Electricity imports will be treated differently under the United Kingdom’s carbon-border mechanism and the EU’s Carbon Border Adjustment Mechanism (CBAM) when the British system begins on January 1, 2027, creating separate compliance requirements for cross-Channel power and industrial trade.
The UK regime will cover specified products in aluminium, cement, fertiliser, hydrogen, and iron and steel, according to HM Revenue and Customs. Unlike the EU mechanism, which requires the purchase and surrender of CBAM certificates, the British system will operate as an import tax.
Electricity itself will not be included in the UK mechanism at launch, while electricity imports are covered by the EU CBAM. The divergence also extends to emissions accounting for manufactured products, with the two systems taking different approaches to emissions associated with purchased electricity.
Indirect emissions remain outside the initial UK charge
The UK will exclude indirect emissions when its mechanism starts, meaning emissions linked to electricity purchased for manufacturing will not initially form part of the British carbon charge on covered goods.
The EU already accounts for indirect emissions in certain CBAM sectors. This creates a further difference for manufacturers and suppliers whose products move between the two markets.
A September 22 analysis by Paul Hastings said the UK’s deferral of indirect emissions is expected to continue until 2029 at the earliest. The analysis also identified differences between the UK and EU systems covering product classifications, thresholds and evidence requirements.
These distinctions mean that emissions information prepared for one jurisdiction may not necessarily establish compliance with the other system.
EU electricity rules do not mirror the general threshold
The EU’s 50-tonne annual exemption for several CBAM sectors does not extend to electricity or hydrogen. Electricity traders therefore cannot rely on the threshold to place smaller volumes of imported power outside the EU mechanism.
The treatment of electricity creates a specific asymmetry for cross-border power trade. Electricity excluded from the UK regime can nevertheless fall within the EU CBAM when it moves in the opposite direction.
A UK exclusion therefore does not provide a corresponding exemption when British electricity enters the EU. The applicable requirements instead depend on the destination, the commodity involved and the emissions covered by the relevant regime.
Different carbon liabilities apply to the same supply chain
Manufacturers supplying both British and EU markets will need to distinguish between the carbon-border obligations attached to each destination. A single contractual carbon-cost provision may not accurately reflect the liabilities arising under both systems.
The same manufacturing process can therefore produce different reporting and payment requirements depending on whether the resulting goods are sold into the UK or EU market.
Both mechanisms address the risk of carbon leakage, but their treatment of electricity demonstrates that the British and EU regimes cannot be treated as interchangeable compliance systems.
