these additional energy costs would reduce the cost of an essential input for food production and food security.

Figure 4: Products covered by the UK CBAM on Fertilisers

Figure 5: Products covered by the EU CBAM on Fertilisers

Iron and Steel

The UK’s proposed CBAM covers agglomerated iron ores and concentrates used to make steel (HS26011200), as well as all basic iron and steel imports under the HS72 tariff code, except for alloys containing silicon, manganese, chromium, molybdenum, tungsten, titanium, vanadium, and phosphorus. Scrap and waste iron and steel imports are also excluded from CBAM, although the UK is mostly an exporter of both because its high electricity costs limit Electric Arc Furnace (EAF) steel recycling. The UK exported 8 million tonnes of scrap iron and steel in 2015, while the 200,000 tonnes it imported mostly came from Ireland and were probably transported via UK ports to recyclers in Turkey, Egypt, Morocco, Pakistan, and India. The UK will also apply a CBAM to iron and steel products covered by HS codes 7301 to 7311, 7318, and 7326.

The UK’s revised CBAM product list is an exact replica of the EU’s CBAM list of products; the UK has aligned with the EU without needing a Reset. However, this will protect EU producers to the detriment of UK steel users. For example, HS7318 is on the CBAM list and covers screws, bolts, nuts, rivets, washers, and similar items. The UK imports over £1 billion worth of these items each year. Its largest suppliers are China, Taiwan, and India. Together, these three countries supply over 70% of the UK’s imports. However, under the new UK/EU CBAM schemes, imports from these countries will incur CBAM charges of around 20%, benefiting imports from the UK’s 4th- and 5th-largest suppliers – Germany and Italy.

The UK produces none of the iron ore or metallurgical coal it uses in its two remaining blast furnaces, currently nationalised to prevent their closure. If they do close, all virgin steel used in the UK will be imported. There is therefore no benefit to be gained from adding a CBAM to ‘agglomerated iron ore concentrates’ or ‘virgin steel’ imports; however, a CBAM would increase the costs of the EAF furnaces remaining in the UK that reshape imported steel, as well as increasing the costs of production for UK vehicle and machinery manufacturers. As mentioned earlier, machinery and transport equipment is the UK’s largest export sector, accounting for 42% of total UK goods exports in 2024.⁷²

Despite this, the UK government is now proposing to add a CBAM to: agglomerated iron ores and concentrates; all iron and steel, except for some iron alloys that use critical metals and scrap iron and steel; and 13 of the 26 HS73 four-digit codes for articles made with iron and steel.⁷³ This list includes many of the UK’s most imported iron and steel products, such as HS7308 Structures, scaffolding, pit propping, towers, and lattice masts; HS7306 Tubes, pipes, hollow profiles, and cross sections; and HS7318 Threaded screws and bolts.

There is no point in adding a CBAM to imported iron ore, iron and steel, and articles made of iron and steel. The UK’s steel-making capacity has dropped to next to nothing over the last 20 years. Several factors have driven this, including outdated blast furnaces and Electric Arc Furnaces and low consumer demand, but the UK’s high industrial electricity costs and ETS costs are also major drivers of these closures.⁷⁴ Even UK Electric Arc Furnaces that recycle steel and therefore have much lower emissions than blast furnaces have struggled to compete with imported products unless they receive government subsidies or have a contract to supply steel to the UK’s defence department.⁷⁵

There are many incongruities in the UK’s emissions policy, most obviously that the Government saved the UK’s last remaining blast furnaces from closure in 2025, but now the Government is proposing to either join the EU’s more expensive ETS market or create its own CBAM, which proposes to add a carbon charge to imported iron ore concentrate, the principal ingredient for making virgin steel in a blast furnace. Adding a CBAM to a necessary import can only be viewed as a misguided revenue-raising exercise. There is no alternative to iron ore in the production of steel.

The UK’s disappearing steel industry

Redcar/Teesside – SSI UK

Redcar was one of Europe’s largest blast furnaces and produced 3 to 4 million tonnes of steel per year, but closed in 2015 due to high UK operating costs and global steel oversupply.⁷⁶ An Electric Arc Furnace (EAF) was proposed for the site and received planning permission in 2024 but was never built.⁷⁷

Rotherham and Stocksbridge – Liberty Steel

Liberty Steel produced roughly one million tonnes a year of EAF steel for engineering and speciality steels. It was mothballed in 2020 and has been effectively insolvent since 2023. High UK industrial electricity and ETS costs made this small electricity-dependent steel recycler uncompetitive with global steel.⁷⁸

Port Talbot – Tata Steel UK

Port Talbot was the UK’s largest blast furnace steel producer, producing 4 to 5 million tonnes a year, but it closed in 2024. It produced slab and strip steel for downstream mills. The blast furnace will be replaced by an Electric Arc Furnace that will recycle domestic scrap steel. The EAF mill is expected to come into production by 2028, but its capacity will be reduced to 1.5 to 2 million tonnes, roughly a third of the old blast furnace capacity.^79,80

Many other small EAF and remelting producers of speciality steels closed between 2005 and 2025 due to global competition and high UK energy costs. Some were bought by larger groups, but most went out of business.⁸¹

The UK’s Remaining Steel producers

Scunthorpe-based British Steel

Scunthorpe has the UK’s last two blast furnaces and has a capacity to produce 3 to 4 million tonnes of steel annually. British Steel’s Chinese owners, Jingye, tried to close Scunthorpe, claiming it was incurring losses of about £700,000 per day.⁸² British Steel stated in March 2025:

‘The blast furnaces and steelmaking operations are no longer financially sustainable due to highly challenging market conditions, the imposition of tariffs, and higher environmental costs relating to the production of high-carbon steel.’

