What is CBAM, and why is it important to UK businesses?

The Carbon Border Adjustment Mechanism (CBAM), implemented by the EU, is designed to reduce "carbon leakage," where companies move production to countries with less stringent climate regulations. Although the UK left the EU in 2021, UK businesses selling certain commodities to EU customers will still be affected by CBAM.

But what is it and how will it relate to my business, I hear you ask?

As Global powers try to protect the long-term ecology of our planet, there are many new measures being implemented to assist with reducing the impact of ‘carbon leakage’.

One such measure is the European Union’s ‘Carbon Border Adjustment Mechanism’ or CBAM for short. If your company manufactures or imports commodities listed below, it will have an obligation to monitor and record the greenhouse gas (GHG) emissions data for its manufactured products.

• Cement
• Aluminium
• Fertilizers
• Iron and Steel
• Hydrogen
• Electricity

For UK-based manufacturers or construction companies, if your company does not export any of the above to the EU it is unlikely that it will be impacted by the CBAM.

If your company exports, either for sale to EU customers or for installation as part of a construction project, any of the above as determined via the 8-digit commodity codes provided in Annex I of the CBAM Regulation, it will be considered as a ‘CBAM Operator’ and be required to provide GHG emissions data for the CBAM products it sells to EU importers.

If your company exports CBAM commodities to the EU, it must review the data currently being collected to confirm GHG emissions and collate this in a format that can be provided to EU customers. This includes data from suppliers of raw materials (known as precursors).

For construction companies who declare themselves as the importer into the EU, it will already have CBAM reporting obligations and will have to appoint a representative to assist with the reporting process.

Although EU defined default values for emissions are currently available for reporting purposes, the phasing to actual values has started with a reduction in the reliance of the default values being imposed for the Q4 2024 reporting period. It is therefore imperative that businesses have processes in place to collect and calculate the applicable emissions per product/commodity.

For many, the process may already have started but it is important to ensure that, even if your business is not currently selling to the EU, it may have to have the data in place as part of its supply chain.

Are there any future changes I need to be aware of?

From 1 January 2025 there are several changes which will be introduced that increase the compliance demands on affected companies.

With regards to the reporting of the emissions, only the ‘EU method’ will be accepted. For complex goods, estimates (including default values) can only be used if they account for less than 20% of the total embedded emissions. The Commission published default values on 22 December 2023.

Another key development will be the introduction of a new section in the CBAM Portal that will allow ‘Installation operators’ to upload their emissions data. This will limit the need to supply data to each EU reporting declarant (e.g. importer).

Is the UK implementing a similar process?

Yes, they are. This will be known at the UK CBAM and the UK Government released a Consultation Report on 30 October 2024 which confirmed the following.

The UK CBAM will be introduced on 1 January 2027.

Commodities covered by the UK CBAM are:

• Aluminium
• Cement,
• Fertiliser
• Hydrogen
• Iron and steel

Products from the glass and ceramic sectors that also give rise to a risk of carbon leakage will be considered for future inclusion but will not be in scope of the UK CBAM from 2027.

UK importers will be able to calculate embodied emissions via one of the following methods:

• using data on the actual emissions embodied within CBAM goods
• using default values as determined by the UK government

All imported embodied emissions will be measured in tonnes of carbon dioxide equivalent (tCO2e).