Staying ahead of the CBAM curve

The Carbon Border Adjustment Mechanism (CBAM) is designed to place a price on the carbon emissions associated with the production of certain imported goods. Its primary goals are to protect domestic industries, reduce the risk of carbon leakage, and encourage global partners to adopt more sustainable practices. The EU CBAM entered its transitional phase in October 2023, with full implementation on 1 January 2026. The UK CBAM will be implemented on 1 January 2027, with no transitional period.

Following a recent consultation, HMRC has revised certain elements of the UK CBAM, this includes increasing the registration threshold from £10,000 to £50,000 in value of CBAM-applicable goods over a rolling 12-month period. This change aims to reduce the compliance burden on smaller importers.

What sets the EU and UK carbon policies apart?

Whilst EU CBAM covers imported cement, iron and steel, aluminium, fertilisers, hydrogen, and electricity, UK CBAM excludes electricity, although, businesses will still face costs related to their electricity. EU CBAM requires importers to purchase CBAM certificates, priced to match the EU Emission Trading System (ETS), whereas the UK CBAM will operate a direct levy based on the difference between the UK carbon price and the carbon cost in the country of production.

Currently EU CBAM requires reporting of direct emissions and indirect emissions, but, for certain goods, only direct emissions will be chargeable initially. However, UK CBAM will require both direct and indirect emissions to be chargeable from the start.

While the UK CBAM is inspired by the EU system, its delayed implementation, broader emissions coverage from the beginning, and ‘simpler’ levy-based mechanism highlight a distinct approach that appears to prioritise ease of use but could make it harder to align with international trade standards.

Impact on suppliers

Importers will rely on their suppliers to provide the relevant carbon cost of production. Therefore, suppliers will face significant challenges with the implementation of CBAM. They will need to navigate the complexities of obtaining the required information on carbon costs throughout the supply chain to ensure compliance with CBAM obligations. This includes accurately calculating the carbon emissions embedded in both their products and the raw materials which are imported into the UK. Additionally, collecting the right data in the correct format may be challenging, certainly initially, due to the need for precise and timely emissions data. To address this efficiently, suppliers can implement robust data management systems that automate data collection and ensure accuracy, however this could be both costly from financial and time perspective. This will help streamline the reporting process and maintain compliance with CBAM requirements.

In summary, the UK CBAM introduces a new layer of complexity for importers and suppliers alike, particularly in terms of compliance and emissions reporting. By understanding the financial and administration implications now, staying updated on CBAM’s implementation, suppliers may be able to navigate these challenges effectively prior to the implementation in 2027 to ensure the business is able to report accurately and on time to minimise costs and avoid penalties.

Main differences between UK and EU CBAM