Despite this, the blast furnaces were ‘saved’ and effectively nationalised in April 2025 by the current government to keep them operating. The government were trying to sell the company to another operator, but the UK’s emissions taxes and the need to import both iron ore and coking coal make it a very uncompetitive steel producer globally.⁸³ The government was proposing to merge British Steel with the insolvent Liberty Speciality Steels EAF in Rotherham to keep the supply of steel for downstream steel producers and close Scunthorpe’s loss-making blast furnaces.⁸⁴

According to the September Committee of Public Accounts, government intervention in British Steel Ltd is now costing £1.3 million per day to keep it running, and total costs through the end of June 2026 were £642 million.⁸⁵

Cardiff-based – Celsa Steel UK

Celsa is a small EAF steel recycler, producing about 1.2 million tonnes of mainly rebar for construction. It has survived by focusing on a single product and market: the domestic rebar market.

Outokumpu Stainless – Sheffield

Outokumpu is another EAF producing 0.7 to 1 million tonnes annually of stainless steel and high-alloy grade steel. It survives by producing high-value stainless products for UK high-tech and high-value engineering firms and for export. The company is part of a large Finnish multinational with diversified operations.

Sheffield Forgemasters

Forgemasters is another small EAF producing less than 0.3 million tonnes annually for the UK’s defence and nuclear industries.⁸⁶ It is owned by the UK Ministry of Defence, which acquired it in 2021 to secure critical defence supply chains. This state backing shields it from both market forces and energy cost considerations.

Overall, UK steel production capacity has fallen from 15 million tonnes in 2015 to just 6 million in the last 10 years, while actual production has fallen from 12.1 million tonnes in 2014 to 2.6 million tonnes in 2025. In 2025, the UK ranked 41st among the world’s top 50 steel producers, down from 35th in 2024 and 18th in 2014, according to World Steel.⁸⁷

Figure 6: UK Steelmaking Capacity

Carbon taxes increase EAF costs, and CBAM increases imported material costs

Although the UK’s proposed Electric Arc Furnaces (EAFs) are intended to replace some of this lost blast furnace capacity, the UK’s high electricity and carbon costs will make it difficult or impossible for domestically recycled steel to compete.⁸⁸ Converting more of the UK’s steel production to EAF will also have other problems. Recycled steel is often of poor quality because it can be contaminated with waste materials from its previous use, or it may have been low-grade steel to begin with. It is typically used for Rebar in reinforced concrete construction. Many of the UK’s downstream steel users need very pure, high-quality steel to produce their vehicles, aircraft engines, parts, and precision instruments. The UK currently exports its scrap steel to India, Turkey, Egypt, and other countries with cheaper electricity, lower or no carbon pricing, and much larger, more modern EAFs.

Adding a CBAM to imported steel now that the UK’s ability to produce steel domestically has almost disappeared would only penalise the UK’s other export industries that use steel to make higher-value products: such as cars, vans, trucks, aircraft parts and engines, gas turbines, mining and construction equipment, and other precision engineering products. Adding a CBAM to their essential imported materials would make their products less competitive in their main export markets.

This collapse in demand for domestically produced steel reflects the deindustrialisation of the UK that has taken place since the UK introduced the Climate Change Levy (CCL) on business energy use in 2001, then joined the EU’s ETS scheme in 2005, and finally added the UK’s Carbon Price Support (CPS) on carbon emissions from electricity producers in 2013. The additional CPS carbon tax was intended to ensure a minimum carbon price, as the Cameron/Clegg coalition government considered EU ETS prices too low.⁸⁹ However, the CPS raised electricity prices for intensive users such as steel and chemical production, while also increasing their emission taxes. The indirect ETS and CPS taxes embedded in electricity costs were partially rebated to eligible sectors, but the process required applications, audits, and cash-flow problems because rebates were paid months after electricity payments.

However, the UK did not rebate direct ETS and CPS emission taxes. Competitors in the EU steel and chemical sectors did not have to pay this additional CPS tax, allowing them to undercut UK producers and drive many out of business. After the UK left the EU, it replaced the EU’s ETS with its own ETS in 2021, and the price dropped, but it was too late to save UK industry.

Adding a CBAM to imported steel now would also increase the cost of domestic infrastructure, including rail, bridges, tunnels, structural beams and columns, as well as wind turbines, electricity pylons, and substations. The UK intends to install more wind capacity and build a new grid to distribute electricity more effectively, but it cannot make the steel needed to do this. Adding a CBAM to the imported steel required for these projects would undermine the green agenda that the new grid and additional wind farms are meant to support.

