UK and EU Near Deal on Carbon Border Tax Exemption
Introduction
In a significant development for post-Brexit trade relations, the United Kingdom and the European Union are on the verge of finalizing an agreement that would exempt British businesses from the EU’s upcoming Carbon Border Adjustment Mechanism (CBAM). This move aims to alleviate potential financial burdens on UK exporters and foster closer environmental cooperation between the two entities.
Understanding the CBAM
The EU’s CBAM, set to be implemented in January 2026, is designed to impose a carbon price on imports of carbon-intensive goods such as steel, cement, and fertilizers. This mechanism ensures that imported products bear a carbon cost equivalent to that of EU-produced goods, thereby preventing “carbon leakage”—a situation where companies relocate production to countries with less stringent environmental regulations. (Taxation and Customs Union)
The UK, while introducing its own CBAM in 2027, has expressed concerns about the potential for UK businesses to face double taxation if they are subject to both the EU and UK carbon border taxes. To address this, the two sides are negotiating a mutual exemption from each other’s CBAMs. This exemption would prevent UK exporters from incurring additional costs when trading with the EU and vice versa. (White & Case)
Economic Implications
The potential exemption from the EU’s CBAM could save UK businesses approximately £800 million annually by 2030. This figure represents the estimated cost that UK exporters would incur if they were subject to the EU’s carbon border tax. By aligning their carbon pricing mechanisms, both the UK and EU aim to create a level playing field for industries on both sides of the Channel. (ICAP Carbon Action)
However, the alignment is not without challenges. Currently, there is a disparity in carbon prices between the EU and UK Emissions Trading Systems (ETS). The EU’s carbon price is approximately €70 per tonne, while the UK’s is around £40 per tonne. Efforts are underway to harmonize these prices, but the process is complex and may take several years to fully implement. (White & Case)
Political and Diplomatic Considerations
The impending agreement on CBAM exemptions is part of a broader effort to strengthen UK-EU relations post-Brexit. In May 2025, both parties committed to linking their emissions trading systems, a move that would facilitate mutual recognition of carbon pricing and reduce administrative burdens for businesses operating in both markets. (ICAP Carbon Action)
This cooperation extends beyond environmental policy. Discussions are ongoing about a new youth mobility scheme to facilitate temporary work and residence opportunities for young people between the UK and EU. Additionally, negotiations are underway for a defense cooperation pact and the UK’s participation in EU-funded military initiatives, with decisions anticipated by November 2025. (The Guardian)
Industry Reactions
Business groups in both the UK and EU have largely welcomed the move towards mutual CBAM exemptions. Over 50 European companies and business groups, including major energy firms like Equinor, Orsted, and RWE, have urged the UK and EU to initiate discussions at a forthcoming summit aimed at linking their carbon markets. They argue that a linked system would harmonize carbon prices, prevent competitive distortions, and reduce costs for both EU and UK consumers. (Reuters)
However, some industry representatives have expressed concerns about the potential for misalignment in the timing of the UK and EU CBAMs. Steelmakers in the UK, for instance, have warned that the country could become a dumping ground for low-cost, high-emission steel imports if the UK CBAM is introduced a year after the EU’s. They have urged the government to expedite the introduction of the carbon border tax to protect domestic manufacturers. (Financial Times)
Looking Ahead
The UK and EU are expected to finalize the CBAM exemption agreement at the UK-EU summit planned for May or June 2026. In the meantime, both sides will continue to work towards aligning their emissions trading systems and addressing any remaining discrepancies in carbon pricing. The success of this initiative could serve as a model for other countries seeking to implement carbon border taxes and promote international cooperation on climate change.
UK and EU Near Deal on Carbon Border Tax Exemption: Case Studies, Comments, and Examples
Understanding the CBAM
The EU’s CBAM is designed to impose a carbon price on imports of carbon-intensive goods such as steel, cement, and fertilizers. This mechanism ensures that imported products bear a carbon cost equivalent to that of EU-produced goods, thereby preventing “carbon leakage”—a situation where companies relocate production to countries with less stringent environmental regulations.
The UK plans to implement its own CBAM in 2027 and has expressed concerns about the potential for UK businesses to face double taxation if they are subject to both the EU and UK carbon border taxes. To address this, the two sides are negotiating a mutual exemption from each other’s CBAMs. This exemption would prevent UK exporters from incurring additional costs when trading with the EU and vice versa.
Industry Reactions
Positive Reception:
Business groups in both the UK and EU have largely welcomed the move towards mutual CBAM exemptions. Over 50 European companies and business groups, including major energy firms like Equinor, Orsted, and RWE, have urged the UK and EU to initiate discussions at a forthcoming summit aimed at linking their carbon markets. They argue that a linked system would harmonize carbon prices, prevent competitive distortions, and reduce costs for both EU and UK consumers.
Concerns from UK Steelmakers:
Steelmakers in the UK have expressed concerns about the potential for the country to become a dumping ground for low-cost, high-emission steel imports if the UK CBAM is introduced a year after the EU’s. They have urged the government to expedite the introduction of the carbon border tax to protect domestic manufacturers.
Cement Industry Warnings:
The cement industry in the UK has warned that the country has become a significant market for cheap, high-carbon cement imports from countries like Turkey, North Africa, India, and China. The industry attributes this surge to the UK’s failure to implement trade protection measures similar to the EU’s CBAM. Without such measures, foreign producers not penalized for carbon emissions are flooding the UK market with high-carbon products.
Potential Impacts of the Agreement
Economic Benefits:
The potential exemption from the EU’s CBAM could save UK businesses approximately £800 million annually by 2030. This figure represents the estimated cost that UK exporters would incur if they were subject to the EU’s carbon border tax. By aligning their carbon pricing mechanisms, both the UK and EU aim to create a level playing field for industries on both sides of the Channel.
Environmental Considerations:
While the mutual exemption aims to alleviate economic burdens, it also raises questions about the environmental integrity of both the UK and EU’s carbon pricing systems. Ensuring that both systems effectively reduce emissions and prevent carbon leakage will be crucial to maintaining the credibility of their climate policies.
Conclusion
The impending agreement between the UK and EU on mutual CBAM exemptions represents a significant step towards harmonizing carbon pricing mechanisms and fostering closer environmental cooperation. While the agreement promises economic benefits for UK businesses, it also necessitates careful consideration of environmental impacts to ensure that both parties continue to make meaningful progress towards their climate goals.