Understanding CBAM
With major changes underway in the UK’s carbon‑pricing landscape, many in the agri‑supply chain are asking what the Emissions Trading Scheme (ETS) and the new Carbon Border Adjustment Mechanism (CBAM) actually mean for fertiliser production, imports, and long‑term competitiveness. Head of Fertiliser, Jo Gilbertson brings together the essentials; what’s changing, why it matters, and how AIC will support Members through the transition.
The UK Emissions Trading Scheme (UK ETS)
To begin, it’s important to understand the Emissions Trading Scheme (ETS). The UK first participated in an ETS when we were part of the European Union back in 2005, so the system has now been operating for more than 20 years. It is essentially a cap‑and‑trade system.
Companies such as power stations, factories, and, more recently, airlines are given a limit on how much carbon they can emit. For every tonne of carbon produced, they must hold a permit — known as an allowance. These allowances can be bought and sold, which is where the “trading” element comes in. Over time, the government reduces the total number of permits to encourage cleaner technologies and make polluting progressively more expensive.
The challenge: competitiveness and carbon leakage
There is, however, a flaw. By increasing costs for heavy industry, ETS can push manufacturers to relocate to countries without similar systems. For example, if nitrogen fertiliser production in the U, an energy‑intensive process, is subject to ETS costs, companies may choose to offshore production to avoid that financial burden. The UK currently offers no protection against imports from non‑ETS countries, meaning production has already moved overseas to countries with lower cost bases, undermining our domestic industry.
How the carbon price forms
The trading of allowances creates what’s known as the UK carbon price (UKA). Like a currency or a share, the price is driven by supply and demand. The more businesses need to buy allowances, the higher the price.
How Free Allowances Fit In
To prevent excessive “carbon leakage”, where production moves abroad to avoid carbon costs, the Government introduced free allowances for certain industries. These give eligible businesses a portion of their permits at no cost. Free allocations can be traded, banked, or used to meet ETS obligations. Fertiliser production in the UK has historically received free allowances.
However, even with free allowances in place, it is still often cheaper to relocate production to regions with lower energy prices or different industrial policy. For example, the United States did not adopt an ETS but instead used large‑scale tax incentives to support decarbonisation. This has contributed to growth in US ammonia production and carbon‑capture technologies.
As a result, production cost disparities between Europe and the rest of the world have widened, particularly when comparing gas prices, which remain markedly lower outside Europe.
CBAM - What Is It and Why Is It Being Introduced?
This brings us to the Carbon Border Adjustment Mechanism (CBAM). CBAM is designed to reduce carbon leakage by applying a border charge on the embedded emissions of imported goods such as steel, cement and, crucially for our sector, fertilisers (including nitrogen products, ammonia and hydrogen). The intention is to level the playing field between domestic producers facing ETS costs and overseas producers who do not.
How the UK will apply CBAM
The UK CBAM will apply from 1 January 2027. It will also apply in Northern Ireland. NI is not subject to the EU CBAM due to the way post‑Brexit frameworks operate. This creates an unusual situation:
- goods imported into the Republic of Ireland are subject to EU CBAM from 1 January 2026,
- while equivalent goods imported into Northern Ireland are not — despite there being no physical border between the two.
This inconsistency could create market distortions and potential political sensitivities.
Potential risks and trade implications
Some have suggested that Ireland could import fertiliser through Northern Ireland to avoid EU CBAM charges. While theoretically possible, such actions would almost certainly trigger strong responses from EU member states, particularly France, given the implications for market integrity and enforcement.
How CBAM Works With Other Carbon Pricing Systems
Many jurisdictions, around 28 or 29 globally, have adopted or are introducing ETS‑style systems. When a product arrives at the UK border, any verified carbon cost already paid in its country of origin will be deducted from the UK CBAM charge. So if the UK CBAM rate is, for example, £36 per tonne, and a shipment already carries £35 of carbon cost from its origin, the UK importer would only pay the £1 difference.
Verification and compliance
Verification is key. HMRC will require proof of embedded emissions and may apply default values if documents are incomplete or inaccurate. These defaults will be deliberately set high to discourage under‑reporting.
Untangling country of origin will also be crucial, particularly for widely traded commodities such as urea, where “open origin” shipments are common.
The Three Key Variables Behind CBAM Charges
There are three main variables:
- Carbon price – fluctuates according to supply and demand in the ETS market.
- Free allowances – being phased out over nine years; these significantly influence costs.
- Embedded emissions – either verified actual emissions or a default value.
Of these, embedded emissions are the most significant, especially where carbon capture and storage (CCS) is used. Halving direct emissions can roughly halve the CBAM charge.
Differences between the UK and EU calculation methods
The UK calculation method differs from the EU’s, largely because the EU cannot impose a border tax, as taxation is a member‑state competence. The UK can. The EU therefore uses a certificate‑purchase system instead. The two systems are structurally different and not directly comparable.
Remaining uncertainties
There is still uncertainty until HMRC publishes the starting values for:
- free allowances,
- default emissions, and
- the detailed CBAM methodology.
These will determine how charges are calculated in practice and how closely UK and EU systems may align in the early years.
Does Carbon Capture Reduce CBAM Liability?
Yes. Carbon capture reduces a product’s verified emissions, and therefore lowers its CBAM liability. In countries like the United States, where CCS equipment is subsidised, this can significantly reduce the CBAM‑exposed cost of ammonia, making US imports more competitive. In effect, the US taxpayer is subsidising low‑carbon ammonia that can then enter markets like the UK with a lower CBAM charge.
This creates the striking situation where, indirectly, the United States is subsidising UK food production.
Why CBAM is Happening, and What Happens Next
CBAM is not happening in isolation, ETS is the root cause. The UK committed to ETS alignment during the Brexit negotiations, and CBAM is effectively the final implementation layer of those commitments.
There is no political appetite to remove fertilisers from scope, either in the EU or the UK. The Treasury is firmly committed, both for environmental reasons and because CBAM will generate revenue.
What this means for the sector
In short, CBAM is a consequence of long‑standing national policy. It will proceed regardless of sector opposition. The focus now needs to shift to the practical mechanics of implementation:
- free allowances,
- verification requirements,
- default emissions values, and
- clear, workable industry guidance.
How AIC Supports Members
AIC will continue to:
- interpret Government decisions as they emerge,
- explain what changes mean for Members,
- provide practical guidance,
- and advocate for fair and workable application of CBAM across the fertiliser and agri‑supply sectors.
This is a complex policy shift with real commercial implications. AIC will ensure Members have the clarity, guidance and representation needed during this transition.
Author
Jo Gilbertson
Jo Gilbertson is AIC’s Head of Fertiliser and is based at our Head Office in Peterborough.
Jo is responsible for the management and co-ordination of all matters relating to the production and distribution of fertilisers on behalf of Members.
Graduating with a BSc (Hons) in Environmental Health, he has additional post graduate qualifications in air pollution control, health and safety, advanced negotiation skills, and quality assurance management.
