Carbon Border Adjustment Mechanism (CBAM): A Quick Guide

What is the Carbon Border Adjustment Mechanism? What will it mean for your industry? Could there be new hidden costs in your supply chain because of it? Check out our quick guide to find out.

8 minutes read

The Carbon Border Adjustment Mechanism (CBAM)

As part of the EU’s path to hitting net-zero greenhouse gas emissions by 2050, a new Carbon Border Adjustment Mechanism (CBAM — a.k.a carbon border tax) was adopted from July 14th 2021. Here’s how the CBAM impacts industry, and how you can avoid high costs by reducing your supply chain emissions.

Global trading has finally begun to take action against climate change: and the result is the world’s first carbon border tax. The European Union’s new Carbon Border Adjustment Mechanism (CBAM), poised to start in 2023, puts pressure on companies to reduce their greenhouse gas emissions in a way that directly affects their bottom line: with a carbon border tax that will soon impact all levels of scope 3 emissions.

What is a Carbon Border Tax?

While EU businesses are already required to measure, report, and account for the costs of their own production’s carbon footprint, this will now extend to businesses importing from outside the EU. It is a vital step in tackling global trading emissions.

Border tax is another way of saying import tariff. Specifically, it relates to the amount of carbon dioxide emitted during the production of certain goods imported into the EU.

From January 2023, some impacted importers will have new carbon reporting requirements to which they must comply. From January 2026, carbon import permits will be introduced; their cost linked to the EU’s domestic carbon price (estimated to reach at least €75 by then). If the carbon pricing in the producing country is compatible with the EU’s, the carbon border tax will not apply. As we mentioned before, carbon emissions clock in at a high price. So if you don’t know how much your entire carbon footprint is, it’s time to prepare for the CBAM and do a life cycle assessment (LCA) of your supply chain activities.

Watch our CBAM webinar with expert insights from EY

Will it affect your industry?

If your company works with non-EU suppliers who don’t comply with EU climate standards (including carbon price), the carbon border tax is highly likely to affect your business in the near future. However, it will initially apply to certain products, including:

  • Steel
  • Aluminium
  • Cement
  • Electricity
  • Fertilizers

Ultimately, this means that the automotive, construction, and packaging industries will be heavily taxed. Indian steel imports could see a 32% rise, while Chinese ones could see a 17% rise. It could also impact the EU’s reliance on Russian oil, and get businesses looking for cleaner supply sources, with a smaller carbon footprint.

The CBAM is to be gradually implemented, giving businesses enough time to prepare and readjust their emissions. It starts with taxing direct emissions first, and the EU will later discuss whether to include more goods and/or indirect emissions in the CBAM’s second phase, due to start in 2026.

If CEOs are not proactive now, they could end up paying a high-price down the line. For example, could your business be importing a crucial component from the US? Since the US does not yet have a carbon pricing mechanism in place, you could be caught out. Leaders of any organization importing from outside the EU will need to rethink their sourcing decisions with a more holistic view of cost-effectiveness: a greener, cleaner impact item may actually save money in the near future and ensure a minimum is passed on to the customer.

How does it work?

With the carbon border tax, EU importers will have to match the corresponding EU carbon price (i.e. the price paid if the goods had been made in the EU) by buying certificates. They have to buy the CBAM certificates from the EU country they are trading with.

Every year, importers will have to declare the emissions and the goods for the year before, and present the CBAM certificates corresponding to these emissions. The price already paid within a third country will be, of course, deducted. However, if the emission information is not available, default carbon prices will be applied.

Trading impacts

With this in mind, we can expect to see new trade agreements and the renegotiation of existing ones to ensure the carbon prices correspond with the EU’s, significantly reducing the carbon border tax.

In fact, many EU companies have already been paying for carbon emissions. The EU’s Emissions Trading System (ETS), initiated in 2005, places caps on emissions for most companies. If they go over their quota, they need to buy emission permits from other businesses.

Carbon-intensive EU manufactures, such as the steel and chemical industries, can sometimes find themselves at a disadvantage against the low prices from manufacturers without the EU green standard (and price).

Here, a carbon border tax could mean a fairer field for EU manufacturers, and international pressure to raise environmental standards in general.

Find out where your emissions are hiding

It’s well-known that carbon emissions hide in most businesses’ supply chains. Since Scope 3 emissions are complex to track, many CEOs avoid focusing on the carbon impact they have on their businesses.

However, the most important step that affected businesses can take to prepare for the upcoming carbon border tax is to find out where and how much their emissions are. This is crucial for understanding exactly how the CBAM will affect them — not only in the immediate future (taxing only direct emissions) but also long term (indirect emissions).

carbmee is already empowering some of the world's largest enterprises to take control of their emissions for effective carbon reduction strategies. If you want to learn more about how EIS™ Carbon Management can help your organization start on its decarbonization journey, or even just level up existing initiatives, talk to one of our industry experts today.