The UK’s deindustrialisation and low infrastructure investment are more apparent when actual steel production and steel imports are combined, as shown in Figure 5 below. Steel production has declined by 80% since 2005, from 13-14 million tonnes per year to 2.6 million tonnes in 2025, of which only 1.5-1.7 million tonnes were virgin steel produced in blast furnaces using coal and iron ore. The government has published a steel strategy to address the future of UK steel production.⁹⁰

Figure 7: UK steel demand – total imports in tonnes

The UK’s total steel imports have been relatively stable but are almost 3 times the tonnage of domestic production (see Figure 7 above). Many people believe China is the culprit behind declining UK production; however, the UK imports two and a half times as much HS 72 iron and steel from Germany as from China. China is only the UK’s ninth-largest supplier of basic iron and steel by value. Germany, Spain, the Netherlands, France, and Belgium all export a greater value of basic HS72 iron and steel to the UK. In total, the EU supplied 60% of the UK’s iron and steel imports and half of the UK’s imports of products made with iron and steel. EU countries also have ETS schemes but in general, they have much lower environmental and policy costs and receive greater protection: EU steel receives free allowances for benchmark products such as coke, sinter, hot metal, and EAF steel.⁹¹ EU member state governments, especially those of Germany, France, and Spain, subsidise industrial electricity more than the UK does. Thirteen mostly former Soviet bloc EU steelmakers have received support from the EU’s Innovation and Modernisation Funds, enabling them to upgrade their plants and make substantial investments in EAFs.^92,93 EU steelmakers also benefit from infrastructure demand, as do producers in China and the US.

Figure 8 below shows that even the UK’s wholesale electricity prices for very large non-domestic users are higher than those in other industrial EU countries, including environmental taxes and policy costs. Major UK companies have built or are building manufacturing facilities in the EU countries included in Figure 8 which will further deindustrialise the UK. BAE Systems is building manufacturing facilities in Italy, Poland, and Czechia; Jaguar Land Rover has a manufacturing facility in Slovakia, Rolls-Royce has a manufacturing facility in Germany, and both BP and Shell have oil refineries in the Netherlands. France provided the UK with 8.5% of its electricity in 2025. Several of these countries continue to use coal to produce electricity; Poland gets 60% of its electricity from coal.

Figure 8: UK electricity prices and policy costs compared with other industrial EU countries

Deindustrialisation has lowered the UK’s demand for steel, as have complex construction regulations and delays to infrastructure projects, thereby reducing the UK steel mills’ ability to benefit from economies of scale. That said, the BSSA claims that the EU steel industry is also in crisis, that EU production is far below historic levels, and that EU steel mills are operating at 60% capacity.⁹⁴

EU steelmakers can export steel to the UK profitably because they receive far more ETS protection, energy subsidies, and investment support than UK mills – and although EU steel is also struggling, its scale and state backing keep it competitive while the UK industry collapses.^95,96

Major EU steel producers do not add ETS or carbon taxes directly to their industrial electricity prices, and many compensate their industries for any ETS-related electricity costs. This is one of the main reasons that UK EAF steel is uncompetitive in the EU market. Figure 9, below, shows that UK commercial electricity users of all sizes pay more for electricity than companies in the other major EU steel producers.

Figure 9: 2024 industrial electricity prices by size of company and country

Under EU ETS rules, member states may refund a large proportion of indirect ETS costs to energy-intensive industries such as steel, aluminium, cement, chemicals, and fertilisers; this is called Indirect Cost Compensation (ICC). The EU’s goal is to keep its energy-intensive industries competitive as it decarbonises and prevent companies from moving their production to countries with lower carbon taxes and regulations. Each EU country has a slightly different approach.⁹⁷ Despite the EU’s faux abhorrence of state aid, 13 of the 27 member states run state aid schemes to compensate energy-intensive industries for ETS costs passed through in electricity prices.

In Germany, industrial users are exempt from most electricity surcharges and receive rebates on renewable levies and 75% to 85% refunds of indirect ETS costs for eligible industries. France provides large rebates and has heavily regulated and subsidised industrial electricity. Spain has one of the most generous compensation schemes in the EU, with a €2.9 billion scheme to compensate energy-intensive industries for indirect ETS costs.⁹⁸ The Netherlands both compensates for indirect ETS costs and caps industrial electricity taxes. Belgium provides rebates and exemptions for energy-intensive users, and Italy also compensates for indirect ETS costs.⁹⁹

Major EU steel‑producing countries do not add ETS or carbon taxes to industrial electricity – instead, they compensate or exempt steelmakers from these costs, while the UK does not, which is why EU steel remains more competitive despite higher headline carbon prices. Figure 10 below comes from an Ofgem report published in 2021 but uses 2020 data, when the UK was a member of the EU’s ETS market. It shows average electricity cost in £/MWh, including the maximum discounts applied to Energy Intensive Industries with annual consumption of 100 to 5000 GWh. Although wholesale costs are similar, Energy-Intensive Industries in Germany, France, or the Netherlands do not pay balancing costs or the Carbon Price Support and have much lower network and policy costs. The Graph makes it obvious why energy-intensive industries struggled to survive in the UK and why converting to Electric Arc Steel furnaces won’t revive the UK’s steel industry.

Figure 10: Electricity prices for Energy-Intensive Industries showing balancing, network, policy costs, and the UK’s CPS cost. The ETS is included in the wholesale price.

In Figure 10, all countries shown bought allowances on the EU ETS. UK Balancing costs are high because of the amount of intermittent wind and solar electricity in the UK grid; however, after the UK left the EU, it established its own ETS market.¹⁰⁰ The UK ETS price has been below the EU’s ETS price since the two markets were split (see Figure 2 on page 15). The UK ETS also has reduced ETS free allocation and compensation rules, even as EU countries continue to operate large compensation schemes, thereby increasing UK industry’s relative disadvantage.^101,102,103 UK indirect ETS compensation is lower, and its industrial electricity prices are higher; UK steelmakers pay a larger share of the carbon cost in their electricity bills and receive lower rebates than their EU competitors. Liberty Steel, an EAF producer, explicitly attributes its collapse to the UK’s high electricity prices and ETS costs.

