Preparing for the UK Carbon Border Adjustment Mechanism

The UK Government’s new Carbon Border Adjustment Mechanism (CBAM) is set to have major impact on businesses.

The new regulation aims to support industrial decarbonisation without disproportionately harming domestic firms but it will also impact costs, supply chains and reporting requirements.

In March, the UK Government’s new Department for Energy Security and Net Zero launched a consultation to explore new climate policies that could have significant implications for businesses importing or exporting to the UK.

These measures will seek to address carbon leakage, which occurs when companies shift their business abroad to escape progressive regulation (such as carbon pricing), leading to more global emissions and unfair economic punishment for the countries rightly taking climate action.

Among the options under consideration is a carbon border adjustment mechanism (CBAM). CBAM would be an effective tax on carbon imports, by putting a price on emissions associated with the production of certain goods that enter the UK. The policy would tackle carbon leakage by ensuring that foreign companies do not out-compete British producers on cost because they are not required to pay for their emissions at home.

“Companies should be preparing now to meet the requirements of the new CBAM,” Chimdi Obienu, research consultant at EcoAct, said. “Imports of basic metals, cement and fertilisers will be covered (at least). These and other carbon-intensive goods are already regulated by the carbon pricing in the UK. To level the playing field, the emissions of foreign producers will also be paid for.

“There will be severe cost impacts. The border cost will be based on the difference between the carbon price in the UK and the country of product origin. The UK’s current carbon price (approximately £65 per tonne of CO2) far outweighs that of all major trading partners, aside from the EU. Therefore, CBAM costs will be high until other nations match this level of ambition.

“Firms of all sizes will face strict reporting requirements. Importers will need to have their product emissions independently verified by a recognised body. Accurate calculations of emissions that stem from complex global supply chains will require in-depth research and effective supplier engagement.

“In preparation for CBAM, companies should be assessing their regulatory carbon pricing risk and seeking transparency regarding the emissions-related policies of their suppliers. Embedding these processes early is critical to showing stakeholders and regulators that business strategies are robust to climate transition risk.”

Companies are advised to engage with their suppliers, to navigate the financial and reputational risks that stem from a failure to keep track of upstream supply chain emissions.

Other preparations include designing and administering surveys and other data collection tools to provide insight into the climate-related actions and policies of your suppliers. Model suppliers’ targeted carbon reductions to understand how this would impact your supply chain emissions.

Support the formal introduction of procurement processes that appropriately account for the low-carbon readiness of potential suppliers. Help embed effective supplier engagement processes to ensure that your relationship management and communication processes are fit for your level of climate ambition.

Calculate and report your embedded emissions and consider ways to reduce your embedded emissions and regulatory risk. LCA’s enable you to implement methodologies to quantify embedded emissions and highlight focus areas; guide you through the process of registering with and reporting to the correct authorities; identify and communicate measures for reducing impact; support low-carbon innovation, design, and product development and quantify your financial risk.