The reporting obligations of the CBAM, which came into force in October, require affected EU importers to submit quarterly declarations to their customs authorities on the carbon emissions associated with certain incoming goods. UK businesses selling in the EU will be affected, even if they are only exporting to EU customers.
Initially, the CBAM will only apply to imports into the EU of certain types of aluminium, cement, electricity, fertiliser, hydrogen and iron and steel. In addition, some processed goods such as fasteners such as nuts and bolts will have to be reported.
UK businesses supplying these goods to an EU importer (or importing into the EU themselves through subsidiaries) will need to collate and report this CBAM data or provide it to their customers. Failure to do so could leave UK businesses ultimately being unable to export affected goods to the EU and result in penalties for the EU importer – the first reporting deadline falls on 31 January 2024.
The CBAM is designed to clamp down on ‘carbon leakage’ by applying a charge on the import of certain goods where those goods have been manufactured in locations outside the EU where environmental regulations may be more lax.
The CBAM works by applying a charge on certain imports that equalises the cost levied on carbon emissions embedded in these goods relative to the domestic EU cost of producing them. The theory is that if the gross prices for imported goods are the same as those manufactured in the EU, the incentive for carbon leakage is removed.
“Many UK businesses have not paid sufficient attention to these new rules and could find themselves on a steep learning curve when it comes to collecting and reporting the required data,” said Matthew Clark, an international trade partner at BDO. “If they don’t start collating data now, it will be a scramble for them or their customers to meet the first reporting deadline on 31 January.
“Importers may run the risk of significant penalties if they fail to report and may find their supply chains disrupted if goods aren’t cleared through customs.
According to BDO, the introduction of the reporting requirement is just the first step. Phase 2 will see payment obligations come into force. This is currently anticipated in January 2026.
“The UK Government is also considering introducing its own carbon border tax, so businesses importing goods to sell in the UK will also need to keep a close eye on developments,” Clark warned.
The European Commission announced its intention to propose a CBAM in its European Green Deal. The first stage of the policy, which will be phased in over three years, came into force on 1 October 2023. This initial trial phase is focused on high emitting sectors, including cement, fertilisers, iron and steel, aluminium, hydrogen, and electricity. After this, the CBAM will be gradually ramped up to include more sectors, until it comes into full force from 1 January 2026. Only then will the carbon price be charged.
The tax will enable the EU to match the carbon price of imports with that of domestic goods. It is intended that this mechanism will create a level playing field, bolster industry decarbonisation, and apply a carbon price to goods entering the Union.
Philip Smith is the editor of The Treasurer