ResponsibleBusiness
All you need to know about the Carbon Border Adjustment Mechanism
Words Neil Johnson Illustrations Michał Bednarski
Under the Carbon Border Adjustment Mechanism, huge numbers of businesses of all sizes will be required to navigate unfamiliar and complex reporting on carbon emissions in their supply chains. Neil Johnson explains what it means
As part of its legally binding commitment to achieving net-zero greenhouse gas (GHG) emissions by 2050, the government will implement a new levy from January 2027 to address carbon leakage, the Carbon Border Adjustment Mechanism (CBAM). If that sounds familiar, it’s because the EU launched its own CBAM in October 2023.
What is carbon leakage?
Carbon leakage is the movement of carbon-intensive production and the associated emissions out of countries with high carbon prices and/or strict emissions policies to countries with low carbon prices and/or less stringent decarbonisation efforts.
How will CBAM be administered?
HMRC will administer CBAM. Liable importers will need to submit an annual return for 2027, due by 30 May 2028, followed by quarterly reporting beginning the first quarter of 2028, due at the end of the month following the reporting period, but with an extension to 30 June 2028 for the first return.
Individual importers will be responsible for self-assessing liability to UK CBAM, following the model typically taken for other indirect taxes, such as VAT.
Will SMEs be affected?
“The government estimates that three in five importers will not be required to register thanks to the £10,000 threshold, but that 95% of embedded emissions will nonetheless be captured by CBAM. If a small business does exceed the threshold, it has 30 days to let HMRC know and to register,” explains Martin McTague, national chair of the Federation of Small Businesses.
“Although many small firms will be under the registration threshold, those that are affected will face higher administrative costs proportional to their level of imports than larger businesses – costs they may have to pass on to customers.”
The levy will, of course, boost HM Treasury’s coffers, but it’s also intended to encourage cleaner industrial production along international supply chains, while seeking “to make sure that UK producers who have made efforts to reduce emissions from their processes are not undercut by imports from countries with less strict rules around emissions”, says McTague.
Image: iStock
What is a CBAM and how will the UK’s work?
CBAM will be a tax on the carbon emitted during the production of carbon-intensive goods entering the UK and heading for the domestic market. Initially, seven sectors will fall within its scope: aluminium, cement, ceramics, fertilisers, glass, hydrogen, and iron and steel. Businesses will need to register to the CBAM scheme if their imports are above a £10,000 threshold over a 12-month period.
UK CBAM will require importers to report Scope 1 and 2 emissions (Scope 1: direct emissions; Scope 2: indirect emissions from electricity; Scope 3: indirect emissions from an entity’s activities that occur at sources not owned or controlled by the entity). Scope 3 is complex and the emissions are difficult to calculate, but it will likely make its way into CBAM in time.
Firms that must register will have two choices for calculating the emissions of their imports: either they can provide bespoke data for their own goods, verified by a certified and independent body, or they can apply default emissions values published by the government, based on a global weighted average of UK imports for the relevant sector.
How will CBAM fit in with the UK ETS?
The UK Emissions Trading Scheme (ETS) sets a carbon price on domestic emissions and obligates certain sectors to buy CO2 emission permits. The CBAM price on imports will be comparable to that for domestic ETS permits. The CBAM price will track the UK ETS.
UK business… get ready!
If you are an exporter to the EU of goods covered in the bloc’s CBAM then this will all be fairly familiar, and your clients may have already started asking for your emissions data. But if you are an importer in the UK, there may be a learning curve ahead, or, as Mark Feldman, EY’s UK & Ireland sustainability tax leader, puts it: “UK CBAM is coming, so get ready.
“Firstly, awareness – learn about it, how will it work, its purpose and timeframe; secondly, find out if you’re in scope – do your imports fall into one of the covered sectors and do you surpass the CBAM threshold?”
Those that are affected will face higher administrative costs proportional to their level of imports than larger businesses.
Martin McTague, national chairman, Federation of Small Businesses
Are you in scope?
In determining this, importers will need to check their 10-digit commodity codes against those in the CBAM list and, in due course, there will be a corresponding default price for each code. Alternatively, you can choose to submit your own emissions data, which over time should become easier and normalised along supply chains as these taxes and regulations proliferate and businesses continuously track the data. Indeed, the government eventually wants self-submitted data to be the norm and will review the default regime, but with no changes till at least 2031.
Stick with default settings or not?
Until then, relying on the defaults, especially for smaller importers, may be the best option. Getting actual embedded emissions data from along a supply chain is no mean feat, as businesses in the EU are finding out. “Talking to my counterparts in the EU, they are struggling now that they are moving away from the default values,” says Matthew Clark, partner in customs, excise and international trade services at BDO UK. “I like that the UK is proposing a choice between using default values or providing your own emissions data.”
Conversely, for high-value importers caught in scope it may be worth gathering emissions data from their suppliers to see if the supply chain is greener than expected and avoid overpaying in CBAM or paying several carbon prices without offsetting.
Businesses and their finance teams
While it may seem there’s little to do until 2026, especially for those who don’t expect to be impacted, it’s advisable to future-proof yourself by staying up to date with the highly fluid outlook of decarbonisation and sustainability regulatory and tax developments, as well as preparing for the likely cost increases that will emanate from the broader supply chain.
Impacted businesses will need to consider their CBAM readiness in terms of data, reporting, systems and processes. CBAM’s complexity is also likely to see an increase in businesses seeking niche services, such as systems experts for data collection and reporting; carbon accountants; green tax and compliance experts; sustainability experts and engineers to calculate embedded emissions; and customs agents.
Finance professionals will be key stakeholders, contributors, collaborators and partners in such a mix, potentially benefiting from investment in learning and development and the creation of new roles and functions.
Accounting practices — the green opportunity
Accounting firms may already be fielding questions from clients about CBAM, so seize the opportunity to boost your trusted and specialist adviser credentials, adding ‘green’ consulting and sustainability accounting/reporting to your suite of services.
CBAM isn’t the first and won’t be the last sustainability measure, so getting ahead of the curve, embedding awareness, expertise and practice into your business can only be a good thing.
Read in detail about UK CBAM at gov.uk here
