Carbon Border Adjustment Mechanism (CBAM) – what it means for your business

Carbon leakage occurs when high GHG emission-intensive goods are produced offshore in a country that does not have the same low GHG emission aspirations and regulations as the UK and these goods are subsequently imported into the UK.

As part of its commitment to address and reduce GHG emissions, the UK government is due to implement CBAM from 1 January 2027. The EU has already introduced a transition period (2023 –2025) where GHG emissions must be reported, with full implementation from 1 January 2026. 

What is Carbon Border Adjustment Mechanism (CBAM)?

Under CBAM a carbon price will be placed on the most GHG emission-intensive industrial goods that are imported into the UK/ EU which currently are not subject to a carbon price under the existing Emissions Trading Scheme (ETS). It is designed to prevent offshoring and to reduce the carbon leakage risks, level the playing field for UK/EU producers (carbon price for imports will be equivalent to the carbon price of goods produced domestically) and encourage cleaner industrial production globally. 

Will CBAM impact your business?

Any business that ticks the below criteria should be considering the impact of CBAM, the cost impact, contract terms and pricing, and the ability to report and submit returns:

• Imports into the UK or EU (i.e. importer or business responsible for the goods when released into free circulation)
• Goods imported fall within any of the following sectors:

1. Aluminum
2. Cement
3. Fertilizer
4. Hydrogen
5. Iron & Steel

The ‘CBAM goods’ that fall within the above 5sectors are based on a specified list of commodity codes. If you import into the UK and EU, a careful review of both regimes should be carried out. While the UK and the EU CBAM are based on similar principles, there are differences to consider.  The main differences are:

• The EU CBAM also includes electricity.
• The EU CBAM regime is based on purchasing certificates.
• The UK regime includes a 12-month rolling period / next 30-day threshold test.

How will CBAM impact your business?

For CBAM goods, based on commodity codes, that fall within the above sectors, a specific CBAM rate (per sector) is applied to the total GHG emissions emitted to produce those goods (direct and indirect emissions).  In the UK you will be required to register for CBAM and submit quarterly returns. In the UK the first return will be an annual return. In the EU, businesses will be required to register with national authorities and purchase CBAM certificates. 

What actions should you be taking now?

Determine your CBAM exposure - Review imports and supply chains to understand the impact on your business. Have your goods been correctly classified to ensure you are correctly applying CBAM? Alternatively, ensure goods that do not fall within CBAM are not caught due to incorrect classification.

Data review - Are you confident that you have the relevant data to correctly calculate the total emissions? Whilst in the UK there will be default emission values available, these will be significantly higher than true emission values.

Training and controls – Are you aware of the full implications, how to address these, monitor, report and have the relevant controls in place?

How we can help with CBAM

If you would like to understand the full implications of CBAM, would like assistance with reviewing goods and commodity codes, calculating emissions, or to learn about our GHG emissions calculation tool and our supplier engagement tool, please get in touch with a member of our ESG and Tax team.

Get in touch