The UK government has confirmed that it will align reforms to free allocations within the UK Emissions Trading Scheme (ETS) with the introduction of the UK Carbon Border Adjustment Mechanism (CBAM), delaying the second allocation period to 2027 from 2026. Thus, the current allocation period which ends in 2025 has been extended to include 2026.
Welcoming this decision, the UK-based trade association UK Steel has stated that, without this alignment, the UK steel industry could have faced a reduction in free allocation, resulting in higher carbon costs, while imported steel would continue to avoid any carbon costs. The association is still very concerned about the risk of trade diversion when the EU CBAM takes full effect in 2026, which could divert high-emission steel towards the UK market. However, the government’s new decision will potentially lessen the trade diversion risk, as the existing allocations will not be reduced in 2026.