The UK and EU followed the same ETS rules, but EU countries chose to give far more generous compensation for electricity‑related carbon costs. In contrast, the UK adopted a smaller scheme and imposed additional carbon taxes, leaving UK energy‑intensive industries at a structural disadvantage. There is also a cash-flow disadvantage, as CPS and ETS costs embedded in electricity bills must be paid before companies receive any government compensation. Companies must apply for compensation and verify the electricity they have used and their eligibility under the compensation scheme.¹⁰⁴ Payments are annual or periodic rather than monthly, creating cash flow problems.¹⁰⁵

The current government is proposing that the UK join the EU’s more expensive ETS market and its CBAM market in order to prevent UK steel exports from being subject to the EU’s CBAM payments. However, lower UK production and high energy prices for reshaping and recycling steel have, in turn, destroyed the UK’s steel export industry, as seen in Figure 11 below, with the exception of the export of scrap steel, which has increased from 41% of UK steel exports by weight in 2007 to 78% in 2025.

Figure 11: UK steel exports including scrap steel exports

In 2025, approximately 78% of the UK’s HS72 basic steel exports were scrap steel by tonnage, and 45% by value. It is nonsense to believe that joining the EU’s CBAM would help UK steel exports to the EU; the EU’s more expensive ETS would simply increase the cost of producing the little steel the UK still makes, making it even less competitive against EU steel in the EU market. Currently, the UK imports the majority of its basic iron and steel from Germany, Spain, the Netherlands, France, and Belgium. In total, in 2025, EU countries provided about 60% of the UK’s elemental iron and steel (HS72) by value, while India provided 9%, South Korea 7%, and Turkey 5%. China supplies approximately 4%, and the US contributes only 1.3%. Joining the EU’s CBAM would force the UK to increase the cost of these non-EU imports, even though the UK needs them as base material for other goods.

UK Security of Steel Supplies

The UK’s steel supply from European allies is not secure, as most of these countries rely on imported iron ore, coking coal, or both. Joining the EU’s ETS and CBAM will make supplies of basic iron and steel, products made with iron and steel, more expensive. France, Germany, the Netherlands, and Belgium import iron ore from Canada, South Africa, Brazil, and Liberia. Sweden is the only EU country that still has enough iron ore to export. In 2021, Russia supplied Germany with 20 of its 39 million tonnes of coal imports, even though Russia occupied Crimea and conducted military exercises with Belarus involving 200,000 troops, 760 armoured vehicles, and 80 aircraft. Admittedly, following Russia’s 2022 invasion of the rest of Ukraine, German coal imports from Russia have fallen dramatically from over 20 million tonnes in 2021 to fewer than 10,000 tonnes in 2025. German imports of Russian and Ukrainian iron ore have also declined by two-thirds. Incredibly, German steel production relied on the aggressor and the victim for supplies of coal and iron ore. Both sources are equally susceptible to war, which means the UK’s finished steel imports from Germany are as well.

This stark example underscores the need for the UK to build alternative, reliable supply chains if it is to continue producing BOS steel at Scunthorpe and reshaping imported finished steel in its Electric Arc Furnaces. Relying on Russian iron ore and coal for steel production and on Russian gas to power its industry was neither a strategically nor a militarily sound move by Germany.

The UK should be concerned about supply chain security, as it has recently announced a major rearmament program that will require substantial quantities of steel and aluminium. Relying on finished supplies that rely on raw materials from a potential adversary for the steel or aluminium needed to replace any aircraft, drones, ships, or submarines is not a sensible strategy.

Like most EU countries, the UK needs to import both iron ore and coking coal for its remaining (Chinese-owned) blast furnaces. In 2020, the UK still imported over 2 million tonnes of coking coal (HS 27011210), over a third of which came from Russia, as did 300,000 tonnes of iron ore. In 2025, the UK’s iron ore imports fell to just 2.9 million tonnes, with Sweden, Brazil, Canada, Mauritania, and the United States as its largest suppliers, while its largest coking coal suppliers were the US, Australia, and Ireland. The UK’s coking coal imports had dropped to less than 250,000 tonnes in 2025. The UK could supply its own coking coal, but the current government abandoned plans to open a new mine to help the UK meet its Net Zero commitments.

The UK has a significant trade deficit with China, amounting to $2.3 billion in HS73 Articles of iron and steel, and a smaller trade surplus with China of $194 million in HS72 Iron and Steel. UK Iron and Steel production has suffered enormously due to the UK’s adherence to the false market of emission taxes and allowances. UK exports of energy-intensive goods fell, and imports increased more than 20 years ago, as production shifted from the UK, the US, and the EU to Asia.

Better UK government policy could save what remains of UK industry, but only if the UK stays outside the EU and sets its own regulations. The current UK ETS system imposes taxes and compliance costs on domestic producers; the EU’s ETS will impose even higher taxes on domestic producers, while joining the EU’s CBAM will add additional taxes and compliance costs on imports, even on products no longer made in the UK. A more effective solution to reduce manufacturing emissions and compliance costs is to remove emissions taxes and replace them with tax breaks to accelerate investment in carbon-reducing innovation, plant, and equipment.

