Executive Summary

• The European Union (EU) and United Kingdom (UK) reached an agreement this week to link their similar emissions trading systems (ETS) and upcoming carbon border adjustment mechanisms (CBAMs); the latest U.S. CBAM proposal, the 2025 Foreign Pollution Fee Act (FPFA), was reintroduced in the Senate last month.
• The three jurisdictions’ CBAM policies all deviate from standard carbon border adjustment under a domestic carbon tax—the EU and UK policies are similar with the CBAM import tax rates linked to the domestic ETS, while the U.S. FPFA is de facto tariffs without including any domestic carbon price.
• Looking forward, it’s important to monitor several developments in CBAM policy, including any final changes with the adoption guidelines of the upcoming EU CBAM in 2026, the implementation of the EU-UK ETS and CBAM integration, and the U.S. CBAM prospects and any potential “reciprocal tariffs” the Trump Administration may impose to retaliate against the EU and UK CBAMs.

Introduction

The European Union (EU) and United Kingdom (UK) reached an agreement earlier this week to link their similar emissions trading systems (ETS) and upcoming carbon border adjustments (CBAMs) as part of a broader bilateral cooperation package. The latest U.S. CBAM proposal, the 2025 Foreign Pollution Fee Act (FPFA) was reintroduced in the Senate last month.

The three jurisdictions’ CBAM policies all deviate from standard carbon border adjustment under a domestic carbon tax, which works by levying a tax on imported goods and providing a rebate for exported goods. The EU and UK policies are similar with the CBAM import tax rates linked to the domestic ETS, while the U.S. FPFA is de facto tariffs without including any domestic carbon price.

Looking forward, it’s important to monitor several developments in the CBAM space, including any final changes with the adoption guidelines of the upcoming EU CBAM in 2026, the implementation of the EU-UK ETS and CBAM integration, and the U.S. CBAM’s prospects and any potential “reciprocal tariffs” the Trump Administration may impose to retaliate against the EU and UK CBAMs.

This insight provides an overview of the EU, UK, and U.S. CBAM policies, analyzes their similarities and differences in design, and summarizes key developments to watch going forward.

Background

EU CBAM

The EU CBAM is an official EU regulation and part of the “Fit for 55 Package” legislation, which consists of various policy initiatives aimed at helping the EU cut its emissions by 55 percent relative to the 1990 levels by 2030. The EU CBAM is a component of the EU Emissions Trading System (ETS), which has been in place since 2005.

UK CBAM

The UK has not passed the CBAM legislation yet. The UK CBAM will be a component of the UK ETS, which replaced the UK’s participation in the EU ETS in January 2021 as a result of the Brexit.

The UK government states that the upcoming CBAM will “operate as a tax.” It published the proposal in Spring 2024 and consulted the public on the policy design and implementation. It published a response to the public consultation on October 30, 2024, confirming that the UK will introduce a CBAM mechanism on January 1, 2027. The proposal is currently in a technical consultation period.

U.S. CBAM

Since 2021, Congress has introduced several legislative proposals aimed at addressing carbon emissions in internationally traded goods. Most recently, on April 8, 2025, Senators Bill Cassidy (R-LA) and Lindsey Graham (R-SC) reintroduced the 2025 Foreign Pollution Fee Act, which is a carbon tariff proposal. As lawmakers work on the reconciliation package, there is reported interest in including the FPFA to help fund the “One Big Beautiful Bill.”

The American Action Forum has published previous analyses of the policy design and revenue effects of the FPFA with more detailed information.

EU-UK Integration in ETS and CBAM

On May 19, 2025, the EU and UK reached an agreement to work toward linking both economies’ ETS as part of a broad bilateral cooperation agreement. When adopted, the UK would in effect rejoin the EU ETS. The goal of the integration is to “address many of the issues raised in respect of trade and a level playing field.”

As part of the ETS plan, the EU CBAM and the pending UK CBAM would be linked, which would allow covered exports from the EU and the UK to be sold to the other jurisdiction exempted from the import taxes under the CBAMs. The agreement does not specify a timeline for the implementation of the agreement.

EU, UK, U.S. CBAMs Compared

There are similarities among the three jurisdictions’ CBAM policy designs:

• Non-standard carbon border adjustments: None of the three policies is a standard carbon border adjustment, which works by levying a carbon tax on imported goods and providing an export rebate for exported goods along with a domestic carbon tax. All three policies include only import taxes without addressing exports.
• Addressing emissions embedded in international trade: All three policies are designed to incentivize emissions reduction in globally traded goods by enacting a tax based on designated calculations of the carbon emission associated with a product.

