Unpacking the 2023 Carbon Tax Legislation: Key Effects on UK Businesses

The year 2023 has been pivotal for climate policy, with several key legislative changes aimed at reducing carbon emissions and driving the UK towards its net zero goals. One of the most significant developments is the introduction of the Carbon Border Adjustment Mechanism (CBAM) and other carbon tax legislation, which will have far-reaching impacts on UK businesses. Here’s a detailed look at what these changes mean and how they will affect businesses across various sectors.

Understanding the UK CBAM

The UK CBAM, set to be introduced on January 1, 2027, is a critical component of the government’s strategy to combat climate change and prevent carbon leakage. Here’s a breakdown of its key aspects:

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Sectors Affected

The UK CBAM will apply to goods imported from sectors that are at high risk of carbon leakage, including aluminium, cement, fertiliser, hydrogen, and iron and steel. Notably, products from the glass and ceramics sectors will not be included in the initial scope[1][3].

Registration and Compliance

Only businesses importing £50,000 or more of CBAM goods over a 12-month period will need to comply with the UK CBAM, following an increased registration threshold from £10,000 to £50,000. This change aims to reduce the administrative burden on smaller businesses[1].

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Verification of Emissions

The government will require verification of emissions by a body accredited by an International Accreditation Forum (IAF) member, such as the UK Accreditation Service (UKAS). Default values will be available for use by importers where verified emissions are not available, with a single default value set per product initially and potential adjustments post-2027[1].

Key Provisions

Tax Point: The tax point for the UK CBAM will arise when goods enter free circulation, with liability based on emissions from processing outside the UK.
Liable Person: The liable person will be the individual responsible for the goods when they are released into free circulation.
Return Window: An initial five-month return window will be provided, with specific guidance for industries with complex supply chains.
Penalties: The government will use existing HMRC powers and penalties, including a general regulatory penalty for offences specific to the UK CBAM[1].

Impact on UK Businesses

The introduction of the UK CBAM and other carbon tax legislation will have significant implications for businesses across various sectors.

Increased Costs and Administrative Burden

Businesses importing goods from affected sectors will face increased costs due to the carbon pricing mechanism. This could lead to higher production costs, which may be passed on to consumers or absorbed by the businesses, potentially affecting their competitiveness.

- Increased carbon pricing costs
- Enhanced administrative burden for compliance and reporting
- Potential impact on supply chain management
- Need for investment in low-carbon technologies to reduce emissions

Opportunities for Low-Carbon Growth

Despite the challenges, the UK CBAM also presents opportunities for businesses to transition towards low-carbon practices. The government’s focus on growing the market for low-carbon products through labeling schemes and government procurement policies can drive innovation and growth in the green sector.

- Incentives for adopting low-carbon technologies
- Government support through tax incentives and investment in charging infrastructure
- Market growth opportunities in the low-carbon sector
- Enhanced brand reputation through commitment to sustainability

EU CBAM and International Cooperation

The EU’s CBAM, which entered its transitional phase on October 1, 2023, also affects UK businesses, particularly those exporting to the EU.

EU CBAM Key Points

Transitional Phase: The current phase involves reporting of greenhouse gas emissions without the need to buy and surrender certificates until 2026.
Definitive Regime: From 2026, EU importers will need to buy CBAM certificates based on the weekly average auction price of EU ETS allowances[4].
Affected Sectors: Similar to the UK CBAM, the EU CBAM covers cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen[3][4].

International Cooperation

The UK government’s decision to establish a UK CBAM international group to engage with other governments highlights the importance of international cooperation in addressing climate change. This cooperation will be crucial in ensuring that the UK CBAM aligns with global climate objectives and does not create undue trade barriers.

- Collaboration with EU and other non-EU countries to ensure compatibility with WTO rules
- Sharing best practices in carbon pricing and emissions reporting
- Joint efforts to prevent carbon leakage and promote cleaner industrial production

Economic and Fiscal Implications

The introduction of the UK CBAM and other carbon tax legislation has significant economic and fiscal implications.

Economic Growth and GDP

While the short-term costs of implementing the UK CBAM might seem daunting, the long-term benefits in terms of economic growth and reduced greenhouse gas emissions are substantial. The transition to a low-carbon economy is expected to drive innovation, create new job opportunities, and contribute to sustainable economic growth.

- Potential for increased GDP through green sector growth
- Job creation in low-carbon industries
- Reduced greenhouse gas emissions contributing to climate change mitigation

Business Investment and Supply Chain

The UK CBAM will necessitate significant investment in low-carbon technologies and supply chain adjustments. Businesses will need to reassess their supply chains to ensure compliance and minimize costs.