Cement

The latest UK CBAM proposal covers imports of: white Portland cement; other Portland cement; aluminous cement; other hydraulic cements; cement clinkers; and other Kaolinic clays.¹⁰⁶

The UK currently produces approximately 7.3 million tonnes of cement per year (2024), roughly half the level in 2000. Production has steadily declined due to high energy costs, environmental regulations, and rising imports, leaving output at its lowest level since the 1950s.¹⁰⁷

UK cement imports have nearly tripled since 2008, rising from 12% of sales to 32% in 2024. However, the UK still produces over two-thirds of the cement it uses domestically. UK cement imports fell to a low of 1.183 million tonnes in 2012, but after the CPS was introduced in 2013, imports have increased every year, reaching a high of 3.65 million tonnes in 2022.¹⁰⁸

Rather than joining the EU’s CBAM, British cement is a commodity that could benefit from applying a UK CBAM on imports from the EU, which provides 100% of UK cement clinker imports, 75% of UK cement (excl. Portland cement) imports, and about 85% of UK imports of Aluminous cement.¹⁰⁹ Joining the EU’s ETS and CBAM will not protect UK producers from EU imports that benefit from lower energy costs.¹¹⁰ While the EU’s default emissions for the UK’s Kaolin and Kaolinic Clay exports, by far the UK’s largest exports to the EU in the cement sector, are lower than the EU’s benchmark emissions, no CBAM would be paid.

Traditionally, cement producers used coal as the primary fuel in cement kilns to generate the 1,450°C thermal energy required to convert the calcium carbonate found in limestone to calcium oxide, which is then combined with various oxides to make clinker materials; coal has been increasingly replaced by gas, which has lower CO₂ emissions per tonne of clinker. However, gas is more expensive than coal, so savings on emissions allowances are partially offset by higher gas prices. Many producers have turned to Refuse Derived Fuels (RDF) and biomass.¹¹¹ The clinkers are then cooled and ground using electricity to make cement powder.

Almost two-thirds of the emissions come from the calcination process, which releases one CO₂ molecule for each CaO molecule produced, regardless of the heating method employed, although producers typically use coal, gas, or RDF to meet the required heat input. About 30% of emissions come from heat-source fuels, and less than 10% from electricity used for factory equipment such as grinders, fans, and conveyor belts.

Cement production is highly carbon-intensive, producing up to 0.9 tonnes of CO₂ per tonne of cement. Producers must purchase UK ETS allowances to cover their direct emissions and pay the Climate Change Levy, which is added to their electricity bills. But producers must also pay the indirect Carbon Price Support (CPS) and ETS costs incurred by their power suppliers, which are passed on through higher wholesale electricity prices. Cement production is classified as an electricity-intensive industry (EII) in the UK, so it receives compensation for indirect CPS costs and partial compensation for indirect ETS costs, as well as a 92% discount on the CCL rate. But the UK has the highest industrial electricity prices in the developed world, partly due to these direct and indirect carbon costs.

However, concrete typically lasts 50 to 100 years, and sometimes much longer. The Pantheon in Rome is made primarily of concrete and has stood for about 2000 years. And although Roman cement is slightly different from today’s cement, Eddystone Lighthouse in Cornwall, built in 1759 using hydraulic lime concrete, is still standing, as is the Thames Tunnel, built in 1843 using Portland cement.

The UK’s CBAM is wrong to consider only the CO₂ emitted during cement production, without accounting for the material’s longevity. A product that lasts for 50 or more years should be charged 2% of the production emissions costs.

In addition to the UK Emissions Trading Scheme (ETS), cement producers face several environmental taxes and regulatory obligations: the Climate Change Levy (CCL) on energy use; the Aggregates Levy on rock, sand, and gravel used in concrete; the landfill tax on cement plant waste; strict Environmental Permitting Regulations limiting emissions of NOx, SO₂, particulates, and dust emissions; and compliance with the UK’s Net Zero 2050 targets. Cement producers are under pressure to adopt Carbon Capture and Storage and to use alternative fuels to meet Net Zero targets. These taxes and regulations are designed to raise costs and push the industry toward lower emissions, but neither the UK’s proposed CBAM nor the EU’s CBAM will compensate producers for these costs; the CBAMs will only compensate for the differential between domestic and imported ETS costs.

The UK imported 4.25 million tonnes of the cement products covered by the UK’s proposed CBAM in 2025. For context, in 2025, the UK exported just 150,000 tonnes of cement and 674,000 tonnes of HS 25070080 Kaolinic clays (other than Kaolin).

Hydrogen

Finally, the current UK and EU CBAM proposals also cover hydrogen. The UK currently produces almost all of the hydrogen it uses domestically because UK hydrogen demand is very small. That said, the UK imports some hydrogen, and its domestic industry would benefit from a CBAM if it protected UK producers from the EU, which provides over 98% of the UK’s hydrogen imports, as this industry is expected to grow.

Although the UK does not currently produce hydrogen in large quantities, several plants are under construction.¹¹² In 2025, the UK produced approximately 27 TWh, equivalent to about 0.8 million tonnes of Hydrogen. Most of this, 25 TWh, or 0.75 million tonnes, was generated from natural gas using steam methane reforming without emissions capture. This is known as Grey Hydrogen. The UK also made a small amount, 1-1.5 TWh (30 to 40 kt), of hydrogen using electrolysis powered by renewables, which is known as Green Hydrogen.^{113 114} And an even smaller amount, 0.5 TWh or 15 kt, of hydrogen from natural gas, where the CO₂ emissions are captured. This is known as Blue Hydrogen.¹¹⁵

Currently, 2 GW of low-carbon hydrogen is under construction, including 1 GW of Green Hydrogen and 1 GW of Blue Hydrogen. The government plans to develop 10 GW of low-carbon hydrogen capacity by 2030, with at least half of it generated by renewable-powered electrolysis.

