As of 1 October 2023, UK exporters of carbon intensive goods must record the carbon emissions embedded in their products for the trial period of the EU’s new carbon border adjustment mechanism (CBAM). Starting in 2026, exporters will face CO2 emissions tariffs on imported steel, cement, and other goods headed to the EU. Here, we’re breaking down what the tariff entails and how it will affect UK suppliers.
What is CBAM and who does it affect?
The Carbon Border Adjustment Mechanism (CBAM) has been put in place by the EU as a means of protecting its commitment to the decarbonisation of imports. CBAM targets the imports of certain goods that are carbon intensive and at the highest risk of carbon leakage.
This includes cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Countries with significantly lower carbon emissions costs will be taxed at a higher rate, thereby encouraging lower-emitting industrial processes. Although, industry leader Energy UK warns that renewable sources such as a wind and solar power will still be subject to import tax. This is because the EU cannot easily differentiate whether imported power comes from clean or dirty energy sources.
“It’s a really big problem as UK wind farms that had planned to send a lot of what they generate to the EU on very windy days could find themselves priced out of the market,” said Adam Berman, deputy director at Energy UK.
What CBAM dates do UK exporters need to know about?
As of 1 October 2023, the CBAM entered its transitional phase. Importers to the EU will have to report their carbon emissions but do not have to pay a tariff. Until the end of 2024, companies will have the choice of reporting in 3 ways:
- full reporting according to the new methodology (EU method)
- reporting based on an equivalent method (three options); and
- reporting based on default reference values (only until July 2024).
As of 1 January 2025, only the EU method will be accepted and then the permanent system comes into force on 1 January 2026. Importers will then have to the previous year’s quantity of imported goods and the associated embedded GHG, and pay any applicable tariffs.
UK carbon market to directly impact tariff prices
The UK Emissions Trading Scheme, which sets the price that a company must pay per tonne of CO2 released, has seen carbon prices plummet since the roll back of multiple net zero targets by Rishi Sunak. For the UK, this could lead to exponentially higher export tariffs. Nations who wish to export to the EU must demonstrate that they have a similar carbon pricing in place or pay fines to make up the difference starting in 2026.
The Financial Times reported that UK ETS prices fell to an all-time low last week if £33 per CO2 tonne. This is a steep drop compared to the £100 peak the UK saw last year. In comparison, the EU equivalent is currently trading at €80 a tonne (roughly £71).
Due to the reduced emissions price, the UK Treasury will also receive less money from carbon pricing; in practice, this means that some of the money that businesses pay to Westminster for carbon emissions will now go to Brussels.
What next for the UK?
While the EU’s CBAM could mark a significant cost increase for UK exporters to the EU, that’s not to say the carbon markets won’t change by the 2026 start date. If you are an energy intensive organisation and would like to know more about CBAM, get in touch with our experts at Sustainable Energy First for a no-obligations chat.