What does it mean for your business?
Do you import carbon intensive products such as Iron, Steel. Aluminium, Cement, Fertilisers, Glass or Ceramics? If so you need to know about the Carbon Border Adjustment Mechanism (CBAM).
In the push to a net-zero economy, many countries are introducing rules requiring goods produced in that jurisdiction to be produced in a way which emits less carbon.
The argument against such regulations is that it will simply force production to move elsewhere to a region without equivalent regulations – so-called “carbon leakage.” This would not reduce the world’s overall carbon emissions but would instead reduce the manufacturing competitiveness of the jurisdictions imposing those rules.
The solution to this problem is a “Carbon Border Adjustment Mechanism” (CBAM). This works by equalizing the higher price of goods produced using low-carbon methods with the lower price of imported goods. Instead of subsidizing the lower-carbon domestic production, the system works by imposing a tariff on the import of selected carbon-intensive goods imported into the regulated jurisdiction, where such import is from a jurisdiction that does not have an equivalent regulatory framework. There is also a need for any CBAM framework to be assessed alongside any applicable emissions trading systems, such as the European Union (EU) Emissions Trading System (ETS).
United Kingdom.
The government announced that, following a previous consultation, it would introduce a CBAM from 1 January 2027 on imports of certain carbon intensive goods from the following sectors: aluminium; cement; ceramics; fertilisers; glass; hydrogen; and iron & steel. This consultation sets out how the government intends to structure and administer a CBAM and invites views from interested parties.
The liability applied by the CBAM will depend on the greenhouse gas emissions intensity of the imported good and the gap between the carbon price applied in the country of origin (if any) and the carbon price that would have been applied had the good been produced in the UK.
CBAM liability will lie directly with the importer of imported products within scope of the UK CBAM on the basis of emissions embodied in imported goods. This system will not involve the purchase or trading of emissions certificates.
Which sectors will a UK CBAM initially apply to?
The UK CBAM will place a carbon price on some of the most emissions intensive industrial goods imported to the UK from the aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron, and steel sectors.
Further detail, including the precise list of products in scope, the design and administration of the mechanisms is the subject of a government consultation closing on the 13 June 2024.
Carbon pricing internationally
The UK CBAM is designed so that other countries which also have an explicit carbon price will see the CBAM liability on their goods adjusted accordingly.
The price applied by a CBAM will therefore be set on the basis of the explicit carbon price differential between the UK and the country where the products were produced.
European Union.
The Carbon Border Adjustment Mechanism (CBAM) is the world’s first carbon border tax, created by the EU, with the aim of reducing carbon emissions.
The first stage of the policy, which will be phased in over three years, came into force on 1 October 2023. This initial trial phase is focused on high emitting sectors, including cement, fertilisers, iron and steel, aluminium, hydrogen, and electricity.
What will companies need to do?
From 1 October 2023 to 31 December 2025, companies importing goods into the EU will have to declare, in quarterly reports, the total volume of products imported, and the quantity of emissions embedded within each product. This includes both direct and indirect emissions. They won’t have to buy any carbon allowances at this stage.
From 1 January 2026, applicable companies will need to purchase the equivalent number of CBAM certificates to cover these “embedded” emissions. If importers can prove a carbon price has already been paid during production, the tariff is likely to be reduced to avoid double taxation.
• Companies importing goods into the EU will need to work with their suppliers to gather necessary data.
• Companies importing goods into the EU will need to quantify the financial risk of CBAM and impact of importation, then weigh up the pros and cons of production locations.
• Importers will need to consider the advantages and disadvantages of choosing low emitting suppliers outside of the EU, or potentially relocating manufacturing to inside the EU.
• Suppliers providing raw materials or goods to the EU will need to provide emissions data or carbon footprints on products.
Australia, Canada, and The United States.
The Australian Government has announced a review on whether to introduce a carbon border adjustment mechanism (CBAM) in Australia. Their particular focus is on steel and concrete.
Canada is developing a similar mechanism to be called the Border Carbon Adjustment (BCA) to impose charges on imports from countries with low or no carbon pricing ensuring equal carbon costs with domestic manufacture. They are also considering export rebates to enhance competitiveness.
The United States through the proposed Clean Competition Act is considering implementing a ‘Carbon Tariff’ with a fixed rate of $55 per tonne with annual increases to encourage companies to reduce their carbon footprint. This differs from European plans to offer.
