Just another levy, or a sustainable opportunity for UK companies?

The Carbon Border Adjustment Mechanism (CBAM), has been introduced as part of the European Union’s 2050 climate neutrality measures. The aim of CBAM is to establish an internal ‘cost’ to the EU’s embedded carbon in the production of certain energy intensive products. This, in turn enables a suitable levy to be placed against goods imported from outside the EU, thereby ensuring an equal cost comparison on products and reducing what the EU calls ‘Carbon Leakage’.

CBAM is intended to encourage importers to either use factories based within the EU or choose international suppliers that can provide proof of carbon neutral operations or low carbon emissions.

When does it come in?

CBAM is here already but is arriving in two phases:

• Phase 1 Transitional Period – 1 October 2023 to 31 December 2025
• Phase 2 Definitive Period – 1 January 2026 onwards

As with all major changes, businesses that prepare for the impact during the transitional phase are likely to be better set up to navigate and even benefit from it.

What products are affected by CBAM?

CBAM is currently based around 6 product groups, with emphasis on those requiring high levels of energy intensity to process or manufacture. They are:

• Cement
• Hydrogen
• Fertilisers
• Iron and Steel
• Aluminium
• Electricity

Note: The EU has advised it is currently looking at other commodities it may choose to introduce the CBAM charge to, this includes kaolinic clay which is used in the manufacture of ceramic products.

This straightforward list doesn’t exactly tell the full story. Broadly speaking, it applies to raw and processed materials, but not to most complex, finished goods.

How can I find out what items are affected by CBAM in my business?

Each sector will have nominated Combined Nomenclature (CN) codes CBAM will be chargeable on. The CN code is the first 8 digits of the EU commodity code. If you are unsure whether your business will be affected or not, and you’d like some guidance on this, get in touch and our team of trusted advisers will be able to help you.

What does this mean for companies operating in the UK?

If you’re selling to the EU, and your commodity falls within the selected codes, you’ll be required to provide reporting information. There are some exceptions, such as goods for use by EU military authorities, or goods valued under €150 for example.

It was recently announced the UK will be establishing its own CBAM.  Very similar to the EU CBAM but with differences in the chargeable sectors; the UK will not be charging for electricity, but it will be charging for Ceramics and glass.

The UK Government recently conducted a consultation seeking comments and feedback regarding the UK CBAM. The consultation closed on 13 June 2024 and we are currently waiting for the report based on the answers given.

UK CBAM is expected to be introduced in 2027 and full details on how UK CBAM will be implemented and the full list of products that will be affected by CBAM are expected to be released before the end of 2024.

Will CBAM work?

It’s clear that a lot of work has gone into setting up CBAM and it is the best operational mechanism to date for levelling the playing field for companies investing in lower carbon production. The phased introduction allows scope for adjustment as the EU learns from initial feedback, so it’s difficult to say what it will look like in 5 years’ time. As UK equivalent legislation generally follows suit to minimise trade barriers, we might expect a trade agreement to be established at some point. If you’re looking for the opportunities, it would be fair to assume that sourcing materials from closer to home, lowering the carbon intensity of operations and, at least ensuring you are keeping detailed and accurate records of direct and indirect emissions within your products, will stand you in good stead!

What should I be doing to prepare for CBAM?

1. Check the full list of EU CN codes to see if your current products could be affected by CBAM and require CBAM reporting. Look to see if your goods may meet exemption status.
2. CBAM is calculated on direct and indirect embedded carbon emissions, you may need to contact your own suppliers to check the emissions amount within the supplied materials.
3. Establish and keep detailed records of direct and indirect emissions within your products. You may not need to report on imports into the EU, but your customers might, and they will be seeking information from you.
4. Ensure you submit timely and accurate reports.
5. Stay up to date with regulations and requirements.
6. Keep checking in with industry experts, such as International Trade Matters for updates for both EU and UK CBAM.
7. Attend webinars related webinars provided by the London Chamber of Commerce  and Industry to learn more and stay up to date. Check our events calendar here.

Written by Rachel Stockton from LCCI’s Trusted Advisers International Trade Matters. To have a complimentary 30 minute advisory session with Rachel and our panel of trusted trade experts, please get in touch.