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Carbon Border Adjustment Mechanism (CBAM)

Updated: Jun 9



The UK is set to implement a comprehensive carbon tax policy by 2027 to more efficiently reduce emissions. This new policy represents a significant shift from previous border trade rules, which primarily targeted UK-based businesses. Under the new framework, even producers outside the UK will be subject to the carbon tax if they wish to export their goods to the UK market. This move is designed to level the playing field and ensure that all goods consumed within the UK, regardless of their origin, contribute to the country's emission reduction goals. This aims to prevent "carbon leakage", where production shifts to countries with looser emission regulations.


For businesses relying on global trade, the additional cost of carbon taxes on products with high carbon footprints means an inevitable increase in operational expenses. Companies will need to adapt by possibly raising prices or investing in greener technologies to reduce their carbon footprint.


The carbon tax also introduces more complex documentation and compliance requirements, as exporters will need to accurately report their emissions. This shift aims to incentivise sustainable practices but will require significant adjustments in how businesses manage their supply chains and trade logistics.


Who will be mainly affected?


  • High-Emission Industries: Companies in industries with high carbon footprints, such as manufacturing, mining, and heavy industry, will face substantial cost increases due to the carbon tax. This includes sectors like steel, cement, chemicals, and aluminium production.


  • Supply Chain Partners: Suppliers and partners in the global supply chain will be indirectly affected as companies they work with seek to reduce their carbon footprints and pass on costs or require greener practices.

  • Logistics and Shipping Companies: The transportation sector, especially logistics and shipping companies that handle exports to the UK, will need to adapt to the new requirements. Potentially, this will result in higher costs and the need for more efficient, lower-emission transport options.


How can companies adapt to the tax before it is too late?


  • Evaluate Carbon Footprint: Conduct a thorough assessment of the carbon emissions associated with their products and operations and analyse the entire supply chain to identify areas with the highest emissions.


  • Invest in Green Technologies: Adopt energy-efficient technologies and renewable energy sources to reduce carbon emissions. This can include installing solar panels and wind powered energy.


  • Improve Supply Chain Efficiency: Optimise logistics and supply chain processes to reduce emissions. For example, improving transportation efficiency, consolidating shipments, and sourcing materials from local or low-emission suppliers.


  • Adopt Sustainable Practices: Implement sustainable practices such as recycling, waste reduction, and sustainable sourcing.


In conclusion, the upcoming UK carbon tax represents both a challenge and an opportunity for businesses engaged in international trade. By taking proactive steps now to reduce carbon emissions, companies can not only comply with future regulations but also gain a competitive edge in a market increasingly focused on sustainability.


Don't wait until 2027—start evaluating your carbon footprint, investing in greener technologies, and optimising your supply chain today. Prepare now to ensure a smooth transition and secure your place in the sustainable economy of the future.


EU CBAM Agreement:


Like in the UK, the EU CBAM is designed to address carbon leakage and ensure that imported goods are subject to the same carbon costs as products manufactured within the EU. By doing so, it aims to create a level playing field for EU industries and promote global emissions reductions.

 

UK exporters should plan for further competitive barriers when supplying EU clients. These regulations will likely make UK businesses less competitive as they will face additional costs to comply with the EU's carbon pricing. As a result, UK exporters may need to adjust their strategies to mitigate the impact of these regulations, potentially exploring ways to reduce their carbon footprint or pass on costs to customers.


Differences between the EU CBAM and UK CBAM:


  • Implementation and Timeline:

    • EU CBAM: Set to start in 2026 with a transitional phase that allows businesses to adapt. Full implementation will involve gradual expansion and stricter enforcement.

    • UK CBAM: Scheduled for 2027, with the exact timeline and phases of implementation still being finalised.

  • Methodology:

    • EU CBAM: Utilises a certificate system where importers must buy CBAM certificates corresponding to the embedded emissions in their goods. Prices are aligned with the EU Emissions Trading System (ETS), ensuring parity with EU-produced goods. More information on each country affected by this measure will be published in our International Trade Guide.

    • UK Carbon Tax: Likely to implement a direct tax on carbon emissions embedded in imported goods. The specifics of the tax rate and calculation method are still being developed. We anticipate that UK importers will likely require additional documentation/procedures under the new regulations. Additionally, we speculate there may be taxes payable on imports. Businesses might need to establish a system to provide information linking the imported goods to their associated carbon emissions. We will monitor developments in this area and keep you updated.

  • The UK CBAM would include ceramics and glass, but not electricity.


The factsheet on the UK Carbon Border Adjustment Mechanism (CBAM) page provides an overview of the upcoming policy set for implementation by 2027. It explains the concept of carbon leakage and the necessity of the CBAM to mitigate it. See the link below for more information: https://www.gov.uk/government/consultations/addressing-carbon-leakage-risk-to-support-decarbonisation/outcome/factsheet-uk-carbon-border-adjustment-mechanism.


Although these taxes have positive effects on the environment, they don't promise the same benefits for business owners because they can significantly increase operational expenses and necessitate large-scale investments in green technologies. Additionally, these implementations don't always succeed in reducing global emissions if other countries don’t adopt similar measures, creating competitive imbalances. Businesses might face higher compliance costs, supply chain disruptions, and the need for extensive operational changes. These factors can strain financial resources, especially for small and medium-sized enterprises, and lead to market uncertainties.



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