EU and UK CBAMs are quite similar in their design, whereas the U.S. proposal (2025 FPFA) is distinctly different:

• Domestic carbon price: While the EU and the UK CBAMs are designed to go with their domestic carbon prices under the respective ETS, the U.S. proposal does not impose any emissions reduction obligations on domestic producers.
• Tax rate: Both the EU and the UK CBAMs set the import tax rates to mirror the effective domestic carbon prices under the ETS; it is unclear how the U.S. proposal (2025 FPFA) determines the punitively high tariff rates.
• Policy goal: Although the three policies aim to encourage imports of less carbon-intensive goods and protect domestic producers’ competitiveness, the EU and UK policies are more oriented toward climate goals, while the U.S. proposal is more driven by a geopolitical goal of countering adversary countries.

EU, UK, and U.S. Carbon Border Adjustment Proposals Compared

	EU CBAM Regulation	UK CBAM Tax Proposal	U.S. CBAM Proposal (2025 FPFA)
Policy Goal	Aims to “put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.”	Aims to “ensure highly traded, carbon intensive products from overseas face a comparable carbon price to that which would have been payable had they been produced in the UK, so that UK decarbonization efforts lead to a true reduction in global emissions rather than simply displacing carbon emissions overseas.”	Aims to “level the playing field for American manufacturers and workers by holding non-market economies like China accountable for their unfair trade practices.”
Treatment of Imports	Requires importers of covered goods to purchase CBAM certificates.	Requires the taxpayer to pay the import tax at customs control.	Levies an ad valorem tax on imported goods, which means the tariff amount is set in proportion to a good’s customs value.
Covered Goods	Specified goods across cement, aluminum, fertilizer, iron and steel, hydrogen, and electricity sectors.	Specified goods across the aluminum, cement, fertilizer, hydrogen, and iron and steel sectors.	Specified goods across aluminum, cement, iron and steel, fertilizer, glass, hydrogen, and certain inputs for solar and battery manufacturing.
Covered Emissions	Direct emissions (generated onsite at the facility) for all sectors, indirect emissions (embedded in purchased electricity) for the cement and fertilizer sectors.	Includes both direct and indirect emissions.	Covers direct and indirect emissions, and emissions associated with the input materials and international transportation of the covered good or input materials before entry into the United States.
Tax Rate	Mirrors the weekly average auction price of the EU ETS allowances, which was on average US$70 per metric ton of carbon dioxide equivalent (Mt CO2e) in 2024.	Mirrors the ETS prices (minus any government subsidies) under the UK ETS to which domestic producers are subject.	Provides country-sector specific tariff rates as high as 200 percent.
Domestic Policy	Complements the EU’s domestic carbon price, which is the EU ETS, a cap-and-trade system.	Complements the UK’s domestic carbon price, which is the UK ETS, a cap-and-trade system.	Does not include any domestic carbon price; the bill prohibits any interpretation of the legislative text to result in any future U.S. carbon price or carbon reporting obligation for domestic producers.
Treatment of Exports	Does not cover exports in current law; a legislative proposal on this topic is expected to be released in early 2026.	Does not cover exports.	Does not cover exports.
Timeline	Initially proposed in 2021, the transitional phase of emissions data collection started in October 2023, and the mechanism will officially go into effect in January 2026.	It is expected to start in January 2027.	Not applicable since the proposal was just reintroduced in the Senate.
Accounting for Foreign Climate Policies	Provides tax refund for imported goods if they are already subject to an explicit carbon price (a carbon tax, or a cap-and-trade system) in the country of origin.	Provides tax refund for imported goods if they are already subject to a direct carbon price (a carbon tax, or a cap-and-trade system) in the country of origin.	Includes an “International Partnership Agreement” that would fully exempt a country’s exported goods to the United States if that country implements an equivalent climate and trade policy.
Special Features	Phases in CBAM gradually and phases out the free allowances given to certain carbon intensive industries under the ETS from 2026 to 2034; a pending proposal of exempting imported goods under a de minimis threshold of 50 metric tons of mass.	Exempts a taxpayer’s imported goods if their total value is under £50,000 over a rolling 12-month period.	Includes provisions to further raise the tariff rates to double or quadruple the size of the specified tax rates if the covered goods are imported from a “nonmarket economy country” or manufactured by a “foreign entity of concern.”

Source: Author’s analysis.

Looking Forward

As it gets closer to the official implementation of the EU CBAM in 2026, specific components of the policy could be updated, such as the upcoming proposal to protect EU exporters’ competitiveness and the pending de minimis threshold exemption proposal.

It’s also important to monitor the implementation of the EU-UK cooperation agreement as both jurisdictions need to first link their ETS before integrating the two CBAMs. It’s unclear whether the integration would occur before the UK CBAM’s expected start date of January 2027.

When the EU starts collecting import taxes under the CBAM next year, it is a big question mark whether the policy would motivate the Trump Administration to retaliate with more “reciprocal tariffs” and if it did, what the impact would be on the prospect of CBAM policies and the global trade and economic growth.

Although the current House version of the reconciliation bill does not include any carbon tariffs, there is at least a minimal chance the Senate could include the 2025 FPFA in the bill as a pay-for.

Additionally, other countries may follow suit and start designing and implementing their own versions of CBAMs – with or without a domestic carbon price.