The EU’s new carbon border adjustment mechanism (CBAM) went live in October, and whilst the reporting of carbon emissions on selected materials is the European importer’s responsibility, we feel it’s important to provide UK exporters with a quick update on where we’re at.
Currently, CBAM is in a transitional phase, with charges for EU importers based on CO2 used to make goods coming into play in 2026. For now, the only obligation EU importers have is to report on the amount of CO2 being used, with the first report due in January.
Already though we are starting to hear individual cases of exporters being asked for CBAM paperwork for goods containing steel, aluminium, iron, electricity, cement, and some fertilisers. This is challenging as the EU has not produced any standardised documentation for UK exporters to use. We are currently working with the British Chamber of Commerce to help policy makers in the UK and EU understand how this is affecting businesses, as well as calling for a standardised carbon reporting mechanism for exporting goods into the EU. If you are a member of the Chamber who is currently being affected by changes as a result of CBAM, please get in touch at [email protected]. For more information on CBAM, please see our guide here.
With CBAM now in its trial period with the EU (Started Jan 2023) we have put together a quick guide to CBAM as it does pose a potential barrier to trade with the EU for businesses here in the North East when fully implemented in Jan 2026.
CBAM stands for ‘Carbon Border Adjustment Mechanism’, which is the EU’s planned new carbon border tax.
It will require importers of certain goods to the EU to purchase digital certificates for each tonne of carbon emissions embedded in their goods, the price of which will be based on the average weekly price of the EU’s Emissions Trading System (ETS) carbon permits. In its initial form, the CBAM will cover imports of aluminium, iron, steel, electricity, cement, and some fertilisers, however, there is scope for extending this further.
The EU aims to use this tax to prevent so-called ‘carbon leakage’, whereby carbon intensive producers move their operations outside of the EU to avoid carbon regulation. If approved by the European parliament and member states, the CBAM will be gradually introduced during a transitional period from January 2023, until it is fully operational, and payments begin in January 2026.
What it means for the UK
The UK is one of the countries most exposed to the EU’s CBAM, with UK exports of iron, steel, and aluminium particularly vulnerable. This exposure poses a problem for the UK and its exporters, as it is not currently listed as exempt from the CBAM regulation.
A failure by the UK to coordinate or keep pace with the EU’s level of policy stringency for industrial sectors could risk important UK exports being penalised by the CBAM. This could entail large financial transfers from the UK to the EU, potentially amounting to €1 billion or more, with exporters of steel hit particularly hard.
After the EU Retained Law Bill, CBAM looks likely to be the biggest point of friction between the UK and the EU when it comes to international trade as the UK is not on the EU’s exemption list and the UK Emissions Trading Scheme (ETS) may not be accepted by the EU as an equivalent to their own.
As part of the large range of policies aiming to decarbonise the European economy, collectively known as the ‘European Green Deal’, the EU is set to introduce a Carbon Border Adjustment Mechanism (CBAM) by the end of 2022.
What is the Carbon Border Adjustment Mechanism?
Currently, carbon emissions from environmentally damaging sectors, such as manufacturing and power generation, inside the EU are monitored and charged through the EU Emissions Trading System (ETS). This limits the level of carbon emissions a firm can legally emit and allows them to ‘buy’ further emissions allowances from other businesses. There is currently no policy that does the same for goods not originating in the EU.
The general aim of the CBAM is to ensure that goods that are imported into the EU are treated in a similar way to those that were produced domestically and to disincentivise ‘carbon leakage’ – where a company transfers part of its production to a country with less strict environmental regulations and then re-imports the finished product.
To do this, EU importers of certain goods will be required to calculate and declare the carbon emissions embedded within their imports from the last year to the CBAM authority. The authority will also sell ‘CBAM certificates’ based on the current price of carbon allowances under the Emissions Trading System. Importers will then be required to use these certificates to ‘pay’ their carbon bill. The hope is that this will make less carbon-intensive imports more attractive.
How does this impact the UK?
According to leaked draft documents for the policy proposal, the CBAM will focus on high carbon-emitting sectors including electricity production, iron, steel and aluminium, cement, and fertilizers.
Because of this, the UK is the second most exposed country to the proposal, primarily due to high levels of ‘iron and steel’ and aluminium exports. This new cost associated with importing carbon-intensive goods could make UK exports distinctly less attractive in their traditional largest market. Analysis by the London School of Economics suggests that up to one-third of the total value of all UK goods exported to the EU could be affected by the policy. The only other country that is predicted to bear a larger overall cost – under modelling by Sam Lowe at the Centre for European Reform – is Russia (below).
As well as the additional cost that this presents to importers of UK goods, calculating the carbon emissions embedded within goods can be incredibly complex, with the carbon emissions throughout the goods’ supply chain needing to be taken into account. If it is not possible for a business to calculate the emissions associated with their goods, then a default figure will be used, based on the emission record of the EU’s 10% worst emitters.
One saving grace is that the draft proposal notes that the total cost of a CBAM charge will be reduced if the country of origin already implements a carbon charging system, similar to the EU’s Emissions Trading System, or a domestic carbon tax. As the UK has now left the ETS, the UK ETS came into force at the end of April 2021 meaning that UK goods would not be charged as heavily. This reduction would be based on how much the domestic system or tax charged for carbon, meaning that imports from the UK may well be more attractive than those from a country with a less ambitious carbon trading system or without one at all e.g. Russia or Turkey.
Next steps…
The CBAM proposal has been approved by the European Parliament, while the European Commission is set to announce further details about the policy and its implementation in July. The policy is set to be first implemented by the end of 2022.
