How do free allowances change the UK Carbon Border Adjustment Mechanism (CBAM) rate?

HM Revenue and Customs (HMRC) describes the sector rate for a quarter as the average UK Emissions Trading Scheme (UK ETS) auction price, adjusted for the share of sector emissions covered by free allowances. A reduction factor reflects the phase-out of those allowances. Your plant's own emissions do not move the rate.

The three elements, as HMRC lists them

• The average UK ETS price: the mean average of all UK ETS auction clearing prices for the relevant quarter. If all auctions fail to clear in a quarter, the last positive average price is used.
• The free allocation adjustment: 1 minus the average proportion of sectoral direct emissions covered by free allowances, multiplied by a reduction factor.
• The output: the CBAM rate for the sector for that quarter.

Where the proportion comes from

HMRC says the average uses UK ETS baseline data reporting on the average sectoral direct emissions in 2019, 2022 and 2023 of sub-installations producing CBAM goods, and the free allowances allocated to the same sub-installations over the same period. Years are discounted if there were no direct emissions for that sector. The reduction factors reflect those applied to phase out free allowances under the UK ETS.

The order of the brackets

The policy summary sentence can be read two ways. HMRC's worked example for the cement sector, published on 16 October 2026, writes the adjustment as 1 minus (proportion x reduction factor), with the multiplication inside the brackets. That is the reading used here. In that example HMRC uses a baseline free allocation percentage of 87.1% and a 2027 reduction factor of 97.5%, and says the factor is the same for all 5 CBAM sectors.

What it means for you

Our reading, not HMRC's: a smaller free allowance share, or a lower reduction factor in a later year, leaves a larger part of the average price in the rate. The rate is set for the sector. Your plant's emissions change how many tonnes the rate is applied to, not the rate.

The adjustment, step by step

• Proportion covered by free allowances: 87.1%. Reduction factor: 97.5%.
• 87.1% x 97.5% = 0.871 x 0.975 = 0.849225.
• 1 minus 0.849225 = 0.150775.
• About 15.1% of the quarter's average UK ETS price becomes the cement rate in this example.

HMRC's example inputs for the cement sector. Final rates are set quarterly.

What Senseible does here

Senseible reads fuel invoices and electricity bills into dated records, which feed a plant's emissions figure. It does not set or forecast UK CBAM rates.

• Which rate applies to a good
• From tonnes to emissions intensity
• UK and EU CBAM compared
• CBAM report from your records

Sources: HM Revenue and Customs, Carbon Border Adjustment Mechanism (CBAM): Policy summary (updated 2 November 2026), HM Revenue and Customs, Illustrative CBAM rates and worked example for Carbon Border Adjustment Mechanism (CBAM) (16 October 2026)

Last reviewed 2026-11-05. HM Revenue and Customs says the details in its policy summary may be subject to change. Re-check the policy summary and the keeping-records page before relying on a date or condition.