As of 1 July 2024, exporters to EU member states must declare their actual embedded emissions data for the quarter from July to September 2024. This marks the next phase of 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 the EU CBAM and who does it affect?
The EU Carbon Border Adjustment Mechanism (CBAM) came into force on 1 October 2023 as a means of protecting the EU’s commitment to the decarbonisation of imports. The EU 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. However, industry leader Energy UK warns that renewable sources such as 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 July 2024, the CBAM entered its second transitional phase. Exporters to the EU must now report all actual embedded carbon emissions data, along with customs and product-related data. In the previous phase, declarations often looked at default emissions values, which are rough estimates of carbon emissions based on industry averages when precise data is unavailable. While perhaps easier for reporting, default emission values may not accurately reflect the true emissions of a specific product or process, potentially leading to either overestimation or underestimation.
Now, UK exports to the EU must include actual embedded emissions data, requiring a more thorough examination of the supply chain and engagement with suppliers to collect accurate data.
Exporters must continue to collect and record actual embedded emissions data from exports to the EU from 1 July – 30 September and submit their data on 31 October 2024. 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. Exporters will then have to report 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 rollback of multiple net zero targets by Rishi Sunak. Statista reported that UK ETS carbon permit prices fell to an all-time low of £31 per CO2 tonne in January 2024. This is a steep drop compared to the £100 peak the UK saw in 2022. UK carbon prices marginally inched back up to roughly £44 per tonne in June 2024. For reference, the EU equivalent is trading at €80 a tonne (roughly £71).
So, what does this mean for the UK? When carbon prices are lower, this could deter further investment in renewable energy. In terms of the EU CBAM, low carbon prices 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 tax to make up the difference starting in 2026.
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.
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.
UK to introduce its own carbon tax from 2027
The UK is set to introduce its own CBAM by 2027, though more details will be released once consultations in 2024 are complete. The UK CBAM serves the same purpose as the EU’s: to reduce the risk of carbon leakage and minimise greenhouse gas emissions.
For those wishing to export carbon-intensive goods to the UK, liability will be dictated by the gap between the carbon price applied in the country of origin (if any) and the carbon price that would have been applied had the good been produced in the UK.
We will continue to update the Energy Advice Hub as more information is released about the UK and EU Carbon Border Adjustment Mechanisms. In the meantime, stay up to date with our monthly LinkedIn newsletter.