EU Carbon Border Adjustment Mechanism - Taxing future carbon emissions

Taxing future carbon emissions

Governments know that to meet their net zero targets for carbon emissions domestically, they could be putting their industries at a cost disadvantage. There is also a risk that, overall, the effect may be to 'export carbon emissions' by importing cheaper goods from other countries that have not imposed tougher emissions standards.

'Carbon leakage' caused by importing high-emission products made in other countries is a well-established problem, and needs to be addressed if net zero targets are to be achieved.

What is CBAM? 

The Carbon Border Adjustment Mechanism (CBAM) is a piece of EU legislation affecting UK exporters. Starting from 1 October 2023, the EU introduced new rules to ensure that CO2 emissions created in the manufacture of goods imported in the EU are recorded and reported within the EU.

Although reporting requirements for the Carbon Border Adjustment Mechanism have been implemented, it won't be until 2026 that businesses will have direct costs under the scheme. Businesses will then have to purchase certificates under the EU Emissions Trading Scheme to cover the imports of such goods - effectively increasing their price and taxing the related emissions. 

UK businesses exporting to the EU will be affected first, with the administrative reporting burden starting this year - including the need to appoint an EU based reporting agent if the UK business has no footprint in the EU.

UK CBAM proposals

The UK government launched a scoping consultation on a wider range of proposals to address future carbon leakage including:

  • A CBAM style solution linked to the UK's own emissions trading scheme
  • Mandatory product standards - ie legally enforced maximum embodied emissions for different products sold (or imported for own use) in the UK
  • Growing the market for low carbon products - for example, by labelling schemes that tell the consumer how much carbon is emitted in the manufacture of the goods encouraging the purchase of greener products and through government procurement policies.

A key element of the scheme will be to efficiently measure the carbon emissions embodied in products - you have to measure it before you can tax it! 

What goods are covered under EU CBAM regulations?

The EU legislation covers a number of heavy industrial sectors where carbon emissions are already known to be problematically high including:

  • Aluminium, iron and steel
  • Cement
  • Electricity
  • Fertilizers and hydrogen.
The scheme also applies to certain precursors - basic materials that are used as inputs in the production of CBAM goods - and a few downstream products e.g., screws and bolts. It is expected that this list of materials we be expanded over time as the deadline for achieving net zero approaches.

The scope of the UK proposals, including the products and sectors it will cover, is part of the consultation but it would be surprising if it were not to mirror the scope of the UK’s current Emissions Trading Scheme. Therefore the UK CBAM regulations are likely to cover:

  • Cement, chemicals, fertiliser and glass
  • Iron and steel, non-ferrous metals
  • Non-metallic minerals
  • Paper and pulp
  • Power generation
  • Refining.
     

The scope of both 'upstream' and 'downstream' emissions to be included has not yet been decided, so could end up being wider in application than the EU legislation.

When will UK CBAM regulations start?

The UK proposals do not envisage reporting on carbon emissions until 2025 at the earliest, with any cut in current free allowances under the UK Emissions Trading Scheme not likely until at least 2026. Importers will have time to follow developments and amend their supply chain arrangements.

The complexity of measuring carbon emissions consistently across producers in many countries and creating a common methodology that can be internationally recognised illustrates why it may be some time before UK proposals are implemented. Read the UK consultation here.

Download our CBAM flyer

How we can help

CBAM risk assessments

If you think your business could be exposed to the new EU CBAM regulations, we can help you determine: 
  • The extent to which your goods are covered by CBAM
  • Your reporting requirements as a supplier to EU customers or a direct importer into the EU
  • What data you are required to collate and report

CBAM reporting service

You can outsource the completion of your CBAM quarterly reporting to our expert team.

CBAM Training

If you need to educate your staff on CBAM regulations, we can provide your staff with sector specific practical training on:
  • What CBAM is and how it will work
  • How to determine whether goods are subject to CBAM
  • Data requirements for reporting for your industry
  • How to prepare and submit your CBAM reports

To discuss how we can best support your business, please get in touch with Matthew Clark.

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