Are we prepared to embrace CBAM in 2026?
The Carbon Border Adjustment Mechanism (CBAM) is a new EU legislation introduced in a transitional state in October of this year.
The Carbon Border Adjustment Mechanism (CBAM) is a new EU legislation introduced in a transitional state in October of this year.
The Carbon Border Adjustment Mechanism (CBAM) is a new EU legislation introduced in a transitional state in October of this year. The full rollout of the CBAM is set for the start of 2026. In effect, the mechanism introduces a levy on products imported into the EU based on the quantity of embedded emissions.
The tool aims to ensure that EU-based companies are NOT penalised for abiding by more stringent emissions policies; combats ‘carbon leakage’.
Despite the measures, the CBAM is NOT expected to incur additional direct costs to the UK industry. However, the indirect cost of increased bureaucracy is significant. As a result of the requirement to quantify embedded emissions of imported goods, Pro Enviro can expect an influx of demand for Environmental Product Declarations (EPDs). It is recommended that the process of producing these documents be streamlined; a common, a systematic approach is adopted.
The Carbon Border Adjustment Mechanism (CBAM) is a tool developed by the European Union (EU) to fight back against ‘carbon leakage’. This is a phenomenon where organisations re-locate carbon-intensive production processes to countries with less rigid regulations. In effect, the CBAM levies an import border tariff based on the amount of carbon emissions associated with the product (e.g., cement from Shanghai may incur a significant tariff) (European Commission, 2023). In effect, CBAM ensures that imports into the EU have an equal carbon cost to those produced domestically.
As of the 1st of October, 2023, the CBAM is in a transitional period. This means that the CBAM applies solely to the import of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. These products have been identified as high-priority and pose a significant risk of carbon leakage.
The transitional period applies until the 31st of December 2025, after which CBAM measures will capture over 50% of carbon emissions from sectors within the European Union Emissions Trading System (EU ETS). It must be stressed that during the transitional period, the purchase of CBAM certificates will not be required, but carbon reporting on high-risk products is mandatory for EU importers.
Overall, the CBAM is part of wider EU legislation which aims to make polluting industries far less profitable, namely the European Green Deal (EDG) and ‘Fit for 55’ (Oropeza, 2023).
Herein, the CBAM process is given (Oropeza, 2023).
1. Carbon content assessment:
The ‘embedded carbon’ (defined as the carbon emissions ‘locked in’ or inherent to a product) is assessed by establishing the extent of greenhouse gases (GHG) released during or as a result of the product's manufacture.
2. Carbon price establishment:
An import cost is established, representative of the cost of the product if it were produced locally.
3. Purchase of CBAM certificates:
CBAM certificates must be purchased by importers of goods to ascertain that the carbon emissions of the imported goods have been accounted for (applicable after the transitional period).
4. Border adjustment:
As a consequence of the discussed factors, the appropriate amount of tax is levied (applicable after the transitional period).
The ‘embedded carbon’ emissions are defined as the direct emissions during production (Scope 1); the indirect emissions associated with energy use during production (Scope 2) as well as the indirect and direct emissions of raw input materials (precursors, partial Scope 3) (Directorate-General Taxation and Customs Union, 2023).
Step 1 – Category Definition
The imported goods applicable to CBAM must be defined and mapped to the respective. ‘aggregated goods category’.
Step 2 – Reporting Requirements
To import goods into the EU, companies must specify the embedded carbon emissions in their product. Reports are produced on a yearly basis, with the purchase of CBAM certificates for goods imported over the previous year.
Direct emissions
Either a calculation-based or measurement-based approach may be taken. A calculation-based approach involves quantifying consumed fuels and relevant materials and using their respective emissions factors. The measurement-based approach involves direct measurement of greenhouse gases emitted on site. It must be stressed that until July 31st, 2024, other methods of emissions monitoring are permitted on the proviso that results are similar in accuracy and coverage. There are two exceptions for aluminium and nitric acid production, where certain approaches are compulsory (Directorate-General Taxation and Customs Union, 2023).
Indirect emissions
The recommended approach for calculating the indirect emissions is comparatively
straightforward. If electricity is taken from the grid, the quantity consumed, multiplied by the appropriate emission factor (such as those provided by the European Commission based on International Energy Agency data), must be provided for electricity. If electricity is directly produced on-site via a power generation and/or combined heat and power (CHP) unit, direct measurement of emissions is required. One must be cognizant that there are precise rules for calculating the emission factor from the fuel mix, and heat production in the case of CHP must be accounted for.
Precursor emissions
Emissions corresponding to precursor or ‘raw’ materials are required to be reported. Reporting of detailed precursor data is best practice but optional. In any case, it is necessary to detail the quantity of each precursor material used.
