UK clarifies carbon pricing schemes eligible for CBAM relief ahead of 2027 launch

• India’s carbon scheme could lower UK CBAM costs
• Effective carbon pricing determines CBAM relief for importers

The UK government has clarified which overseas carbon pricing schemes will qualify for relief under its Carbon Border Adjustment Mechanism (CBAM), reducing uncertainty for importers of iron and steel, aluminium, cement, fertilisers and hydrogen ahead of the mechanism’s introduction on 1 January 2027.

A non-exhaustive list published today recognises emissions trading systems (ETSs) in the EU, China, Japan, Kazakhstan, South Korea, Montenegro, New Zealand and Switzerland. It also includes carbon taxes in Chile, Serbia, Singapore and South Africa, Australia’s Safeguard Mechanism, Canada’s federal Output-Based Pricing System, India’s Carbon Credit Trading Scheme and Taiwan’s carbon fee.

The government said the list will be updated as additional schemes are assessed. It noted that some regional carbon pricing systems may already meet the eligibility criteria published last month, while schemes currently under development could also qualify in future.

The guidance also explains how importers should calculate the carbon price already paid in the country of origin when claiming relief under the UK CBAM.

Rather than relying solely on a headline carbon price, importers must calculate an effective carbon price by adjusting for the design of each qualifying scheme, including factors such as free allowance allocations, additional carbon charges, greenhouse gas removal payments and applicable emissions thresholds. Where carbon prices are market-based rather than fixed, quarterly average prices must be used.

The resulting effective carbon price is then applied to the embodied emissions covered by the qualifying scheme for the imported goods. After conversion into pounds sterling, the amount is deducted from the importer’s UK CBAM liability.

The UK CBAM will apply an effective carbon price to imports of aluminium, cement, fertilisers, hydrogen, iron and steel from 1 January 2027. The recognition of overseas carbon pricing schemes means exporters from jurisdictions with eligible carbon pricing mechanisms, including India, will be able to offset qualifying carbon costs already incurred against their UK CBAM obligation, reducing the risk of double carbon pricing.