The Carbon Border Adjustment Mechanism - its impact on UK competitiveness and carbon pricing

In December 2023, the UK government announced plans to implement a Carbon Border Adjustment Mechanism (CBAM) by 2027.

Frontier was appointed by the Commission for Carbon Competitiveness, a cross-party and cross-industry group, to examine the impact on UK government revenue of the imposition of a Carbon Border Adjustment Mechanism (CBAM) to reflect the carbon emissions-intensity of imports. 

The primary purpose of a CBAM is to equalise the emissions price faced by domestically produced emissions intensive goods and their imported counterparts. This is seen as necessary to address the risk of carbon leakage i.e. the relocation of economic activity from jurisdictions that have more ambitious greenhouse gas reduction targets to ones with less ambitious targets, thus jeopardising the effectiveness of actions against climate change.  

For many sectors (such as energy intensive industries like steel, chemicals, cement, refining and ceramics) ensuring such a level-playing field is an important element of maintaining fair competition. As a secondary effect it can generate revenue for governments. 

The revenue raised by the UK government depends on several factors: the coverage of the CBAM (more or fewer sectors); whether other countries impose carbon prices similar to those in the UK; and the speed of adjustment in the affected sectors. For a given sectoral coverage, the more similar carbon prices are similar elsewhere to those in the UK, the lower the revenue. The faster the adjustment to low-carbon production, the lower the revenue. In both cases competitiveness is then preserved because producers in other countries face similar costs to those in the UK.  

Our estimates suggest that the CBAM could generate of annual revenues of between around £340 million   to £1.8 billion, depending on assumptions on carbon prices and product coverage. 

The UK’s plans for the CBAM follows the entry into force of the EU CBAM in mid-2023. Measures to deal with the question of carbon leakage, in the wider context decarbonisation and industrial transformation, introduce new policy question. Frontier regularly works with decision-makers in industry and government as they grapple with these. 

Click here to read our full report, UK competitiveness and carbon pricing