Environmental marketplaces: EU and UK head towards copycat ETSs and CBAMs

The UK and EU are yet to decide on the details of how to link their emissions trading schemes (ETSs) that they signalled in May at their first mutual summit since Brexit – but it is already clear that importers will be significantly less affected by each jurisdictions' carbon border adjustment mechanism (CBAM).

CBAMs and ETSs

CBAMs target imported goods that are not subject to an ETS in their country of origin. When these goods are imported to market where an ETS is present, they are essentially subject to a carbon tax that ensures that there is no disparity in carbon pricing across goods available on the market.

ETSs create a financial incentive for companies to reduce their greenhouse gas emissions. A cap is set on emissions and a finite number of emission "allowances" are auctioned or issued for free by a government. Companies can then proceed to trade these allowances with one another. The emissions cap is reduced over time to encourage an industry-wide transition to net zero emissions.

UK carbon mechanisms

Currently, importers of goods into the UK that are not subject to the UK ETS do not have to pay an equivalent carbon tax, resulting in a disparity between the carbon pricing of goods. These exempted imported goods also increase "carbon leakage" – a term given to describe the relocation of businesses and their associated emissions to maximise the differing levels of environmental regulation.

In response to the increasing risks, the UK announced that a CBAM was set to apply from 1 January 2027. Following an initial 12-week policy consultation, the UK government on 24 April opened a further consultation on proposed UK CBAM draft legislation closing on 3 July. The draft legislation seeks to impose a carbon price on specific imported goods from sectors vulnerable to carbon leakage such as aluminium, cement, fertilisers, hydrogen, and iron and steel.

The proposed legislation's measures to be adopted include a de minimus threshold that requires a person to register with HMRC for CBAM if the value of their relevant imported goods is over £50,000.

The proposals also include a "free allocation adjustment" for the calculation of the CBAM rate that takes into account the free allowances available to sectors under the UK ETS, a criminal offence for the fraudulent evasion of CBAM, and a "group treatment" for two or more connected liable persons under the mechanism.

The government has also released a CBAM policy update alongside a factsheet for businesses affected by CBAM with an overview of its scope and design.

While UK CBAM remains in the design phase, UK importers should already be preparing for its launch in January 2027. However, the policy paper associated with the recent EU-UK ETS linkage announcement indicates that UK importers of EU goods will be able to rely on an exemption from UK CBAM. The scope and applicability of UK CBAM may be shrinking, therefore, before the ink has even dried.

EU CBAM

In contrast to UK CBAM, EU CBAM is already in force. Businesses are already heavily invested in CBAM compliance measures across the EU. In short, current obligations require quarterly reporting for importers affected by the mechanism, namely importers of certain goods made from cement, electricity, fertilisers, iron and steel, aluminium or chemicals.

However, EU importers will need to prepare for more stringent measures that are set to be introduced from January 2026. After this date, importers will need to apply for an "authorised CBAM declarant" status, submit a CBAM declaration and surrender CBAM certificates.

EU importers will be taking note of the simplification measures that arrived on 22 April 2025. As part of the first EU omnibus simplification package, the European Parliament endorsed the European Commission's proposal to simplify the EU CBAM.

These changes included the introduction of a new de minimis mass threshold of 50 tonnes, exempting 90% of importers, primarily small and medium-sized enterprises and individuals, from EU CBAM rules.

The proposals also rationalise the authorisation process for declarants, the calculation of emissions and the management of CBAM financial liability, while there are measures to strengthen anti-abuse provisions.

Mirroring UK CBAM, the recent proposals to link EU and UK ETS will have an impact on EU importers of UK goods. These businesses will be able to rely on the linkage's proposed exemption of EU CBAM for UK goods. Reducing the scope of applicability of CBAM could also result in significant savings to businesses by decreasing the associated compliance investment costs.

EU businesses should note the recent call for evidence by the EU Commission on 1 July 2025 which seeks feedback on proposals to extend the scope of EU CBAM by including a range of downstream products (namely certain steel and aluminium intensive goods) alongside CBAM anti-circumvention measures.

Osborne Clarke comment

Importers and exporters may welcome the news that the UK and EU have agreed to work towards linking their respective ETS. With the UK government estimating a significant cost saving for both UK and EU exporters, concern among businesses on navigating yet more sustainability law amendments might begin to take a back seat. However, the recent call for evidence by the EU to a possible extension of scope of EU CBAM may propel these concerns once more, and leaves open the question to whether the UK will take the same approach.

Beyond direct cost savings, UK importers of EU goods will save significant time and money by avoiding the need to prepare for the launch of UK CBAM in January 2027 and undertake ongoing compliance with the regime. However, these importers should closely follow the evolution of the UK-EU ETS linkage and only cease preparing for UK CBAM once they are certain that they fall within the scope of the CBAM exemption. This also applies in the reverse instance to EU importers of UK goods, who will now look to rely on the EU CBAM exemption.

While EU and UK import businesses will benefit from the CBAM exemption, the promise that the UK ETS will become "dynamically aligned" with the EU ETS is likely to result in an increase in the UK's carbon pricing. The UK has agreed that the its ETS emission cap and reduction pathway should be "at least as ambitious" as the EU cap. This could result in UK businesses being forced to dig deeper to finance their emission reduction measures.

In the long run, the ETS linkage should lead to the creation of a larger and more liquid carbon market that is likely to encourage greater investment from businesses into emission reduction measures. The streamlining of the EU and UK ETS will also remove barriers to investment in UK sectors where excess red-tape has previously disincentivised EU investors.

The landscape of sustainability law is evolving rapidly, so it will come as little surprise to businesses that they will likely have to grapple with yet more changes.

This is the first in a series of UK-focused Insights looking at environmental marketplaces that will also cover voluntary carbon and nature markets.

Osborne Clarke is at the forefront of these developments and ready to help businesses navigate the fast-changing sustainability regulations. Please contact our experts if you wish to further discuss these developments.

Fabian Trotman Drake and Mia Clothier, trainee solicitors at Osborne Clarke, contributed to this Insight.