In line with the Paris Agreement, on May 10th 2023, the European Parliament established Regulation (EU) 2023/956 – more commonly known as the carbon border adjustment mechanism (CBAM).
The CBAM is an essential step in the EU’s ongoing mission to become fully carbon neutral by 2050. Its main objective is to reduce “carbon leakage”, where emission reductions in one country are offset by an increase in another – a situation that occurs when companies move their production across borders.
It will achieve that goal by placing a new carbon levy on certain goods when they’re imported from non-EU and non-EFTA countries. The price of the levy will track against the levies companies must pay when producing the same goods within the EU – negating much of the cost advantage of shifting production elsewhere.
The import levy won’t come into action until 2026. But with its scope covering steel, cement, fertilisers, aluminium, electricity, hydrogen, and a variety of downstream products, procurement teams should begin planning for its introduction today.
What’s going to change for importers?
While some requirements are being phased in sooner, from the moment that the full scope of CBAM regulation comes into force on January 1st 2026, all importers will need to:
- Declare and obtain authorisation to import all CBAM goods. Organisations will need to apply to become “authorised CBAM declarants” if they want to continue importing goods covered under CBAM regulations.
- Declare and report on the yearly quantity of CBAM goods they import, and their associated greenhouse emissions
- Pay levies to cover the declared emissions. This price will vary depending on the weekly average auction price of EU ETS allowances.
In addition to creating a lot of new reporting and compliance work for organisations, those changes will have a significant effect on how production and buying decisions are made.
For some goods, the new levies could lead organisations to bring production back into the EU. For others, fluctuations in levy amounts will impact exactly when goods are purchased and the quantities they’re purchased in. And of course, the introduction of these changes will carry significant implications for many of the industries directly affected by CBAM regulations.
How will key industries be impacted?
The CBAM has the potential to impact a wide variety of industries and categories. Here’s a short breakdown of five closely-related industries and how CBAM is likely to affect them.
1) Construction – High impact
The CBAM is concerned with the direct emissions related to goods such as steel, iron, and cement from the moment they’re produced, right up until they cross the border into the EU. With many metals and building materials included in the current draft of the regulations, the construction industry is likely to be among those most significantly impacted by their introduction.
2) Industrial manufacturing – High impact
The industrial manufacturing industry depends on many of the same raw materials as the construction industry. So, it’s likely to be significantly impacted by the regulations for the same reasons as above.
3) Consumer and packaged goods – Low impact
The CBAM will only affect indirect emissions related to the production of most consumer and packaged goods. That may impact how and where some producers source the electricity used to power their production facilities, but beyond that, the industry should be reasonably unaffected.
4) Agriculture – High impact
Because the CBAM covers emissions related to the production of fertilisers, the regulations have the potential to significantly impact the agriculture industry. As much of the industry operates on tight margins, rising fertiliser costs could trigger many growers to change where they source fertilisers from, or which fertilisers they use.
5) Logistics – High impact
The new levies – and the increased bureaucracy that comes along with managing them – will bring more challenges for logistics companies. Some companies could also see a significant fall in the demand for their services, if sourcing certain goods domestically becomes more economically viable.
What your organisation should be thinking about today
With such significant and wide-reaching implications for organisations across the European Union and beyond, businesses need a strong short- and long-term response plan to help them mitigate CBAM’s potentially disruptive impacts.
As soon as possible, teams should focus on three key activities:
1) Carry out an initial impact assessment
Map out which of your products and key categories will be covered by CBAM regulations. Then look at the volumes you’re buying and where they’re coming from to build up a clearer picture of how significantly CBAM is likely to affect your business.
2) Establish a process for collecting embedded emissions data
CBAM will require you to understand and report on all emissions relating to the production and movement of the covered goods you import from outside of the EU. That brings new data collection challenges, so you should start establishing a framework for the collection of emissions data as quickly as possible.
3) Build your reporting processes
For some organisations, reporting on the CBAM data they collect will create a significant and critical admin workload. Now is the time to establish a clear process for reporting on emissions data internally, so you can meet reporting requirements as soon as they’re introduced.
Long-term strategies to mitigate the disruption triggered by CBAM
Once you’ve built processes to collect and report on CBAM emissions data, you should be well set up for the full implementation of the regulations. But beyond that, teams will need to keep a close eye on the procurement categories covered by CBAM that matter to their business.
The regulations are likely to trigger a combination of price fluctuations, logistics challenges, and even shifts in production strategies – all of which can have a major impact on how goods are procured. Each impacted category strategy will need to be reevaluated in light of new market and supplier intelligence to determine if it’s still the most cost-effective, secure, and viable way of sourcing a specific good.
It’s also crucial for all businesses to stay on top of changes to CBAM regulations as they emerge. The European Parliament has already stated that it intends to add additional goods to the list covered by CBAM over the coming years. To avoid being caught out by those shifts, teams will need to stay informed of planned changes and proactively tweak their processes to facilitate them.
The final long-term challenge for businesses will be maintaining a high standard of supply chain data, especially data related to the emissions associated with imported goods. If teams let their quality slip, they’ll run into reporting challenges, and in turn, costly fines.
Stay ahead of market and production shifts as CBAM regulations come into force
As new elements of the CBAM regulations are introduced and enforced over the coming three years, market conditions and reporting requirements will likely change a lot. If you’d like some help staying on top of the latest market, category, and regulatory developments – and their impacts on your organisation – speak to us today.