- Investment in low-carbon technologies to reduce emissions
- Supply chain adjustments to comply with CBAM regulations
- Potential for new business opportunities in the green sector

Public Sector and Private Sector Collaboration

The success of the UK CBAM and other climate policies hinges on effective collaboration between the public and private sectors.

Government Support and Incentives

The government has outlined several measures to support businesses in their transition to a low-carbon economy. These include tax incentives, investment in charging infrastructure, and procurement policies favoring low-carbon products.

- Tax incentives for adopting low-carbon technologies
- Investment in charging infrastructure for zero-emission vehicles
- Government procurement policies supporting low-carbon products

Private Sector Innovation

Private sector innovation will be crucial in driving the transition to a low-carbon economy. Businesses are encouraged to invest in research and development of new technologies and processes that reduce carbon emissions.

- Innovation in low-carbon technologies
- Adoption of sustainable practices in supply chain management
- Investment in renewable energy sources

Practical Insights and Actionable Advice

For businesses preparing for the implementation of the UK CBAM, here are some practical insights and actionable advice:

Conduct a CBAM Risk Assessment

Businesses should conduct a thorough risk assessment to determine the extent to which their goods are covered by the CBAM and understand their reporting requirements.

- Identify goods that fall under the CBAM regulations
- Determine the carbon emissions embedded in your imports
- Understand the reporting and compliance requirements

Invest in Low-Carbon Technologies

Investing in low-carbon technologies can help businesses reduce their carbon footprint and comply with the UK CBAM regulations.

- Explore available tax incentives for low-carbon investments
- Invest in renewable energy sources and energy-efficient technologies
- Adopt sustainable practices in your supply chain

Engage with Industry Working Groups

Participating in industry working groups, such as the CBAM industry working group established by HMRC and HMT, can provide valuable insights and support during the transition period.

- Engage with industry peers to share best practices
- Collaborate with government agencies to understand regulatory requirements
- Stay updated on the latest developments and guidance

The introduction of the UK CBAM and other carbon tax legislation marks a significant step towards achieving the UK’s net zero goals. While there are challenges associated with these changes, they also present opportunities for businesses to innovate, grow, and contribute to a more sustainable future.

As the UK moves forward with these climate policies, it is essential for businesses to be proactive in understanding the regulations, investing in low-carbon technologies, and collaborating with both the public and private sectors. By doing so, businesses can not only comply with the new regulations but also drive economic growth, reduce greenhouse gas emissions, and play a vital role in mitigating climate change.

Table: Comparison of UK CBAM and EU CBAM

Feature	UK CBAM	EU CBAM
Start Date	January 1, 2027	Transitional phase started October 1, 2023; definitive regime from 2026
Affected Sectors	Aluminium, cement, fertiliser, hydrogen, iron and steel	Cement, iron and steel, aluminium, fertilisers, electricity, hydrogen
Registration Threshold	£50,000 over a 12-month period	No specific threshold; applies to all imports within scope
Verification of Emissions	Accredited by IAF member (e.g., UKAS)	Accredited by EU national authorities
Tax Point	When goods enter free circulation	When goods enter EU customs territory
Liable Person	Person responsible for goods when released into free circulation	Importer or declarant
Return Window	Initial five-month return window	No specific return window; annual reporting
Penalties	Existing HMRC powers and penalties	General regulatory penalties and VAT penalty points system

Quotes

“By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined.” – EU Taxation and Customs Union[4]
“The UK CBAM will require both primary and secondary legislation, which will be published in draft before being laid in front of Parliament. The government will also issue further guidance and support ahead of the UK CBAM’s commencement in 2027.” – techUK[1]
“The transition to a low-carbon economy is expected to drive innovation, create new job opportunities, and contribute to sustainable economic growth.” – UK Government[2]

List: Key Actions for Businesses

Conduct a CBAM Risk Assessment: Identify goods that fall under the CBAM regulations and determine the carbon emissions embedded in your imports.
Invest in Low-Carbon Technologies: Explore available tax incentives for low-carbon investments and adopt sustainable practices in your supply chain.
Engage with Industry Working Groups: Participate in industry working groups to share best practices and stay updated on the latest developments and guidance.
Understand Reporting Requirements: Familiarize yourself with the reporting and compliance requirements to avoid penalties.
Adjust Supply Chains: Reassess your supply chains to ensure compliance and minimize costs associated with the UK CBAM.
Seek Professional Advice: Consult with experts to ensure you are fully prepared for the implementation of the UK CBAM.