This week the Government has announced that firms are to be freed from ‘pen-pushing paperwork’ and costly red tape in a business reporting overhaul aimed at saving businesses more than £450 million per year. It will be interesting to see if the statement that “today’s rules are too complex and burdensome for every business, from multinational companies to the removals firm down the road” translates into a reduction in Green Laws, Red Tape and Green Laws Galore.

One can live in hope, but it seems unlikely, not least since the Government is now seeking to introduce a new Carbon Border Adjustment Mechanism (CBAM) from the beginning of next year. A summary of its complex provisions can be found here.

If one believes in the need to reduce consumption (as opposed to territorial) greenhouse gas emissions, then the theory behind the CBAM makes sense of a sort:

CBAM…will ensure highly traded, carbon intensive products from jurisdictions outside the UK face a comparable carbon price to that paid by UK manufacturers, so that UK decarbonisation efforts lead to a true reduction in global emissions rather than simply displacing carbon emissions overseas.

This goes to the heart of one of the main criticisms of the UK’s Net Zero drive – that to date it has in large part failed to reduce emissions overall, since its effect has largely been to export them (along with jobs, industry and wealth) to countries with lower environmental and human rights standards.

So far, then, perhaps so good. However, to describe the CBAM and its implementation as complex and bureaucratic would be a massive understatement. The summary runs to nine very lengthy sections with an annex. Calculating an importer’s CBAM liability involves eight steps:

1. Identify the monitoring period for the CBAM good. This monitoring period is 1 calendar year.

2. Use verified emissions data from that monitoring period to identify the amount, in tonnes, of relevant emissions emitted by the installation in the production of that type of CBAM good during the monitoring period. This step requires the use of the System Boundaries Document and monitoring methodology set out in force of law notices to attribute the installation’s emissions to the CBAM good.

3. Where amounts of relevant emissions identified in step 2 are not amounts of carbon dioxide, convert them into an amount of carbon dioxide equivalent. Nitrous Oxide is multiplied by 265; tetrafluromethane (CF4) is multiplied by 6,630; Hexafluoroethane (C2F6) is multiplied by 11,100.

4. Add together all amounts from steps 2 and 3 to produce a total amount, in tonnes, of carbon dioxide equivalent.

5. Where the CBAM good comprises precursor goods, add precursor emissions for that CBAM good to the emissions already calculated (per step 4).

6. Identify the amount in weight of the CBAM good produced by the installation during the monitoring period.

7. Calculate the emissions intensity by dividing the total tCO2e (per step 5) by the weight of goods produced within a monitoring period (per step 6), rounded to 5 decimal places.

8. Multiply the emissions intensity by the amount of the CBAM good imported into the UK.

The process doesn’t end there. An appropriate verifier must be appointed to verify the data. The verifier must be accredited by an eligible accreditation body for CBAM. Verifiers must also be accredited for the correct scope of activities. For example, a verifier who has been accredited for the activity group corresponding to the production of urea and mixed fertilisers would not automatically be eligible to verify emissions released at an installation producing iron and steel products.

The verification process is described at significant length, but then we’re told that:

Whilst it is preferable for the liable person to use independently verified actual emissions data, default emissions values will also be available to determine the embodied emissions in CBAM goods. This means the liable person can meet CBAM obligations when actual emissions data is unavailable. Default emissions values can also be used for precursor goods, even where actual emissions data is used for the final CBAM good. However, actual emissions data cannot be used for precursor goods if default emissions values are used for the final CBAM good.

From 1 January 2027, there will be one default emissions value set per CBAM good. Default emissions values will be published in a notice on GOV.UK in advance of CBAM coming into force.

CBAM rate calculation

The calculation is comprised of 3 elements:

1. The average ETS price, calculated as the mean average of all UK ETS auction clearing prices for the relevant quarter. In a scenario where all ETS auctions fail to clear in a given quarter, the last positive average ETS price will be used.
2. The free allocation adjustment, which is calculated as 1 minus the average proportion of sectoral direct emissions covered by Free Allocations (FAs), multiplied by a reduction factor. This average is determined by using UK ETS baseline data reporting data related to the average sectoral direct emissions generated in 2019, 2022 and 2023 by sub-installations producing CBAM goods, and average Fas allocated to those same sub-installations over the same period. Years will be discounted if there were no direct emissions for that sector. The reduction factors will reflect the reduction factors applied to phase out Fas under the UK ETS.
3. The final output is the CBAM rate for the given sector for that quarter.

But then there’s carbon price relief: the liable person can claim carbon price relief (CPR) which will reduce their CBAM liability if the embodied emissions in the CBAM goods they have imported have been subject to a qualifying carbon pricing scheme and they have the necessary verification documents, such as the carbon pricing verification form, as well as other relevant information, to calculate the amount of CPR. This includes where a CBAM good has been subject to more than one qualifying carbon pricing scheme and produced in more than one installation within the same jurisdiction.

The total relief claimed cannot exceed the amount of CBAM liability due.

It’s all as clear as mud, and filling in the associated paperwork must be like wading through mud. And who has to wade through that mud? All but the very smallest of import businesses:

A person must register with HMRC for CBAM if they meet or exceed the minimum registration threshold. The minimum registration threshold considers the total value of CBAM goods that are imported or are expected to be imported into the UK over a given period as set out in the 2 tests below. The value is set at £50,000.

That’s less than the annual turnover threshhold for VAT registration in the UK.

