UK CBAM free allowances phase-out sets a nine-year glidepath under the UK emissions trading scheme

UK, CBAM

UK CBAM free allowances phase-out will reshape carbon costs for key heavy industries. UK CBAM free allowances phase-out will run from 2027 to 2035 under the UK emissions trading scheme. However, the UK plans only limited early reductions to ease the transition. Therefore, firms in covered sectors should plan for steadily rising effective carbon exposure.

The UK will apply the phase-out at sub-installation level and across all covered sectors. The scope includes aluminium, cement, fertiliser, hydrogen, iron, and steel. Meanwhile, the government does not plan to retain free allocations to offset export leakage risk. As a result, exporters may face a sharper carbon cost step-up than under hybrid models.

UK ETS free allocation review prioritises stability over conditionality

The UK ETS free allocation review keeps current benchmarks in place for 2027. The authority plans to adopt new EU benchmarks once they become available. However, it will apply those updated benchmarks from 2028 to 2030, not in 2027. Therefore, companies get a one-year buffer before benchmark changes bite.

The UK extended the 2021–25 free allocation period to 2026 to align with UK CBAM timing. Operators can exclude either 2020 or 2020–21 data from historical activity calculations. Meanwhile, this option addresses Covid-era distortions in industrial output. As a result, some sites may secure more representative baselines for 2027–30 allocations.

Uniform phase-out raises competitiveness questions for metals and materials

The UK will keep its existing carbon leakage list using historic EU-wide data. The authority will not adopt UK-specific leakage metrics for the list. However, it will also avoid tiered free allocation levels by leakage intensity. Therefore, the UK CBAM free allowances phase-out will apply more uniformly than many industries requested.

The authority rejected new conditions tied to free allocations, such as mandatory decarbonisation plans. It also rejected penalties for installations that fail to cut emissions. Meanwhile, the authority cited higher administrative burden and limited decarbonisation gains. As a result, the policy leans on price signals and border measures, not compliance gating.

The Metalnomist Commentary

This UK CBAM free allowances phase-out could tighten domestic incentives while increasing trade sensitivity for energy-intensive exporters. However, the uniform design may create uneven pain across subsectors with different abatement options. Therefore, the UK-EU ETS linking talks could become a major swing factor for industrial strategy.