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What does the UK’s Carbon Border Adjustment Mechanism (CBAM) mean for businesses?

March 2026

Executive summary

The UK Carbon Border Adjustment Mechanism (“CBAM”) is intended to address “carbon leakage”. In simple terms, it is designed to prevent UK businesses that are subject to the UK Emissions Trading Scheme (“ETS”) from being undercut by goods produced offshore in jurisdictions with weaker or cheaper carbon pricing. Where that occurs, CBAM applies an equivalent carbon charge on import.

The EU’s own CBAM regime entered into force in 2026, and the UK will introduce its own regime from 1 January 2027. Although the UK framework borrows heavily from the EU model, it is not identical. It will operate as a UK tax administered by HMRC, with its own scope, registration thresholds, reporting obligations, and relief mechanisms.

The principal risk for many businesses is not the level of the charge itself, but compliance failure. CBAM places the legal and administrative burden on UK importers, even where emissions data and verification sit deep within overseas supply chains. Importers of construction materials and other CBAM‑exposed goods are likely to feel the impact most acutely.

The changes require action well in advance of 2027. Businesses need to understand whether their imports fall within scope, whether the necessary emissions data can be obtained and verified, and how CBAM risk and cost should be addressed in live projects, tenders, and contracts. Below we explain how the UK CBAM framework fits together, where the principal pressure points lie, and what practical steps businesses, for example in the construction, engineering and infrastructure sectors, should be taking now.

1. When does the regime apply and to whom?

It applies to importers of specified CBAM goods into the UK, not to overseas producers directly. In practice, this places the legal burden on UK‑based businesses even where the relevant emissions data sits upstream in another jurisdiction.

Registration with HMRC is required once statutory thresholds are met. The Transitory Provision Regulations modify the early years of the regime by delaying certain registration and payment deadlines, but they do not remove the obligation to prepare.

Businesses should not assume that being below thresholds today removes the need for planning. Supply chains change, volumes fluctuate, and thresholds are tested over rolling periods.

2. The recent UK consultation: three core sets of UK CBAM Regulations and what they do

The principal provisions of the CBAM regime are contained in the Finance (No. 2) Bill 2025 to 2026, which is currently working its way through Parliament having passed its first two readings in the House of Commons.

UK CBAM is not contained in a single instrument. It is spread across three principal sets of regulations, each performing a distinct role.  Each of these is currently subject to consultation, with deadline for the response later this month.

(a) Transitory Provision Regulations 2026 (Draft)

These regulations smooth the initial years of CBAM implementation. They effectively set the timing of the new regime, delaying the deadline for registration for those triggering registration in 2027 and adjusting the timing for returns and payments up to mid‑2028.

Whilst aiming to be pragmatic, businesses face less frequent but larger early reporting obligations, increasing the stakes where data is wrong or incomplete.

(b) Calculation of CBAM Rate and Determination of Carbon Price Relief Regulations 2026 (Draft)

These regulations form the engine room of the regime.

They explain:

• how the UK CBAM rate is calculated by reference to UK ETS prices;
• how free allowances under the UK ETS are reflected in that calculation;
• when carbon price relief is available for overseas carbon pricing; and
• how that relief must be calculated and evidenced.

Two points are often overlooked.

First, relief is not automatic. It must be claimed, calculated by the importer, and supported by verified data.

Second, not all overseas carbon pricing schemes qualify. The regulations set detailed criteria for what constitutes a “qualifying carbon pricing scheme”, including transparency and verification requirements. For importers relying on foreign suppliers’ carbon taxes or ETS‑style schemes, this is a significant risk area that must be properly understood and managed.

(c) Administrative Provisions Regulations 2026 (Draft)

These regulations govern how CBAM operates day‑to‑day.

They cover:

• the information required on registration;
• what must be included in CBAM returns;
• record‑keeping obligations;
• reimbursement arrangements where CBAM costs are passed on; and
• HMRC’s powers to assess weight, value, and compliance.

From a risk perspective, these provisions are as important as the rate itself. HMRC has extensive powers to make assessments where data is missing or unreliable, including by estimation.

4. Which goods are in scope?

The initial scope of UK CBAM broadly mirrors the EU CBAM sectors, including cement, iron and steel, aluminium, fertilisers and electricity, while also extending to glass and ceramics. This extension is particularly significant for the construction sector, as well as downstream producers that utilise these goods in their supply chains.

It is important to be aware that UK CBAM does not apply only to raw materials. Schedule 16 to the Finance Bill defines CBAM goods exhaustively by reference to specific commodity codes, rather than by abstract product categories. As a result, CBAM can apply to a wider range of goods than is sometimes assumed where those goods fall within a listed code. For example, within the category of aluminium goods, the legislation applies to products such as aluminium wire, bars, rods and profiles, as well as unwrought aluminium. Where such goods are captured by Schedule 16, CBAM liability is determined by reference to their embedded emissions, including emissions attributable to precursor materials.

