The world’s first carbon border tax was introduced by the EU at the start of October 2023. Our experts break down how the Carbon Border Adjustment Mechanism, or CBAM, will work and how it will impact businesses.
What is CBAM?
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. Its primary focus is to address an issue called ‘carbon leakage’ or offshoring emissions. This happens when companies transfer the production of goods to countries with lower emissions standards, often leading to an overall increase in 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. After this, CBAM will be gradually ramped up to include more sectors, until it comes into full force from 1 January 2026. Only then will the carbon price be charged.
The tax will enable the EU to match the carbon price of imports with that of domestic goods. It is intended that this mechanism will create a level playing field, bolster industry decarbonisation, and apply a carbon price to goods entering the Union.
CBAM's adoption marks a significant moment in the history of carbon pricing. By putting a price on carbon, it becomes an immediate and impactful risk, something that will trigger individual companies, industries and countries.
The ambitions of the policy are also high. It aims to tackle carbon leakage resulting from the EU Emissions Trading Scheme, while simultaneously incentivising international partners and countries to take climate action. This will require short term action, in line with long term plans to reach Net Zero.
What does this mean for carbon markets?
There is still uncertainty as to what the final version of CBAM will look like. Regardless, the tax will have far reaching implications for international markets and companies conducting trade across EU borders. Globally, it will mean a significant ramp-up of emissions reporting and associated paperwork.
Verified product carbon footprints are expected to be a requirement for CBAM certificates. Therefore, offering a verified low carbon product will likely create a strong competitive advantage for companies supplying to the EU.
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.
Overall, this will mean:
- Companies importing goods into the EU will need to work with their suppliers to gather necessary data. For example, asking for the upstream emissions or carbon footprints of each product or material.
- 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.
How can EU companies prepare for CBAM?
Although CBAM will not be implemented in full until 1 January 2026, companies can prepare in advance by:
- Carrying out a scenario analysis to identify emissions related to CBAM-applicable imported goods and their likely impact.
- Engaging with suppliers and manufacturers to gather emissions data for imported goods. Here is an example of the Carbon Trust’s supplier engagement work.
- Involving climate risk and opportunity colleagues to calculate the tonnage of products and the resulting carbon price. This will determine how CBAM is likely to financially impact the company.
- Ensuring the company is registered for importing with relevant regulatory bodies.
- Assessing if goods are already carbon priced in the country of production or purchase to avoid double pricing.
- Establishing processes to collect emissions data, then systems to report and process payments according to CBAM’s regulations. For large organisations with multiple entities or teams, we recommend assessing in-house capacity and establishing roles and responsibilities for these activities.
How can the Carbon Trust help?
To get ahead of the changing compliance landscape, our team of experts can help businesses navigate the risks and opportunities surrounding CBAM by providing guidance on:
- Carbon footprinting
We provide these services for individual products and wider value chains, measuring and reporting the emissions of products being imported into the EU. Our team has expertise developing footprinting models and product footprints, which can be aligned to CBAM requirements and each business’ needs. For more information on these services, or to speak to a member of the team please see here.
- Footprint verification
As product footprints will likely need to be verified for CBAM, we also provide verification services. This can help combine compliance with competitive advantage in the marketplace by using the Carbon Trust label. For more information on our label services please see here.
- Supplier engagement
We have extensive expertise, across complex value chains, in helping businesses work with suppliers on reducing their product footprints. Reducing your product footprint will benefit your business through lowering your carbon price under CBAM. To speak to a member of the team about our supplier engagement work, please see here.
- Climate related risk and opportunity assessments
Our experts can provide analysis of the risks and opportunities of CBAM to business operations, along with the probability of these. They can also assess the timeframe of these effects and evaluate the overall financial impact of CBAM. For more information on our climate change risks and opportunities offering please see here.
CBAM won’t create an immediate financial impact for companies, but it is imperative that businesses look ahead and prepare for when it is introduced. The best way to do this is by having a clear grasp of the transitional risks this regulation could create, and how this could affect your business. Companies can also appropriately plan how to address and modify their strategies to create a competitive advantage in the market. Our climate related risk and opportunity assessment services can help you undertake this work.