Introduction

The United Kingdom has now confirmed through its consultation outcome that indirect emissions will not be included in the initial phase of the Carbon Border Adjustment Mechanism. Only direct emissions from the production of imported goods will be covered when the system takes effect in 2027. This decision is significant for sectors where electricity consumption is a major driver of total emissions. Companies exporting to the UK or sourcing from high electricity use supply chains must understand how this policy shift alters carbon cost exposure and compliance strategies. This article explains the policy change, its sector impacts, the differences from the EU approach, and preparations companies should consider.

Why the UK Removed Indirect Emissions From Its CBAM Design

The consultation revealed that many respondents viewed indirect emissions reporting as too complex for the launch phase. Businesses highlighted challenges in obtaining accurate electricity data from suppliers across multiple jurisdictions. Verification of electricity related emissions would have required extensive auditing and a consistent global standard for energy attribute tracking, which does not currently exist. The government concluded that focusing on direct emissions would create a simpler system while still sending a meaningful signal to reduce carbon leakage.

Administrative efficiency was a key driver. The UK government found that a broad scope could increase compliance burdens to a degree that might discourage participation or create delays in implementation. The decision to remove indirect emissions aligns with the objective of enabling a smoother first phase. By limiting the scope, regulators aim to reduce early barriers and encourage a more manageable and reliable reporting cycle for importers.

This approach also reflects concerns over data reliability. Electricity systems vary widely among exporting countries. Many regions lack granular emissions factors or governance structures that ensure traceability. A system built on uncertain data could create inconsistent charges or undermine trust among participants. The UK intends to revisit the scope later, once global methods for tracking electricity emissions improve.

Sector Impacts: Aluminium, Hydrogen, Fertiliser and Other Electricity Intensive Products

Industries with high electricity use will experience a notable shift in expected carbon cost exposure. Aluminium production is a clear example. The majority of total emissions in primary aluminium come from electricity used during smelting, so excluding indirect emissions significantly lowers the effective carbon burden under UK CBAM. Hydrogen production also relies heavily on electricity when produced through electrolysis, which creates a similar effect. Fertiliser production in certain regions uses energy intensive transformation processes where electricity is a major factor.

This narrowed scope may reduce immediate financial pressure on some producers, but companies should not assume this represents long term stability. Indirect emissions remain central to the actual climate impact of these industries. Importers may still request electricity related data from suppliers to inform internal Scope 3 assessments or voluntary reporting commitments. There is also a possibility that international buyers will begin differentiating between products based on total lifecycle emissions rather than only direct emissions.

Market distortions could emerge. A producer with low electricity related emissions might not gain full recognition under the UK CBAM design, while a producer with high electricity related emissions faces a reduced incentive to decarbonize. These differences create uncertainty for long term investment and procurement decisions. Companies should continue collecting electricity data to prepare for potential future changes in the system.

How This Differs From the EU CBAM

Comparison Table: UK CBAM vs EU CBAM (Launch Phase)

The EU CBAM includes indirect emissions for cement and fertilizer and requires detailed electricity consumption data in its reporting templates. Importers into the EU must work with suppliers to gather electricity usage information and associated emissions factors. Verification procedures are built into the EU model to strengthen data confidence. The system is designed to reflect a more complete carbon profile of certain products.

The UK CBAM takes a different approach by excluding indirect emissions entirely during its launch phase. The UK system limits reporting requirements to direct emissions from production processes. This creates a more streamlined administrative structure but results in a narrower picture of actual product emissions. For companies operating across both markets, this divergence means they must maintain dual reporting systems and ensure accurate alignment with two distinct regulatory regimes.

Trade flows may shift as a result. Exporters with high indirect emissions may find the UK market more attractive in the short term, while exporters with low electricity related emissions may prefer the EU market, where full lifecycle performance is acknowledged. The lack of alignment could complicate supply chain planning for multinational companies and increase the need for robust emissions data systems.

The difference also signals an emerging policy gap. Many global carbon pricing systems are moving toward more comprehensive emissions coverage. The UK has indicated that indirect emissions could be considered in future phases, so companies should view the current exclusion as a temporary design choice rather than a permanent feature.

Conclusion

The UK government’s decision to exclude indirect emissions in the initial phase of its CBAM changes the compliance landscape for electricity intensive industries and importers. While this simplifies early reporting and reduces administrative burdens, it also narrows the environmental signal and creates divergence from the EU model. Companies should prepare for the 2027 launch by building strong systems for collecting direct emissions data and planning for the potential future inclusion of electricity related emissions.

Importers and exporters must stay alert to the evolving regulatory environment. Even with indirect emissions excluded, supply chain transparency remains essential for Scope 3 disclosures and commercial competitiveness. Companies that build reliable emissions tracking capabilities now will be better positioned to adapt to future shifts in border carbon requirements and global climate policy.

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