Grey hydrogen is produced by combining methane (CH₄) with steam (H₂O) at temperatures between 700°C and 1,100°C to release hydrogen (H₂) and Carbon dioxide (CO₂). The furnaces use natural gas to generate the required heat, thereby producing CO₂ that contributes to the chemical reaction’s total CO₂ emissions. The CO₂ emitted by the Steam Methane Reforming (SMR) plant must be offset by the purchase of ETS allowances for the CO₂ emitted during hydrogen production. The process emits roughly 10 tonnes of CO₂ for every tonne of hydrogen produced, plus the upstream emissions from the natural gas supply. Grey hydrogen production is not subject to CPS or CCL on its gas feedstock, as natural gas supplied as a feedstock to produce hydrogen is listed as a qualifying non-fuel use and is therefore exempt from the main CCL rates.¹¹⁶

The UK’s energy companies make hydrogen, as it is used in refining, fertilisers and ammonia and methanol production, and in some bus transport. The UK’s Wrightbus Hydroliner runs on hydrogen and is in use in London, Belfast, Birmingham, and Aberdeen.¹¹⁷ However, only the Aberdeen buses are refuelled with green hydrogen produced using renewable electricity; the others primarily use grey hydrogen. JCB¹¹⁸ has also developed a hydrogen combustion engine for construction and agricultural equipment.¹¹⁹

However, because hydrogen is expensive to store and transport, and because almost all UK hydrogen is Grey Hydrogen, it is surprising that hydrogen is on the UK’s CBAM list. Hydrogen is generally transported by converting it to ammonia or methanol. In 2024, the UK imported just 537 tonnes of hydrogen. Almost all of it is from the Netherlands or other EU countries, with only 5 tonnes imported from the US.

However, as hydrogen is used mainly to run buses and machinery to help the UK meet its Net Zero targets, imposing carbon taxes on UK production and a CBAM on imports seems counterproductive. Surely making hydrogen production cheaper by reducing the taxes on UK oil and gas companies and using tax credits to encourage hydrogen use would be better for the environment as a whole.

Chapter 5. Alternatives to CBAM

The government could take several courses of action to curb externalities from industrial processes. The first question must be: how bad are the externalities produced by UK manufacturers, which industries could be helped by import restrictions, and would taxing imported materials used by upstream manufacturers cost more than the externality?

Is climate change detrimental to life on Earth?

There should be a serious debate as to whether CO₂, water vapour, and other GHGs are causing the climate change currently attributed to them, and whether this effect is detrimental to animal and plant life on Earth. The Western world should also review its current regulations and taxes to determine whether these measures are actually reducing GHG emissions or simply shifting them to other countries/increasing tax revenues, and lowering living standards.

Is taxing externalities working, or are there more effective ways to reduce them?

If it can be proved that CO₂ emissions cause the problem and that controlling CO₂ is more effective than adapting to the ultimate change in climate, then the UK must review whether taxing carbon dioxide emissions has made UK manufacturers more efficient or simply encouraged heavy industry to move offshore. If it is the latter, a better solution is to remove carbon taxes and instead offer tax breaks for installing more efficient equipment.

Territorial emissions versus consumption emissions

Many developed nations have deindustrialised due to high taxes on territorial carbon emissions and now import emission-intensive goods produced in developing nations. This has allowed Western nations to claim they have cut their emissions when they have simply outsourced them. This has increased international development, and many previously impoverished countries are now middle-income countries according to World Bank GDP per capita measures. But this has not changed global emissions; it has simply changed which country produces them. If CO₂ is the problem, outsourcing emissions will not solve it.

The carbon price should reflect the lifespan of the product

Aluminium and steel used in car and aircraft production, which have a 25- to 30-year lifespan, should have their production emissions divided by 25 or 30, respectively. In contrast, aluminium used to make drink cans or steel used to make food cans should have ETS payments based on production-related emissions. Steel beams used in buildings or bridges should have their production emissions divided by 50 or 100, as the product will last for 50 to 100 years. This simple alteration to the calculation of carbon emissions would reduce the carbon taxes applied to the production costs of the developed world’s most useful and durable materials – steel, aluminium, cement, ceramics, and glass. This may not result in on-shoring, as many developing countries now have the newest, most efficient facilities, along with low wages and employment costs, but it might stop the exodus of remaining domestic production, at least to meet domestic demand. International demand is predominantly in the developing world, where it will remain while these countries build infrastructure and housing.

Rebate carbon taxes on imported materials for export goods production

Many of the products the government intends to subject to a carbon import tax, such as imported steel and aluminium, are essential inputs for high-value export products such as cars and aircraft engines. Adding a CBAM charge will increase production costs and make the end products less competitive internationally. At the very least, the government should rebate any CBAM charges when the goods made with the imported materials are exported. A better solution would obviously be not to charge a CBAM on goods that are not produced in the UK at the six-digit Harmonised System tariff code level. The government’s current proposed blanket CBAM on almost all aluminium, iron, and steel covers many metal shapes and thicknesses that are no longer produced in the UK. The system appears designed to force UK manufacturers to import goods only from EU manufacturers.

