By Steven Godfrey
UK & EU CBAM – Navigating the UK & EU Carbon Border Adjustment Mechanism
The EU has implemented a carbon border tax on the importation of certain goods into the EU. Importers are required to report the embedded carbon emissions of that shipment, and pay a carbon tax called CBAM. This document is a brief discussion of what CBAM is – and what do about it.
What is CBAM?
Certain types of products are ‘carbon-intensive’ to manufacture, i.e. a lot of carbon is released into the atmosphere during the manufacturing process (termed ’embedded’ or ’embodied’ carbon). Such products include iron/steel, aluminium, cement, fertilisers, electricity and hydrogen.
Additional carbon dioxide in the atmosphere accelerates global warming, so for many years EU-based manufacturers of the above products have been subject to a compliance penalty, under the EU Emissions Trading Scheme (EU ETS). Although technically not a tax, the purpose of the EU ETS is – unsurprisingly – to incentivise a transition towards lower-carbon manufacturing processes.
However – the EU does not operate in isolation. Many non-EU countries also manufacture the same products, and many of these domiciles have no domestic carbon tax. That makes EU manufacturers vulnerable to competition from cheaper imports, or domestic producers ‘offshoring’ their production facilities – often termed ‘carbon leakage’.
To protect domestic manufacturers against these cheap, less regulated imports, in October 2023 the EU put in place the first ever carbon border tax, known as CBAM (‘Carbon Border Adjustment Mechanism’). Importers of certain products must pay an additional tax. Directly linked to EU ETS, the tariff applied is taken from the EUA carbon price.
The intention is to ‘level the playing field’, ensuring that:
EU producers are protected against offshoring, leakage, and cheap imports;
Producers in the EU and elsewhere are incentivised to cut emissions;
Other domiciles are encouraged to implement their own carbon reduction/pricing initiatives.
What products does EU CBAM apply to?
EU CBAM goods are identified by their Combined Nomenclature (CN) code, which is the EU’s customs and trade statistics classification system. CN codes are in turn based upon global Harmonized System (HS) nomenclature, range between 4 and 8 digits, and are shown in Table 1 of Annex I to Regulation (EU) 2023/956. If the CN code of the imported good falls within the list of goods in Annex I of the CBAM Regulation, a CBAM reporting obligation is triggered.
EU CBAM goods are based upon the eligible material content of goods covered by that CN code. This takes the form of a disclosure of SEEg – Specific Embedded Emissions for these goods.
By 2030, EU CBAM will be gradually extended to all sectors covered by the EU ETS. Experience gained from EU ETS suggests that the list of EU CBAM products is likely to grow beyond that over time.
Independent verification is a cornerstone of EU CBAM and follows the EU ETS requirements and rules.
Timings
From 1st Oct 2023 to end Dec 2025, the only obligation placed upon importers of EU CBAM goods is the requirement to submit quarterly reports detailing the embedded carbon of all EU CBAM goods ‘released to the market’ (i.e. cleared by customs) during that quarter – i.e. no tax is payable. Termed the ‘Transitional Phase’, this period is intended to serve as a learning period for all stakeholders.
On 1st Jan 2026 the ‘Definitive Phase’ begins. Each importer of EU CBAM goods (or their Authorised CBAM Declarant) must submit annual CBAM reports and CBAM tax becomes payable thereon. The tax obligation is satisfied by purchasing and surrendering the appropriate quantity of CBAM certificates, the price of which will be equal to the price of emissions allowances traded on the EU ETS in the previous week.
MRV requirements (Monitor, Report, Verify)
In order to make an EU CBAM declaration, the importer or their representative (‘CBAM Declarant’) will require embodied carbon data from manufacturers. Providing this data will start with stringent chain-of-custody tracking to identify the country of origin of each shipment of precursor or feedstock. The method of production of each product type must also be recorded, along with an assessment of the boundaries of that production process and the carbon emissions therefrom.
The data calculation will be based upon the mass of the EU CBAM product within the semi-finished or finished product, the embodied carbon in precursor materials or feedstock, minus any carbon tax already paid in the producer’s home country. To meet the above requirements, producers must put in place a robust and documented MRV system that incorporates data sources from the ‘goods in’ bay through to outbound shipments. Needless to say, that MRV system should be capable of providing accurate, timely and verifiable carbon data.
Potential problems for UK manufacturers/exporters
Fines are payable for under-reporting a CBAM declaration (€10 to €50 per tonne of unreported emissions) – over-reporting will result in excess tax been unnecessarily paid;
Due to the punitive costs of non-compliance, EU importers will naturally shun suppliers unable to provide the necessary embedded carbon data for their products;
All the above will place a large additional burden on UK exporters, most of whom are unlikely to have the necessary technical expertise (or manpower) to cope;
From 1st January 2026 it is required that the data be verified by an accredited independent third-party;
Up to 30th June 2024, importers who hadn’t received usable data from their supplier were permitted to report based upon default figures. This derogation no longer applies;
Once UK CBAM becomes effective, UK manufacturers who both import UK CBAM products and export EU CBAM products will face particularly challenging and complex reporting obligations.
What are the cost implications?
The two most immediate are:
The cost of the CBAM tax itself – although this cost is nominally borne by the importer, will it be passed back down the supply chain?
The cost to the producer in providing the importer with accurate data about embedded carbon emissions for each product, production method, etc.
Is the UK implementing a CBAM?
Yes, starting on Jan 1st 2027. Full legislation is yet to be announced, but a list of UK CBAM goods can be found in Annex B of the government consultation response.
Potential opportunities for UK manufacturers/exporters
EU CBAM and UK CBAM are not selective tariffs targeted at a particular country of manufacture but will be universally applied. Producers can therefore gain a competitive advantage by:
Becoming the importer’s preferred supplier by producing timely and accurate emissions data;
The intelligent matching of source product stocks with export destination, in order to minimise the eventual tariff;
Incorporating considerations such as CN nomenclature, source material types and/or countries of origin into product design decisions.
Auditel can help with all the above.
What should UK manufacturers/exporters do now?
Unlike EU CBAM, UK CBAM will not have a ‘bedding in’ period during which producers can ‘learn on the job’ how to produce accurate, timely data. In addition – EU CBAM’s ‘Definitive Phase’ requires the importer to make an annual declaration. UK CBAM will require quarterly reporting.
UK CBAM’s tighter reporting regime requires producers to make adequate preparations long beforehand, allowing time to iron out any problems or gaps in data well in advance. In cases where UK manufacturers import from non-EU sources and export to the EU in tandem – advance preparation is vital.
How can Auditel help?
CBAM is one instance wherein it is important not just to do the right things – but to do them in the correct order. Because of this, Auditel have drawn upon its considerable experience in the field of greenhouse gas/carbon emissions measurement and reporting to develop a proprietary ‘CBAM Maturity Model’. This is designed to take our CBAM client through each of the necessary stages, in the correct order.
The end goal is not mere compliance – if implemented correctly it will result in an accurate but optimised tariff. In that way, CBAM can become a point of difference with your peers. Put simply – if your competitors are not as proficient at managing, reporting and reducing carbon as you are, an irksome additional tax can become a competitive advantage