In the instance that precursor materials are produced in-situ, embedded emissions of said precursor must be included when calculating the embedded emissions of the imported product.
If the precursor is acquired from other producers, the following data must be requested from
the supplier:
▪ Location of the installation where the precursor is produced,
▪ Specific direct and indirect emissions (emissions per tonne of material),
▪ The production route,
▪ The reporting period used,
▪ Carbon price due.
Note that additional details are required depending on the goods imported.
Step 3 – Carbon Price
When a carbon price is due in the country of production of the imported goods and its
precursors, this must be provided. From 2026 (beyond the transitional period), this may allow a reduction or removal of the CBAM levy.
Step 4 – Reporting Period
The reporting period for carbon emissions from the production facility operator and suppliers of precursor materials must be given. This period may be a standard calendar year; alternative reporting periods must exceed or equal to three months.
Step 5 – Embedded Emissions
As discussed, embedded emissions data must be communicated. The European Commission provides a template for the request of data from suppliers/operators.
As the UK is not a member of the EU (and NOT exempt), UK exporters of products to the EU are not exempt from the CBAM. It is apparent from the prior section of this document (Guidance for EU importers) that the measures will instigate new levels of bureaucracy for the applicable UK businesses (Burke, Sato, Taylor, & Li, 2021).
As of writing, it is understood that due to the UK Emissions Trading Scheme (UK ETS), it is unlikely that UK companies will be subject to CBAM charges. For instance, it is expected that the UK will continue to adopt a similarly priced carbon levy. In effect, on the condition that carbon prices paid in the UK are greater or equivalent to EU prices, the UK industry will not incur additional costs. However, this is not confirmed as of writing; revenue generated by the CBAM will be collected by the EU rather than the UK (Lowe, 2023).
Despite the low probability of additional direct costs, the increased bureaucracy will be time-consuming and thus incur indirect costs for UK businesses. Linking the EU and UK ETS would likely result in exemption for the UK from the CBAM (and the associated paperwork), however discrepancies in pricing and policy, as well as political factors, means this is unlikely (Low & Lowe, 2023).
The implications of the EU CBAM on Northern Ireland are complex. The CBAM falls within the jurisdiction of the Northern Ireland Protocol, meaning that goods produced in Northern Ireland would be subject to CBAM measures (IETA, 2023). It is hypothesized that this will have a ‘significant economic impact’ to Northern Ireland (Zhao & Zhang, 2023).
There is a greater incentive for manufacturing companies to reduce the embedded carbon emissions of their products, meaning that Pro Enviro can expect increased demand for their services from medium to large enterprises (particularly those which already export goods to EU countries and/or produce the goods already subject to the CBAM).
UK importers must report the carbon emissions associated with their products, and thus, the
demand for Life Cycle Analysis (LCA) and Environmental Product Declarations (EPDs or similar) are expected to increase significantly for the relevant sectors until the end of the transition period. Beyond the transition period, a further increase is expected sector-wide.
As a result, it is recommended that a systematic approach to the production of EPDs is finalised. With further experience in producing EPDs, streamlining this process is likely. EPDs are produced according to ISO 14040/14044, ISO 14025, EN 15804 or ISO 21930 standards. Third-party verification may be required to ensure that produced EPDs are compliant, and thus applicable to the CBAM. It is important to note, however, that carbon reporting for CBAM remains lenient until the 31st of July 2024 at the earliest, with reference values permitted (Lowe, 2023).
Burke, J., Sato, M., Taylor, C., & Li, F. (2021). What does an EU Carbon Border Adjustment
What does mMLondon School of Economics and Political Science.
Directorate-General Taxation and Customs Union. (2023). Guidance Document on CBAM
Implementation for Importers of Goods into the EU. Brussels: European Commission.
European Commission. (2023, October 3rd). Carbon Border Adjustment Mechanism.
Retrieved from Taxation and Customs Union
IETA. (2023, October 10th). IETA Response to Environmental Audit Committee’s Call for
Evidence on a Carbon Border Adjustment Mechanism. Retrieved from Parliament Committees
Low, J., & Lowe, S. (2023, September 11th). UK and EU Emissions Trading Schemes -
drifting in different directions? Retrieved from UK in a Changing Europe
Lowe, S. (2023, August 3rd). CBAM: what might an EU carbon-border adjustment
mechanism mean for the UK? Retrieved from UK in a Changing Europe
Oropeza, J. C. (2023, October 3rd). The Implications of the EU Carbon Border Adjustment
Mechanism on the Environment and Global Trade. Retrieved from Earth.org
Zhao, X., & Zhang, D. (2023, September 4th). The Complexity of the EU CBAM in Northern
Ireland. Retrieved from CITP - Centre for Inclusive Trade Policy