The above notes regarding the bureaucracy involved in all this barely scratches the surface. If you’re interested, I urge you to visit the relevant government website. I provided an embedded link above, but for ease of access, it’s here.

EU CBAM

Also, whatever one’s personal view as to the merits or demerits of Brexit, this does seem to be a case of the UK government simply continuing to behave as though the UK never left the EU. In large measure, the UK CBAM replicates (albeit one year later) the EU’s CBAM. This replication is obvious when one looks at the goods to be covered by CBAM, or rather goods within these sectors: aluminium; cement; fertiliser; hydrogen; and iron and steel. The reasoning seems to be that these are “carbon-intensive” sectors – or it may simply be that these are the sectors covered by the EU’s CBAM, and it was easier (especially for a government keen to re-establish close ties with the EU) to do what the EU has already done.

As the EU’s CBAM has been in operation since the beginning of this year, I asked AI how it was going. As is usual, it responded with a reply that was on-message, having trawled the websites seeking to claim it as a shining success. So I decided to push AI a little, and challenge its quick and easy answer by asking:

Leaving aside the pro-CBAM propaganda from the EU and its acolytes, how successful has it really been? Doesn’t the EU have a massive – and growing – trade deficit with China?

That prompted a very different answer, which I reproduce below in its entirety:

Stripping away the institutional optimism, looking closely at the real-world metrics reveals that the European Union faces deep structural trade imbalances, and the early months of the definitive CBAM phase have exposed significant friction.

The EU-China Trade Deficit: A Widening Chasm

Yes, the EU has a massive and growing trade deficit with China. The numbers confirm this imbalance is a severe macroeconomic headache for Brussels:

The Record Deficit: The EU’s goods trade deficit with China reached €359.9 billion.

Escalating Trajectory: Far from shrinking, the deficit widened by another 9% in the first half of 2026. The gap is averaging a staggering €1 billion a day, prompting EU Trade Commissioner Maroš Šefčovič to warn that the massive gap is “unsustainable” and could trigger broader trade defense measures.

The Tariff Deflection Factor: A primary driver of this growing deficit isn’t actually CBAM. Following the escalation of US-China trade tensions, heavily subsidized Chinese industrial output has been deflected away from the US market directly into Europe’s open consumer market of 450 million people.

The Harsh Reality of CBAM’s “Success”

When evaluated strictly against the claim of a frictionless rollout, CBAM reveals several major structural flaws:

1. It Misses the Bulk of Chinese Imports

Critics point out that CBAM is currently a drop in the ocean regarding the total trade deficit. In its current phase, CBAM only covers specific raw commodities (steel, aluminum, cement, fertilizers, hydrogen, and electricity). These goods account for only about 1.8% of China’s total exports to the EU. The actual drivers of the trade deficit—finished electronics, machinery, solar panels, and electric vehicles—are not yet covered by CBAM.

2. The Verification Nightmare

The EU claimed the transition to the financial phase went smoothly, but the reality on the ground is a data verification bottleneck. Importers are struggling immensely with Measurement, Reporting, and Verification (MRV) compliance. Reconciling China’s domestic carbon accounting with the EU’s strict embedded-emissions methodologies has created major bureaucratic friction. Importers are trapped using punishing “default values” that over-estimate carbon content, driving up immediate costs.

3. Self-Inflicted Economic Harm (The Fertilizer Crisis)

The mechanism is drawing intense internal fire because it acts as an import tax on European industries. For example, the tax on imported nitrogen fertilizers has caused significant pushback from farming groups. European lawmakers are currently locked in fierce debates over whether to remove emergency safeguards that would prevent CBAM from driving up domestic food and agricultural costs, leading critics to argue the policy is penalizing European businesses more than foreign polluters.

4. The Clean Export Laundering (“Resource Shuffling”)

Foreign manufacturers are already finding loopholes. Instead of fundamentally decarbonizing their entire supply chains, international conglomerates are simply “shuffling” their resources—allocating their limited supply of green-energy manufacturing exclusively to EU-destined exports, while continuing to dump coal-heavy, high-emission production into domestic markets or less regulated regions. The global net reduction in emissions is thus far less than advertised.

Ultimately, while the EU has successfully built the bureaucratic machinery to collect the tax, calling CBAM an absolute “success” ignores its current inability to dent the broader trade deficit, the severe operational compliance costs it inflicts on EU importers, and the rising domestic inflation it threatens to trigger.

Conclusion

There the AI reponse ends. I’m not kidding myself – with a little judicious prodding and goading, AI can be persuaded to write pretty much whatever it “thinks” its interlocutor wants to read. Nevertheless, its amended response does mention a whole load of issues, that suggest that the EU version of CBAM (which the UK version will largely replicate) has to date proved to be highly problematic – costly, inflationary, bureaucratic, and of limited efficacy. It might have been a good idea for the UK government to watch and wait, to see how things pan out with the EU version of CBAM before rushing to join in. It might have been a good idea to contemplate a meaningful but simple version of CBAM before rushing forward with Net Zero plans and the associated expensive renewable energy that has crippled UK manufacturing and driven jobs, wealth and manufacturing abroad, mostly – but not exclusively – to China. At least then UK industry might have stood a chance when the costs of energy-intensive industries were hiked. Instead, this looks like a sorry attempt, too little too late, to do any good. It seems guaranteed to increase bureaucracy and to fuel domestic inflation. I might be wrong, of course, and we will have to wait and see. But that, I suggest, is what the UK government should have done regarding the EU version of CBAM before rushing to follow suit.