The Carbon Border Adjustment Mechanism (Calculation of CBAM Rate and Determination of Carbon Price Relief) Regulations 2026

Luke Myer Excerpts

Monday 12th October 2026 General Committees

[James Murray]

Thank you for the quick explainer, Mr Stringer. It is a pleasure to serve on this Committee and to see you in the Chair.

The regulations form an important part of the legislative framework for the UK’s carbon border adjustment mechanism. The core framework for CBAM has already been set out in the Finance Act 2026, but the regulations provide further detail on two important aspects of its operation. Mainly, they establish how and under what circumstances liable persons can claim relief for charges paid under overseas carbon pricing schemes; they also provide additional clarity on how the CBAM rate should be calculated in practice.

CBAM is a new environmental tax that will apply from 1 January 2027. It will apply to specified goods in five highly traded carbon-intensive sectors: aluminium, cement, fertiliser, hydrogen, and iron and steel. The reason for introducing CBAM is clear: to support the UK to decarbonise, domestic producers face carbon costs that encourage investment in cleaner and more efficient production. Without CBAM, there is a risk that production and associated emissions will simply move overseas to jurisdictions with lower carbon costs, leading to what is known as carbon leakage rather than to a true reduction in global carbon emissions.

CBAM is designed to address the risk of carbon leakage by ensuring that imported goods face a carbon price comparable to what manufacturers would pay were they producing the same goods in the UK. In doing so, it supports our decarbonisation objectives and gives UK producers the legislative support that they have called for to bolster their confidence in investing in the transition to net zero.

The regulations put this idea into practice by creating a mechanism that ties the CBAM rate to domestic carbon prices. They set out that the CBAM rate is to be calculated by taking the quarterly mean average of the UK emissions trading scheme auction price, and how the free allocation adjustment is to be applied to reflect the upcoming phase-out of free allowances to domestic industry.

[Luke Myer (Middlesbrough South and East Cleveland) (Lab)]

Can the Minister explain why the Government are proceeding with the removal of free allowances when there is no contingency plan if the UK’s CBAM fails to prevent carbon leakage?

[James Murray]

The mechanism of removing free allowances is part of the transition to the new system. Under the new system, the CBAM price will ensure that those industries within the UK that are investing in decarbonisation are not disadvantaged by industries moving overseas. If the industries move overseas to areas that have a higher carbon intensity, they could be at an advantage relative to the industries here in the UK. It is about levelling the playing field for businesses operating in the UK.