Creating a true Carbon Market between emitters and sequestrators

All carbon markets must become true markets; governments must cease issuing pollution permits (emissions allowances), except for industries of national importance, such as the defence industry. All other emission allowances should be sold only by businesses engaged in CO₂ sequestration, such as forestry, farming, or physical carbon capture. This would encourage farmers to plant winter cover crops by providing a revenue stream from selling carbon credits. To participate in this market, farmers should have their soil carbon measured annually and be able to sell any increase in stored carbon in their local Carbon Credit Market. Forestry businesses could sell carbon credits sequestered through replanting harvested timber, providing a revenue stream as their future assets grow. Even local councils could sell the carbon credits from carbon sequestered by tree-lined streets and local parks.

This would create an actual ‘Net Zero’ emissions certificate for emission-intensive products, for which consumers may be happy to pay a higher price. Carbon credit sales should be limited to domestic sequestration to prevent fraud, or worse, prevent industrialised nations from paying farmers in developing countries to remain underdeveloped, as is currently occurring.

Innovation and efficient production

It would be better to encourage innovation and more efficient products and production methods, with less environmental regulation and tax incentives for adopting new, more efficient plants and equipment. Free markets naturally accelerate innovation, which improves production efficiency, since it is always in a company’s interest to be more efficient unless environmental regulatory complexity hampers it. For example, improvements to the internal combustion engine have reduced total emissions by 60% to 80% over the 30 years from 1990 to 2020, despite the increase in the number and type of cars on the road and the increase in mileage driven.¹²⁰

Companies will invest in innovation if they are sufficiently incentivised. Porsche invested more than $100 million in developing a synthetic petrol alternative called e‑fuel. E‑fuel does not mean ethanol added to petrol; e-fuels are carbon‑neutral synthetic fuels designed to keep internal‑combustion engines running after 2035. They are produced using electricity, water, and captured CO₂, and behave almost identically to petrol or diesel.¹²¹

Supply-side innovation can be encouraged by tax deductions for investment in efficient production methods, and tax-exempt investment funding for capital investments.¹²² This avoids governments ‘picking winners’ because it allows tax-exempt debt for all capital expenditures (property, plant, and equipment), recognising that lowering the cost of capital expenditure speeds adoption of the latest technologies and drives broad productive efficiency.

The UK government currently subsidises low-emission innovation, such as the Net Zero Teesside project, which is building electricity production with Carbon capture.¹²³ While many may consider this project commendable, government subsidies give this technology and location an advantage over other companies, locations, and potential technologies. Instead, investment funds could have been raised for these types of investments through the use of full expensing for research and development, and for the installation of more efficient equipment.

Tax-efficient investment programs have the advantage of being technology-neutral and allowing market forces to determine which technologies are most useful and efficient, as they will be the ones most widely adopted and will consequently attract the most investment. This is important considering the track records of most Western Governments in not predicting innovation.

Instead of imposing a carbon tax on imported goods, as the CBAM proposes, encouraging investment, trade, and market competition to incentivise and accelerate more efficient technology use would be more effective and encourage economic growth. In addition, breakthrough technologies that lower emissions or reduce waste could receive a 15-year tax exemption on profits from their inventions. This is another positive incentive to encourage innovation rather than the growth destroying imposition of taxes, regulations, and enforced adoption of suboptimal technology.

Economic Freedom and Competition

Lightly regulated open markets and free trade should be given equal weight to supply-side tax and investment policies as an alternative path to decarbonisation without CBAM’s economic downside of deindustrialisation and lower living standards.

Market competition is important. Competitive markets drive down costs, give innovators easier access to markets, and enable consumers to demand cleaner, cheaper, and more reliable electricity. By contrast, monopolies have no economic incentive to innovate, care about consumer preferences, or cut costs. A recent study by the Pacific Research Institute, comparing competitive and monopoly US power markets, found that competitive power markets are decarbonising 66% faster than uncompetitive ones.¹²⁴

Countries with higher levels of economic freedom tend to have higher levels of environmental performance. This is demonstrated by a strong positive correlation between the Economic Freedom Index developed by the Fraser Institute and the Environmental Performance Index of Yale University ^125,126 The Economic Freedom Index rates the degree to which a country’s policies and institutions encourage voluntary exchanges, the freedom to participate and compete in markets, and the upholding of the rule of law and private property rights. The Environmental Performance Index is a comprehensive sustainability measure based on 58 indicators and presented as a score from 0 to 100. From these two indices, we can conclude that countries with a more intensive capitalist model also score higher on air quality, drinking water, waste management, and other indicators related to environmental preservation and climate impact mitigation.

This result is not surprising. When individuals own and directly manage resources, they have a much stronger motivation to preserve and improve them, while avoiding overexploitation and the inefficient conflicts typical of communal ownership and management. Competition drives investors and producers to develop cleaner technologies and more efficient processes. They do so because this improves productivity (lowering cost per unit) and, as an unintended consequence, reduces their carbon footprint on natural environments. Hence, more liberalised economies invest more in research and development, facilitating the creation of greener, more sustainable technologies.

Economic growth, driven by economic freedom, provides the resources needed to invest continuously in improved environmental protection. Mitigation and adaptation are as necessary as they are expensive. Therefore, richer countries can afford to implement some environmental regulations whose implementation costs would be unaffordable in less prosperous economies. Richer nations also have the capacity to fund ecological initiatives that favour conservation, such as modern water treatment and waste management systems found in the developed world. Additionally, social preferences matter, as people in more prosperous societies tend to prioritise environmental protection when their basic needs are met.

