The Carbon Border Adjustment Mechanism (CBAM) is an EU regulation designed to prevent carbon leakage by imposing a carbon price on imports of certain goods from countries with less stringent climate policies. For UK businesses, CBAM represents a significant regulatory shift, with implications that will increase over time as the regulation expands in scope, affecting a broader range of products and industries.

Understanding CBAM: The EU’s Carbon Border Adjustment Mechanism

What is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is a policy instrument (aka protectionist red tape) introduced by the European Union to address the issue of carbon leakage. Carbon leakage occurs when businesses transfer production to countries with less stringent climate policies to avoid the costs associated with carbon pricing in the EU. CBAM aims to level the playing field by ensuring that imported goods are subject to the same carbon costs as products manufactured within the EU.

CBAM applies an additional carbon cost to imports of specific carbon-intensive goods, such as cement, steel, aluminium, fertilisers, and electricity. This carbon price is calculated based on the carbon content of the imported goods and the difference between the carbon price paid in the country of origin and the EU’s carbon price under the Emissions Trading System (ETS).

The Impact of CBAM on UK Corporations

Immediate Implications for UK Businesses

For corporations in the United Kingdom, CBAM represents a significant regulatory challenge. Although the UK is no longer a member of the European Union, the close economic ties between the UK and the EU mean that UK businesses exporting goods to the EU will be directly affected by CBAM. Companies that export carbon-intensive products to the EU will need to comply with CBAM requirements, which include providing detailed information on the carbon content of their goods and paying the corresponding carbon price.

For example, a UK-based steel manufacturer exporting to the EU will need to calculate the carbon emissions associated with its production processes, report this data to the relevant EU authorities, and pay the applicable CBAM levy. Failure to comply with these requirements could result in financial penalties, delays at the border, and potential loss of market access.

Moreover, UK companies that rely on imported goods from non-EU countries with lower carbon pricing regimes may face increased costs as these goods are subject to CBAM when entering the EU. This could impact supply chains and the competitiveness of UK businesses in the EU market.

Long-Term Implications as CBAM Expands

The scope of CBAM is set to expand over time, with significant long-term implications for UK businesses. Initially, CBAM will cover a limited number of carbon-intensive products, but the EU has made it clear that the scope of the regulation will increase in the coming years. This expansion will likely include a broader range of products and sectors, potentially affecting more UK businesses that trade with the EU.

For instance, the EU may eventually extend CBAM to cover sectors such as chemicals, plastics, and even downstream products that contain significant carbon-intensive materials. As the scope of CBAM expands, more UK companies will need to ensure that they are compliant with the regulation, particularly those involved in manufacturing, construction, and energy-intensive industries.

In addition to the increased scope, the administrative burden associated with CBAM compliance is expected to grow. Companies will need to invest in systems and processes to accurately measure and report the carbon content of their products, as well as to navigate the complex regulatory requirements associated with the mechanism.

How CBAM Affects Supply Chains and Competitiveness

Supply Chain Considerations

CBAM has significant implications for supply chains involving UK businesses. Companies that import raw materials or components from countries outside the EU will need to consider the carbon content of these goods and the potential CBAM costs when exporting finished products to the EU. This could lead to a reassessment of supply chain strategies, with companies seeking to source materials from countries with lower carbon footprints or investing in cleaner technologies to reduce the carbon content of their products.

For example, a UK automotive manufacturer that imports aluminium from outside the EU and exports cars to EU countries will need to account for the carbon emissions associated with the aluminium. The CBAM levy on this aluminium could increase production costs, prompting the manufacturer to seek alternative suppliers or invest in carbon reduction initiatives.

Furthermore, companies that are part of complex supply chains involving multiple countries will need to ensure that all links in the chain are compliant with CBAM requirements. This could involve collaborating with suppliers to improve carbon reporting accuracy and reduce overall emissions.

Impact on Competitiveness

CBAM is likely to have a profound impact on the competitiveness of UK businesses in the EU market. Companies that cannot effectively manage the carbon content of their products or that face high CBAM levies may find themselves at a competitive disadvantage compared to EU-based companies or companies from countries with lower carbon footprints.

For instance, if a UK cement producer exports to the EU and is subject to a high CBAM levy due to its carbon-intensive production processes, it may struggle to compete with EU producers who are not subject to the same additional costs. This could lead to a loss of market share and reduced profitability for the UK company.

However, companies that proactively address their carbon emissions and integrate sustainability into their business models could gain a competitive advantage. By reducing carbon emissions, improving energy efficiency, and sourcing low-carbon materials, UK businesses can minimise their CBAM liabilities and enhance their standing in the EU market.

Preparing for CBAM: What UK Companies Need to Do

Conduct a Carbon Footprint Assessment

The first step for UK businesses in preparing for CBAM is to conduct a comprehensive carbon footprint assessment. This involves calculating the carbon emissions associated with all stages of the production process, from raw material extraction to manufacturing and transportation. A detailed understanding of the carbon content of products is essential for compliance with CBAM and for identifying opportunities to reduce emissions.

For example, a UK chemicals company exporting to the EU would need to assess the carbon emissions from its chemical production processes, including energy use, raw material inputs, and waste management. This data will be crucial for determining the company’s CBAM liabilities and for developing strategies to reduce emissions and costs.

Engage in Supply Chain Audits

A Supply Chain Audit is critical for understanding the carbon impact of materials and components sourced from outside the EU. By auditing the carbon content of their supply chains, UK companies can identify high-emission suppliers and work to either reduce these emissions or switch to lower-carbon alternatives. This is particularly important as the scope of CBAM expands to cover a broader range of products and sectors.

For instance, a UK electronics manufacturer that imports components from Asia and exports finished products to the EU will need to audit the carbon emissions associated with these components. By doing so, the company can work with suppliers to reduce emissions or consider alternative sourcing options to mitigate CBAM costs.

Implement Carbon Reduction Strategies

To minimise CBAM liabilities and enhance competitiveness, UK businesses should invest in carbon reduction strategies. This could involve adopting energy-efficient technologies, switching to renewable energy sources, and improving waste management practices. By reducing the carbon content of their products, companies can lower their CBAM costs and position themselves as leaders in sustainability.

For example, a UK food processing company that exports to the EU could invest in energy-efficient machinery and renewable energy to reduce the carbon emissions associated with its production processes. These efforts would not only reduce CBAM costs but also align with the company’s broader sustainability goals.

Why Choose ESG Pro Limited?

At ESG Pro Limited, we specialise in helping UK businesses navigate the complexities of CBAM compliance and develop effective carbon management strategies. Our team of expert ESG consultants provides comprehensive support in carbon footprint assessment, supply chain audits, and carbon reduction planning.

• Expertise in GHG carbon emissions reporting and compliance with EU regulations
• Tailored solutions to ensure your business is fully prepared for the expanding scope of CBAM
• Strategic guidance to enhance your competitiveness in the EU market

Our team at ESG Pro Limited is committed to helping businesses of all sizes understand and comply with CBAM requirements, reduce their carbon emissions, and achieve their sustainability goals. With our support, you can navigate the challenges of CBAM and position your company for long-term success in the evolving regulatory landscape.

• Proven track record in delivering successful ESG strategies
• Strategic guidance to align your business with EU carbon regulations
• Ongoing support to ensure continuous improvement in carbon management