The UK Carbon Border Adjustment Mechanism and potential impacts on projects

The UK Government is introducing the UK Carbon Border Adjustment Mechanism (“UK CBAM”) from 1 January 2027. The measure will apply a levy on certain imported goods based on the greenhouse gas emissions associated with their production. The stated aim is to address carbon leakage – the risk that companies move production to countries with weaker climate regulations, which risks undermining the UK’s decarbonisation efforts.

As many UK construction, energy and infrastructure projects rely heavily on imported construction materials (such as, steel, aluminium, and cement), the UK CBAM will have potentially far-reaching implications not only for importers of in scope goods, but also for businesses that rely on those goods in their supply chains, including developers of UK energy and infrastructure projects, through increased procurement costs and related pricing pressures. In this note we provide a high-level overview of the UK CBAM and some initial thoughts on how it may affect energy and infrastructure projects in the UK.

Legislation and guidance

The primary legislation introducing the UK CBAM is contained in the Finance Act 2026, which sets out the scope of the regime, the basis on which liability is calculated and how it will be administered. Secondary regulations provide further detail, the latest of which were published this month.

A draft Notice, that will have force of law, was also published to explain how the UK CBAM legislation and regulations are intended to operate together. The UK Government is expected to lay the final secondary legislation later in 2026, with the regulations coming into effect alongside the UK CBAM.

When will the UK CBAM apply?

The UK CBAM will require the importer of certain carbon-intensive goods to pay a levy reflecting:

• the embedded emissions in those goods;
• the difference between the carbon price for those goods in the UK; and
• any explicit carbon price paid in the country of origin.

The levy will be administered as a tax by HMRC and importers will need to report on either the actual verified emissions for the relevant goods or rely on government-set default values.

The first accounting period for the UK CBAM will run for the whole of 2027, with UK CBAM returns due five months after the end of the first accounting period i.e. by 31 May 2028. From 1 January 2028, reporting is expected to move to a quarterly, instead of annual, cycle. Larger importers must register with HMRC and submit annual (then quarterly) the UK CBAM tax returns. Whereas, smaller importers (who import under a £50,000 annual threshold of in-scope goods) will be exempt. HMRC will enforce compliance using existing tax powers for enforcement.

Scope: which goods are covered?

The UK Government has indicated that the UK CBAM will initially apply to specific goods in the following sectors, which are defined using specific commodity codes:

• iron and steel;
• aluminium;
• cement;
• fertilisers; and
• hydrogen.

The focus is on the most emissions-intensive materials that pose the highest risk of carbon leakage. Although other sectors (e.g. glass, ceramics) were considered, they are not included in the scope of the initial levy being launched in 2027. Notably, electricity is not currently included in the UK CBAM, even though it is within scope of the EU CBAM.

The UK CBAM will cover both direct emissions from the manufacturing process and indirect emissions associated with electricity used in production. Some “precursor” goods used to make the final steel, chemical or cement product may also fall into scope.

Interaction with the UK Emissions Trading Scheme (UK ETS) and EU CBAM

The UK CBAM and the UK ETS are designed to work together. UK producers of carbon-intensive materials already incur a carbon cost through the UK ETS. Many also receive free allowances, which reduce their net carbon price. The Government has confirmed that the UK CBAM rates will be adjusted to reflect these free allowances, so importers are charged on a comparable “effective carbon price”.

The UK CBAM will operate separately from the EU CBAM, which is already in a transitional reporting phase. Some businesses may be exposed to both regimes (e.g. EU-based suppliers to UK projects, or UK manufacturers exporting to the EU). This may increase administrative complexity for supply chains operating across multiple jurisdictions.

Why does the UK CBAM impact future energy projects in the UK?

Many construction, energy and infrastructure projects rely on materials that fall squarely within the UK CBAM’s initial scope. As a result, the UK CBAM is likely to have an impact on:

Costs and procurement budgets

Steel, aluminium, and cement are important inputs for:

• wind turbine towers, foundations and monopiles;
• solar panel frames;
• hydrogen infrastructure (pipelines, storage, electrolysers);
• grid and transmission infrastructure;
• battery storage sites; and
• traditional energy facilities.

If these materials are imported from countries without an equivalent carbon price, projects may see increased costs once the UK CBAM applies. The extent of the cost impact will depend on both the carbon intensity of the source country and the level of the UK carbon price at the time of import. As the UK CBAM rates will be set quarterly, there may also be cost variability to factor in when modelling long-term project finances.

Supply chain strategy

The UK CBAM may encourage project developers and contractors to:

• shift procurement towards the UK or other lower-carbon suppliers;
• request more detailed emissions data from international manufacturers;
• consider the use of low-carbon or recycled materials where possible; and
• assess whether design changes (e.g., less steel-intensive structures) could reduce exposure.

For some technologies, the global supply chain is concentrated in jurisdictions with high embedded carbon (for example, some steel and aluminium producers in Asia). If the UK CBAM materially increases the cost of importing such products, this could drive a rebalancing of supply chains or incentivise domestic/European production.

Programme and administrative considerations

From 2027, contractors and developers who import in-scope goods will need to:

• register with HMRC;
• gather embedded-emissions data from suppliers;
• arrange for verification (where using actual data); and
• file UK CBAM returns.

The administrative requirements associated with the UK CBAM are expected to be addressed by EPC or specialist procurement contractors. However, project sponsors are likely to seek visibility of these impacts in order to assess overall project risk. There may also be contractual considerations as parties consider how UK CBAM costs are reflected in long term framework agreements or projects spanning 2027 onwards.

Commercial and market effects

Potential wider effects include:

• incentivising investment in low-carbon industrial capacity in the UK;
• a possible cost advantage for domestic manufacturers of “green steel”, “green aluminium” and low-carbon cement;
• increased emphasis on ESG credentials and carbon reporting in procurement decisions; and
• potential financing implications, as lenders and investors may seek assurance that projects have considered the UK CBAM-related cost risks.

For new or early-stage projects the UK CBAM may become another factor in evaluating project feasibility and competitiveness.

Opportunities

Although the UK CBAM introduces new compliance requirements, it will also create opportunities, including:

• support for domestic low-carbon manufacturing, which could strengthen the UK’s supply chain for renewables and hydrogen;
• greater transparency in emissions reporting across global supply chains; and
• increased incentive for developers to use low-carbon materials, supporting the project’s ESG targets and potentially making assets more attractive to investors.

Over time, the UK CBAM may contribute to a broader shift towards cleaner industrial materials, which could ultimately benefit projects as low-carbon options become more available and competitively priced.

Conclusion

The UK CBAM represents a significant development in the UK’s approach to industrial decarbonisation and is likely to have meaningful implications for the delivery of projects. While many of the details will be finalised through secondary legislation and guidance, developers (and supply chains alike) should prepare now by reviewing procurement practices, engaging suppliers on emissions data, and assessing potential cost impacts. Proactive engagement will be critical to managing risk and maintaining project momentum. We will continue to monitor the development of the UK CBAM regime and its interaction with the UK ETS and EU CBAM as further guidance is issued.

Authors: Danielle O'Brien, Hawwa Soomro and Aarti Advani

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at April 2026. Specific advice should be sought for specific cases. For more information see our terms & conditions.