Guidance

Carbon Border Adjustment Mechanism (CBAM) — Illustrative CBAM rates (and worked example)

Published 16 October 2026

Executive summary

The UK Carbon Border Adjustment Mechanism (CBAM) is designed to address the risk of carbon leakage as the UK economy decarbonises. It does this by applying a carbon price to imported goods in covered sectors, that reflects the carbon price faced by comparable domestic production.

Unlike most taxes, CBAM does not have a single headline rate set out in primary legislation. Instead, the rate is calculated using a methodology that combines recent carbon prices, sector-level emissions data and the extent to which domestic producers receive free allowances under the UK Emissions Trading Scheme.

The methodology for the CBAM rate is set out in law, in the Finance Act 2026. Further details, such as the process for calculating the average UK ETS price and the planned phase-out of free allocation, are included in secondary legislation.

The purpose of this note is to explain how sector-level CBAM rates are calculated, using current data, to help businesses understand how future rates will be set.

The figures presented in this document are illustrative only and represent the rates that would apply from 1 January 2027 if based on current data. The data used to produce these figures is likely to change prior to 1 January 2027. These rates do not create or imply any tax liability for any business, but the examples may provide an indication of the potential scale of future CBAM rates.

The CBAM rates that will generate a liability from 1 January to 31 March 2027 will be published before the end of the year. Rates will be updated and published quarterly to reflect changes in the average UK ETS price and the applicable free allowance phase-out reduction factor.

The CBAM rate methodology calculates sector-level rates for covered CBAM sectors. Currently, these are the following sectors:

• aluminium
• cement
• fertiliser
• hydrogen
• iron and steel

You can find more information about CBAM policy design on GOV.UK.

Illustrative rates

The table below provides illustrative CBAM rates for all covered sectors, calculated using the most recent data available at the time of publication. This includes the average UK ETS price from July to September 2026 and initial data from the UK ETS baseline data reporting process (which remains subject to further checks by the UK ETS Authority). These figures are intended to demonstrate what sector-level CBAM rates would be if calculated using current data under the CBAM rate methodology. They should not be interpreted as forecasts or as the rates that will apply when CBAM liability begins.

CBAM rates will be calculated using the latest available data and published at the start of each quarter, the first of which will be published before the end of the year.

Table 1: Illustrative rates (/tCO₂e)

Iron and steel	Aluminium	Cement	Fertiliser	Hydrogen
£9.69	£9.79	£8.78	£1.45	£9.24

Worked example — Cement sector

The following example shows how the CBAM rate for the cement sector will be calculated. The data used in this example are subject to change prior to 1 January 2027.

Step 1: Calculate the average UK ETS price

The average UK ETS price for the preceding quarter is calculated as the mean of all UK ETS auction clearing prices during that period. If no allowances were sold at auction in that quarter, the average is based on the most recent quarter in which auction sales occurred.

Table 2: Average UK ETS price

Year	Average UK ETS Price
Q3 (July to September) 2026	£58.15

Step 2: Identify relevant sub-installations

To calculate the baseline free allocation percentage in Step 3 for each CBAM sector, the relevant UK ETS sub-installations within the scope of CBAM must first be identified.

UK ETS sub-installations which produce CBAM goods are identified through operator submissions. Operators must provide evidence, via the Baseline Data Reporting exercise, demonstrating that the sub-installation contributes to the production of a UK CBAM good, in accordance with the mapping set out in the UK Emissions Trading Scheme Free Allocation Regulations.

The data submitted through the second stage of the Baseline Data Reporting exercise, including consideration of identification of relevant UK ETS sub-installations, remains subject to further checks over the coming months by the UK ETS Authority. Consequently, the final list of sub-installations used to calculate the baseline free allocation percentage may change. This list will be finalised for 1 January 2027.

Step 3: Calculate the baseline free allocation percentage for the relevant sub-installations

The baseline free allocation percentage represents the proportion of sectoral direct emissions covered by free allowances.

It is calculated by dividing the total free allowances for all identified sub-installations across the period by the total direct emissions for those sub-installations across the same period.

Any revisions resulting from the UK ETS Authority’s checks will be reflected in the final baseline free allocation percentage, and in the CBAM rate for Q1 2027.

The baseline free allocation percentage for the cement sector can be seen in table 3.

Table 3: Cement sector — Baseline free allocation percentage

Sector	Baseline free allocation percentage
Cement	87.1%

Step 4: Apply free allowance phase-out reduction factor

The free allowance phase-out reduction factor reflects the gradual withdrawal of free UK ETS allowances as sectors move from partial protection to paying the full carbon price. The reduction factor is consistent across all 5 CBAM sectors. The phase-out of these allowances is written in The Greenhouse Gas Emissions Trading Scheme (Amendment) Order 2026 legislation.

The phase-out reduction factor for CBAM sectors in 2027 is as follows:

Table 4: Phase-out reduction factor

Reduction factor	2027
Free allowance phase-out reduction factor	97.5%

Step 5: Calculate the CBAM rate

Using the average UK ETS price from Step 1 (£58.15/tCO₂e), the baseline free allocation percentage calculated in Step 3 (87.1%) and the free allowance phase-out reduction factor from Step 4, we can then calculate the CBAM rate as follows:

Table 5: CBAM rate calculation

Year	Calculation	Illustrative CBAM rate
2027	£58.15 × [1 - (87.1% × 97.5%)]	£8.78/tCO2e

Due to presentational rounding, totals may not exactly correspond to the calculation of individual items.

Glossary

Term	Meaning
UK ETS	UK Emissions Trading Scheme.
Average UK ETS price	The average UK ETS price used as the carbon price input in the rate calculation.
CBAM	Carbon Border Adjustment Mechanism.
Direct emissions	Emissions directly associated with the relevant production activity.
Baseline Free Allocation Percentage	The proportion of relevant sectoral direct emissions covered by free allowances.
Free allowances	Allowances allocated without charge under the UK Emissions Trading Scheme.
Reduction factor	The factor applied to reflect the phase-out of free allowances in a given year.
Sector-level rate	The tax rate calculated for a covered CBAM sector.
Sub-installation	A component or activity within an installation used for emissions and allocation calculations.