CBAM – what you need to know about the new green import levy

A net zero future will require new policies and measures to be brought into effect to achieve the targets governments have set. As momentum builds around the start of the transition period for the European Union’s carbon border adjustment mechanism, or EU CBAM, we look at what this means for businesses in the UK.

The concept of an EU CBAM emerged in 2021 when the European Commission released a draft document as a key part of its “Fit for 55” package of climate measures. The EU CBAM became a reality in 2023, with the transitional phase taking effect from 1 October 2023 until 31 December 2025. The full operation and payments for EU CBAM certificates are expected to start in January 2026.

But what is the thinking behind it, who is affected and what is the impact on UK businesses? Today, we’re exploring what UK businesses need to know about the EU CBAM.

What is the aim of the new EU CBAM?

National measures for reducing greenhouse gases only cover domestic emissions, but a lot of what is used in one country is actually manufactured elsewhere, so those imported emissions may not be counted. There is significant variation to the carbon price in place in different countries, and so this risks undermining the EU’s emissions targets.

By placing a levy on certain carbon-intensive goods that is equivalent to that for EU domestic production, the EU CBAM addresses ‘carbon leakage’, where goods with a high emissions intensity are manufactured outside of the EU and imported from jurisdictions with less stringent climate regulations and a lower carbon price. The EU CBAM was designed to be compatible with World Trade Organisation (WTO) rules, but that could yet be challenged at the WTO.  

How does the EU CBAM work?

Initially, the EU CBAM covers aluminium, iron and steel, cement, fertilisers, electricity and hydrogen (EU CBAM goods), so the greatest impact will be felt within those carbon-intensive sectors. But the list is set to grow, with the European Commission due to consider the feasibility of the EU CBAM applying to other products within the scope of the EU Emission Trading System (EU ETS).

During the transition period, importers of EU CBAM goods will need to submit quarterly CBAM reports, containing information on: the total quantity of each type of product imported in respect of each installation in the country of origin, the actual total embedded emissions, total indirect emissions, and the carbon price paid in the country of origin. The first reporting period for importers is the quarter 1 October to 31 December 2023, with reporting deadline by 31 January 2024.

From 1 January 2026, businesses importing EU CBAM goods to the EU will need to buy CBAM certificates for each tonne of carbon emissions embedded in their goods. Those will need to be surrendered at the same time as an annual CBAM declaration is submitted (by 31 May following the calendar year). The requirement for EU CBAM certificates will be phased in between 2026 and 2034, corresponding with the phase out of free allowances under the EU ETS. The cost will be based on the average weekly auction price of EU ETS allowances (average of c.EUR 79 for 2022), with an offset for the carbon price paid in the country of origin.

Considerations for UK businesses

The party responsible for meeting EU CBAM obligations at the time of import is the EU importer or indirect representative acting as customs declarant. UK businesses will therefore need to agree procedures with their indirect representative. The additional requirements could act as another driver towards setting up an EU establishment.

UK businesses who manufacture EU CBAM goods that are supplied to businesses importing into the EU will need to provide information on the embedded emissions and meet associated obligations.

At present, the UK is not included in the list of countries outside the scope of the CBAM regulation (which includes Norway, Iceland, Switzerland and Liechtenstein), but this could change in future. However, where a carbon price has been paid in the UK, it may be possible to claim a CBAM reduction.

The UK government is currently considering implementing a UK CBAM as part of a range of potential policy measures to mitigate carbon leakage risk further to the consultation that ran between 30 March and 22 June 2023. The design of any new legislation will be crucial and needs to happen in consultation with businesses.

In conclusion

Carbon pricing is undeniably becoming more prominent, with a landscape consistently evolving. Earlier this year, the OECD’s inclusive forum on carbon mitigation approaches was launched as an initiative designed to help improve the global impact of emissions reduction efforts through better data and information sharing, evidence-based mutual learning and inclusive multilateral dialogue.

The EU CBAM is the first carbon leakage mitigation on this scale and will have an impact on numerous businesses around the world. Its transition period places reporting obligations on businesses, but also provides businesses (and the European Commission) with a ‘lead in’ period to ensure that they are fully prepared ahead of full implementation, expected from 1 January 2026.