The scope of UK CBAM is not static. The legislation anticipates expansion over time, and businesses importing finished products should not assume they are out of scope simply because they are not importing raw materials. Precursor goods and embedded emissions can bring products into scope indirectly, even where CBAM exposure is not obvious at first glance. It will therefore be important to monitor the scope of goods captured by the regime as the consultation develops, the framework progresses through Parliament, and once the regime is implemented.

5. How the charge is calculated, in practical terms

At a high level, the CBAM charge reflects:

• the quantity of goods imported;
• the emissions embodied in those goods;
• the prevailing UK ETS price, adjusted for free allowances; and
• any eligible overseas carbon price already paid.

In practice, this requires:

• accurate emissions data at installation level;
• identification of relevant precursor goods;
• verification by accredited third‑party verifiers; and
• detailed record‑keeping (or associated audit rights) for at least six years.

Default values may be available in limited circumstances, but reliance on defaults is unlikely to be cost‑optimal and may attract scrutiny.

6. The interaction with EU CBAM

For UK businesses exporting to the EU, or operating integrated UK‑EU supply chains, dual compliance is a real issue.

EU CBAM is already in force in a transitional phase, with full financial obligations commencing in 2026. UK CBAM follows in 2027, but the regimes are not aligned in every respect.

Differences in scope, methodology, reporting formats, and timing mean that compliance with one regime does not automatically satisfy the other. That said, efficiencies can be achieved if emissions data, verification processes, and contractual frameworks are designed with both regimes in mind from the outset.

The table below summarises the principal similarities and differences between the two regimes:

Topic	UK CBAM	EU CBAM
Legal nature	UK tax administered by HMRC	EU regulatory regime administered by Member State authorities
Start of financial obligations	1 January 2027	1 January 2026
Transitional phase	Yes, through Transitory Provision Regulations	Yes, reporting‑only phase from October 2023 to end 2025
Who bears the obligation	UK importer	EU authorised declarant
Core sectors in scope at launch	Cement, iron and steel, aluminium, fertilisers, electricity, plus glass and ceramics	Cement, iron and steel, aluminium, fertilisers, electricity, hydrogen
Treatment of free allowances	Reflected via UK ETS free allowances	Gradual phase‑out of free allowances under EU ETS
Carbon price relief	Available where qualifying overseas carbon price paid	Available where carbon price paid in country of origin
Verification expectations	Third‑party verification of emissions data	Third‑party verification mandatory
Expansion over time	Explicitly anticipated	Explicitly anticipated

6A. Long‑running projects and framework agreements

CBAM presents particular challenges for projects and framework agreements entered into before the regime takes effect but performed after 2026 or 2027. In those cases, pricing assumptions, supply chain arrangements, and risk allocation may have been fixed without reference to CBAM‑related cost or compliance obligations.

Businesses should be cautious about assuming that CBAM can be addressed solely through change‑in‑law arguments. Much will depend on the contractual structure, the ability to demonstrate material impact, and the extent to which emissions data and verification obligations sit within the contractor’s control.

Early assessment of CBAM exposure on live projects can reduce the risk of disputes later, particularly where projects extend into 2028 and beyond.

7. Contractual and commercial implications

CBAM is not just a tax issue. In practice, it is a contract and tender risk issue, and many businesses are now focusing on how CBAM exposure is allocated before bids are submitted and contracts are signed.

Contractual discussions typically focus on:

• carbon cost pass‑through and pricing adjustment mechanisms;
• risk allocation for the application of the CBAM regime and future implementation;
• change in law and regulatory compliance provisions;
• supply chain disruption and material substitution risk;
• the limits of force majeure arguments in a CBAM context;
• warranties, indemnities, and data accuracy obligations; and
• termination or renegotiation rights where CBAM materially alters project economics.

For sectors such as construction, where margins are tight and supply chains complex, these issues are not theoretical.

8. What businesses should be doing now

Even though the charge does not apply until 2027, there are steps that should be taken now.

• Work out how the cost will affect your supply chain. Is there an extra cost and is it manageable?  Will changes be required to your supply chain to avoid unbearable costs?
• Map procurement strategies and supply chains to identify CBAM‑exposed imports.
• Engage with suppliers to understand product availability, data availability and verification readiness.
• Review tender documentation, pricing assumptions, and draft contracts to address data provision, cost allocation, and non‑compliance risk before positions become commercially fixed.
• Assess internal systems and governance. CBAM compliance often sits across tax, sustainability, procurement, and legal functions unless responsibility is clearly owned. Familiarise yourself with available guidance as it emerges as well as the declarations you will need to complete.  Designate personnel responsible for compliance or identify appropriate external resource to support your business with imports.
• Monitor future developments; neither the provisions of the Bill nor draft Regulations are set in stone, and it is possible that the scope of goods caught by the regime will evolve. However, the direction of travel is clear, and businesses should use the time available to set their own strategy.

In our experience, organisations benefit from separating CBAM work into two parallel streams: operational readiness and contractual risk allocation. Treating CBAM as solely a compliance exercise, or solely a drafting issue, risks leaving material gaps.

If you would like to discuss how UK CBAM may affect your business, including its impact on live projects, tenders, and contractual structures, or how it interacts with EU CBAM obligations, please contact the authors.

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