The global trade landscape is going through a rapid transformation as governments incorporate climate objectives into economic policies. The EU's Carbon Border Adjustment Mechanism (CBAM) has entered its transitional phase, which is one of the most significant developments.
Simultaneously, the UK is conducting consultations to develop its own CBAM framework, with the objective of addressing carbon leakage and advancing its net zero objectives. It is crucial for businesses to understand and get ready for these changes in order to maintain their competitiveness and ensure compliance.
Transitional phase
The EU's CBAM started its transitional phase in October 2023, with a specific focus on importers of carbon-intensive products, including steel, cement, aluminium and fertilisers. Businesses are required to disclose the greenhouse gas emissions that are generated by the manufacturing processes of their products during this phase.
While there are no financial obligations during the transitional period, this phase is essential for the purpose of accumulating data, refining methodologies and preparing for the full implementation of the mechanism, which is set to start in 2026. EU importers will be required to acquire CBAM certificates to make up for the embedded emissions in their shipments from that point forward.
This mechanism ensures that foreign producers pay a comparable carbon price to domestic manufacturers by aligning the cost of imported products with the EU Emissions Trading System (ETS). The goal is to promote cleaner production processes on a global scale, level the playing field and discourage carbon leakage, which occurs when companies relocate operations to countries with less stringent environmental regulations.
The UK’s evaluation
The UK has conducted several public consultations to evaluate the feasibility of establishing a domestic framework for its own CBAM. The purpose of these consultations was to analyse the potential effects of a CBAM on UK industries, with focus on energy-intensive sectors like steel, cement and chemicals.
In order to mitigate carbon leakage and guarantee reasonable competition for domestic producers, a UK CBAM might work with the UK Emissions Trading System. Nevertheless, policymakers are also taking into account the potential risks, such as the need to adhere to international commitments regarding climate change and the emergence of unintended trade barriers.
Key implications for businesses
The evolving CBAM landscape presents both opportunities and challenges for businesses that are either preparing for potential UK regulations or trading with the EU.
Importers are required to establish reliable systems for assessing and disclosing embedded emissions during the EU's transitional phase. This is an important stage in the preparation for the full enforcement stage, during which penalties may be imposed for noncompliance.
Forecasting financial obligation can be beneficial for traders. Importers will be obligated to acquire CBAM certificates for carbon-intensive imports to the EU beginning in 2026, which will result in additional expenses. This could have a substantial effect on the pricing structures and costs in some supply chains, potentially leading to increase in the prices of some goods.
Investing early in decarbonisation strategies, such as the procurement of lower-carbon materials and the implementation of better production technologies, can provide businesses with a competitive advantage and reduce future costs.
A carbon-conscious future?
The implementation of CBAM represents a paradigm shift in global trade, prioritising sustainability as the primary objective of economic policy. Position your business for success in the future of sustainable trade by ensuring that your voice is heard.
The Chartered Institute of Export & International Trade is available to assist businesses as they adapt to these changes. Become a member to gain access to expert advice, training and advocacy that will enable you to remain ahead in a regulatory landscape.
The Chartered Institute offers resources and training to assist businesses in navigating the complexities of CBAM implementation, in addition to advocacy. Expert guidance is available to assist members in meeting reporting requirements, understanding compliance obligations and implementing sustainable trade practices on the Chartered Institute technical helpline.
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