The UK CBAM: What businesses need to know to get ready
The UK government’s green light for a domestic Carbon Border Adjustment Mechanism (CBAM) is a major step towards net zero by 2050. But who will it affect and how? We look at what’s known, what’s yet to be confirmed and what it means for UK businesses.
On 1 January 2027, the UK CBAM will become effective, a move set to support worldwide action against carbon leakage.
Like the EU CBAM, which comes into full force next year, it will place a price on emissions embedded in highly traded, carbon-intensive imports. The aim is to tackle disparity in carbon pricing, which can see manufacturing move to countries with weaker climate regimes, undermining global efforts to reach net zero.
According to the World Bank, 80 Emissions Trading Schemes (ETSs) and carbon taxes have been implemented, with carbon pricing currently covering only 28% of global emissions.1
The UK picture
The UK’s primary carbon pricing mechanism is the UK ETS, which is based on buying and selling emissions allowances. But imports are not covered, which results in a risk of carbon leakage if goods are not subject to carbon pricing, or a lower rate, at the point of production. By ensuring imports face the same carbon pricing as domestic goods, the UK CBAM will help address this risk.
The government recently consulted on draft primary legislation, also publishing explanatory notes and a policy update. It has announced a new agreement with the EU, including plans to link the UK and EU ETSs. As a result, goods originating in the UK or the EU are expected to be exempt from CBAM costs on import into the other jurisdiction, subject to certain conditions. However, the timing of this linkage is not yet clear.
So, what does this all mean in practice?
Five important take-aways
Practical steps to take now
Businesses importing CBAM goods into the UK will be directly impacted. Those in sectors that rely on CBAM goods may be indirectly affected, even if they are not importing products themselves. Taking early steps to understand the implications, drawing on lessons learned from obligations under the EU CBAM where relevant, can help to manage the financial and compliance burden.
But how should businesses start preparing?
Conduct a comprehensive impact assessment. Analyse your manufacturing footprint and supply chains to gauge the full impact. Identify potential risks and opportunities related to emissions, costs and supplier relationships. Consider the crossover with actions taken to comply with other regulations, such as the Corporate Sustainability Reporting Directive, EU Deforestation Regulation and Corporate Sustainability Due Diligence Directive.
Determine the compliance operating model. Develop a robust operational framework to manage UK CBAM compliance. As part of this, explore processes for collecting emissions data and submitting accurate returns and evaluate technology for data management and reporting. Examine your existing supplier contracts to identify where data sharing and compliance provisions are required.
Assess the commercial impact. Work out the financial implications and build this analysis into strategic decision-making. This could include modelling the potential cost increases of importing carbon-intensive goods and the impact on pricing. Integrate findings into sourcing decisions and explore supplier diversification and lower-carbon alternatives.
It’s also important to embrace potential opportunities, such as investing in greener products, switching early to low-carbon manufacturers or developing a competitive advantage through sustainability leadership.
Engage with suppliers. Businesses may want to work with their value chains to increase awareness of the regime and assess suppliers’ ability to provide detailed emissions data for reporting.
Given uncertainties in the wider global trade landscape, this is an ideal time to scrutinise value chains to ease cost pressures and build resilience. And the UK CBAM can be a driver for positive change, as preparations will reveal valuable insights from compliance data.
The UK CBAM requires a strategic response
Confirmation in last year’s Autumn Budget that the CBAM will go ahead offered certainty for impacted sectors, meaning businesses can start getting ready for this new tax.
The UK CBAM marks an important step in the journey towards net zero. While echoing certain aspects of the EU CBAM, it presents unique considerations for companies operating in the UK, and those importing goods in impacted sectors must adapt to the changing regulatory environment.
As we highlighted in our recent article on supply chain optimisation, as well as making decisions on where to trade, businesses will need to be more agile, potentially diversifying their supplier base and geographic footprints to mitigate risk.
And a strategic and holistic approach is essential. By embracing proactive measures and staying up to date on future legislative developments, companies can not only navigate the risks, they can uncover new paths to sustainable growth – especially if tax and legal teams are at the table.
Managing CBAM obligations may be challenging, but this can be an opportunity for businesses to emerge even stronger.
If you would like to find out more about the UK CBAM or any other tax issues, get in touch.
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References
Managing CBAM obligations may be challenging, but this can be an opportunity for businesses to emerge even stronger.