When new investments become cheaper and face fewer government-imposed barriers, the latest, cleanest, most efficient technologies are deployed faster and in greater numbers. Innovation, energy efficiency, and the technology transition accelerate as costs fall. Many developed countries have ignored this factor. For example, the UK’s EV mandate enforces existing lithium-battery technology, even though more efficient technologies, such as combustion-engine e-fuels, hybrids, or improved battery technology, could be better long-term solutions.

Chapter 6. Conclusions

While CBAM charges address carbon leakage and discourage companies from offshoring production to avoid carbon taxes, they will not help if emission-intensive industries have already moved their production offshore or closed, as is the case with the UK’s aluminium, steel and, fertiliser industries.

CBAM will not bring industry back to the UK because companies relocate production for other reasons as well, such as employment regulations, wages, employment taxes, environmental regulations, water pollution regulations, and regulations that limit access to raw materials. Sometimes companies are enticed to move their production by grants from the government of their new location. For example, environmental regulations governing the refining of critical minerals and rare earths in the US and Australia have driven these industries to China, where environmental regulations are fewer, and many manufacturers that use these products have followed suit. Similarly, in the UK, restrictions on opening new oil wells have driven UK oil companies and oil refineries out of business, as well as other downstream industries, such as chemical and plastics manufacturers. A CBAM won’t make companies onshore their production, as it doesn’t compensate for or even address these other costs.

Nor will a CBAM help if most domestic manufacturers have gone out of business, as has happened in the UK for aluminium and steel production. Adding a CBAM to imported steel or aluminium used to produce high-value goods will only increase the costs of UK downstream producers. It will not bring back blast furnaces and aluminium smelters. However, if the UK is to keep high value-add downstream production in the UK, it must not increase its material input costs by adding a CBAM. The transport machinery and equipment sector, a large user of steel and aluminium, is also the UK’s largest goods export industry, so its products must remain competitive internationally. CBAM charges on imported raw materials will have the opposite effect.

However, if the government is determined to add a CBAM to imported products or an ETS to domestically produced products, these charges should be divided by the expected lifespan of the goods: the ETS charge on the aluminium used in a plane or EV will have a much greater lifespan than the aluminium used in a drink can. However, even if spread over the product’s lifespan, such charges will still make UK goods more expensive for domestic consumers and less competitive globally if their export competitors do not have to pay similar taxes.

Creating a real market for CO₂ emissions between emitters and sequestrators would at least achieve net-zero emissions among market participants. It could be considered a real market solution as long as the government does not force companies to participate; however, it would not address other production externalities. Nevertheless, a real market solution would be less cumbersome to administer than the present system, thereby benefiting the economy.

However, the best solution is to encourage companies to install the most efficient plant and equipment through reduced regulation, investment incentives, and tax incentives, yielding greater environmental benefits and reducing compliance and enforcement costs. Encouraging manufacturers to update their plant and equipment to the most efficient available would lower energy use, reduce pollution, save money, and help maintain employment and value-added industries in the country.¹²⁷

Annexe 1: How UK ETS, CPS, and CCL charges are calculated

Emission Trading Scheme (ETS) costs are calculated based on carbon emissions from energy-intensive industries with more than 20 MW thermal input, electricity generation, domestic and intra-EEA aviation, and domestic maritime transport over 5,000 tonnes. Emissions are covered by surrendering ETS allowances bought at government auctions or on the secondary market. The CPS is levied only on fossil fuel inputs used specifically for electricity or combined heat and power generation. ETS and CPS charges from electricity generation are embedded in wholesale electricity prices and are therefore passed on to domestic and industrial consumers, and are indirectly reflected in electricity prices. However, Energy Intensive Industries (EIIs) can apply for partial government compensation for these indirect ETS and CPS costs if they have a Climate Change Agreement.

CCL is a separate environmental tax on business energy consumption. The CCL is charged on electricity, natural gas, LPG, and certain solid fuel use, and is a fixed price per unit of power consumed: 0.801 p/kWh for gas and electricity, and 2.175 p/kg for LPG. The CCL is charged on non-domestic customers only, calculated directly from electricity consumption using a fixed p/kWh rate.

UK ETS – How the cost is calculated (indirect electricity cost)

The UK ETS is not a direct charge on electricity bills. Instead, power generators must buy ETS allowances, and they pass these costs into wholesale electricity prices.

How ETS cost is calculated for compensation purposes

The UK uses a standard formula to estimate the indirect ETS cost embedded in electricity prices:

• ETS cost = (ETS allowance price × Emission factor × Electricity consumption)
• The emission factor represents the carbon intensity of marginal generation.
• The formula is used to calculate compensation for EIIs.

Carbon Price Support (CPS) – How the charge is calculated

CPS is a tax on fossil fuels used for electricity generation, not on electricity consumption. Generators pay CPS based on the carbon content of the fuel they burn.

Official CPS calculation formula

CPS liability = Fuel used × Emission factor × CPS rate
(CPS rate is expressed in £/tonne of CO₂)

How CPS affects electricity prices

Generators pass CPS costs into wholesale electricity prices.

Emission Intensive Industries (EIIs) can receive compensation for these indirect CPS costs.

Climate Change Levy (CCL) – How the charge is calculated

CCL is a direct tax on business electricity consumption. It appears as a line item on industrial and commercial electricity bills.

CCL charge = Electricity consumed (kWh) × CCL rate (p/kWh)

Rates are set annually by HM Treasury. Energy-intensive industries (EIIs) with Climate Change Agreements (CCAs) receive a discount, not an exemption.

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