Next Wednesday (31st Jan) will be an important day for many UK companies trading in key economic sectors with customers in the EU.
It is the day by which they will need to report for the first time on embedded carbon emissions in six categories of affected products they trade with the EU – iron and steel, aluminium, cement, electricity, hydrogen and fertilisers.
This is under the EU’s Carbon Border Adjustment Mechanism (CBAM) Regulation which is being phased in between 2023 and 2026 and requires the importer of record in the EU to supply attestations on embedded carbon emissions in affected products.
In due course these requirements will apply to more than half the products in scope of the EU’s Emissions Trading Scheme. It works in two ways – the first stage is to get non-EU businesses to quantify the scale of carbon emissions embedded within their goods, whereas the second (from early 2026) involves a fiscal element whereby the difference between the carbon price of goods sourced outside the EU and the EU carbon price is reflected in a charge paid to the European Commission.
This will be facilitated by requiring reporting firms to purchase and then surrender carbon certificates – an approach which it seems the UK CBAM will not follow.
Through these twin policy mechanisms the EU hopes to prevent EU manufacturers being undercut by manufacturers producing goods to lesser regulatory standards in terms of climate change carbon emissions, such as from coal.
The EU has been first out of the gate in adopting this approach, and countries such as the UK and Turkey are now considering how to orientate their own policies on carbon leakage.
In November last year, the UK government released its consultation responses on the topic, pledging to introduce a UK CBAM by 2027, but with some differences to the EU’s – ie. ceramics and glass products will be in scope in the UK version, but electricity generation will likely be excluded. The BCC’s position is that the UK and EU should seek linkage of their Emissions Trading Schemes (ETSs) to promote a stable investment position across the European neighbourhood, and to prevent UK exports losing competitiveness in their largest export market – the EU.
Linkage is conceived of within the Trade and Co-operation Agreement (TCA). Alignment with key EU regulations may be required if such a proposal is sought by the UK and offered by the EU. It took Switzerland 7 years to negotiate a linkage deal.
CBAM reflects a regulatory and fiscal policy choice made by the EU to address potential outsourcing of complying with carbon emissions targets to production locations with weaker environmental regulations than in the European neighbourhood.
CBAM is the first in a series of EU rules affecting its market and supply chains which has effects beyond the Single Market to non-EU states like the UK, also including the Deforestation Regulation, prospective Corporate Responsibility on Due Diligence Directive, Packaging rules, and by the end of the decade reforms to the EU VAT and customs rulebooks.
Last year the UK and EU carbon prices diverged substantially across many commodities, with the UK price falling to £40/tn – in some areas around half the EU carbon price – prior to market intervention measures being taken by Jeremy Hunt, the Chancellor of the Exchequer, which have reversed a portion of the carbon price divergence.
Another complication is that a decision has yet to be taken on whether the EU CBAM will apply in Northern Ireland, which could create further GB to NI trade frictions.
Key measures which affected GB exporting firms should be taking now include:
- Be aware of carbon emissions which may become embedded in the manufacture or production of your goods.
- Maintain strong dialogue with their importing customers in the EU to ensure they have all the information required from the UK supplier to make their quarterly declarations on embedded emissions to the European Commission.
- Get used to the latest Implementing regulation and guidance from the European Commission to third country economic operators to assist with filling in the requisite paperwork and spreadsheets.
- Appoint someone as the responsible CBAM compliance officer within the firm – this may be someone from their customs team.
- If in doubt or unsure about how to fill in the compliance paperwork approach your local Chamber for assistance, who will work with the BCC team to help with your issues.
- Keep tabs on what products may enter scope of the CBAM reporting requirements over the next 2 years and when this occurs.
If you would like support with any of the issues covered in this article, our international trade team can help.
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