Environmental regulations have become an important driver when it comes to how businesses make decisions, both strategically and operationally. Especially, when those regulations have a cash impact on the business, either by increasing costs through taxes or regulations, or by returning cash to businesses through tax incentives or grant funding. Staying informed and having the right decision makers with the right knowledge at the right stage in your process will help you lower direct costs and address indirect costs effectively.
One example of regulation set to increase costs is the Carbon Border Adjustment Mechanism (CBAM), which aims to price carbon emissions in specific products when they are imported into a CBAM covered jurisdiction. These price changes could have a major impact throughout the supply chains of many industries. However, these price increases are targeted at specific emissions-intense goods, which means there's scope to plan for and mitigate these costs.
The UK has a CBAM under consultation now, which is intended to enter into force from 1 January 2027. The EU CBAM is already in a reporting-only phase, with the EU CBAM charge being applicable from 1 January 2026. However, the expectation is that the charge will only begin to be paid in 2027, as per the European Commission’s (EC) recent Omnibus legislative proposals.
CBAMs – or CBAs (Carbon Border Adjustments) – work to draw a 'carbon border' around a jurisdiction. This makes importers of high-emissions-intensity goods pay the same carbon price as local producers, who already pay a ‘carbon price’ usually through an emissions trading scheme (ETS) or local carbon taxes.
The intention is to stop ‘carbon leakage’, that is when higher local carbon prices cause businesses to outsource production to places with lower carbon prices, and often higher emissions. Preventing carbon leakage generally involves introducing policies which equalise the price of lower-emissions local goods and higher-emissions imported goods. CBAM seeks to increase the price of imported goods.
If the carbon price paid by local consumers is the same for domestically-produced products and imported products, there's less incentive to import the high-emissions goods as it's no longer cheaper to do so.
To ensure those who import low-emissions products or products on which a carbon price has already been paid, the CBAM price is generally calculated using the emissions in the product (lower emissions equalling a lower price). Importers can offset the cost of local carbon taxes or other carbon pricing mechanisms against the CBAM charge. In practice, getting verified data on emissions can be difficult depending on the supplier, so both the UK and EU CBAMs allow for the use of default values. These assume high levels of emissions, however, resulting in a higher CBAM charge. Similarly, getting relief for a carbon price already paid involves obtaining detailed information from each supplier about the carbon price actually paid on their products.
Many countries which charge a carbon price on local producers, such as through a carbon tax or an ETS, typically have measures in place to address carbon leakage. This often involves providing free allowances – allowing the producer to emit a tonne of CO2 without paying the carbon price – under an ETS, which lowers local production costs. When jurisdictions introduce CBAM, this is generally seen as an alternative carbon leakage measure and is accompanied by plans to phase out existing carbon leakage measures, like the ETS free allowances. Both the EU and UK have intentions to do just that, which is likely to lead to higher carbon costs for both imported and locally produced goods.
The UK proposes to introduce a CBAM from 1 January 2027. This will be in the form of a tax, charged on the person responsible for the goods when they're released into free circulation in the UK. The liable person could be the importer of the CBAM goods, but this isn't always the case, for example, where there is a change of ownership while the goods are under customs control.
It's set to cover certain products within the categories, often called sectors: aluminium, cement, fertilisers, hydrogen, and iron and steel. Each category will have a different rate of tax.
The EU CBAM is already live in its ‘reporting only’ phase, whereby importers must report on CBAM products imported into the EU, including the emissions on those products. Once the CBAM charge comes into effect, it will operate by importers purchasing CBAM certificates which cover a tonne of emissions; they will then surrender these certificates to the authorities when they import CBAM covered goods.
In February 2025, the EC launched its Omnibus legislative proposals, which was focused around the simplification of ESG reporting and included revisions to EU CBAM. The EU CBAM will still begin to be applied for goods being imported from 1 January 2026, but the purchasing of CBAM certificates is delayed until 2027.
Simply, anyone who uses CBAM-covered goods.
There's a large proportion of businesses who use CBAM-covered goods but don't import those goods into the UK. We estimate that the cost of importing certain covered goods, from certain countries, may increase by as much as 24% due to the CBAM charge. It's hard to predict how much of that cost will be passed on to customers in the UK, or whether those suppliers will continue to supply the UK.
For businesses that can purchase goods from UK producers, this may provide more cost certainty – albeit likely somewhat higher than current costs – over the period where CBAM is being introduced. However, once domestic producers of covered goods begin to have their free allowances phased out, these costs could increase further.
Operating in an exposed sector could also impact costs of borrowing as banks consider the exposure to carbon pricing in businesses they lend to.
Having an appropriate CBAM strategy in place to understand and manage such potential costs is critical, particularly for those who have long-term purchasing or sales contracts which span the pre- and post-CBAM periods.
Importers of CBAM-covered goods also need to manage the costs of CBAM they incur directly. This not only includes the increased costs of the goods but also the cost of managing the administrative reporting requirement. While CBAM administration is more straightforward in the UK than in the EU, developing the compliance and governance procedures, which introduce appropriate policies and controls, still must be undertaken. Importers will also need to engage with suppliers to obtain data on the emissions of each product. While default values can be used, these assume a high-carbon intensity and result in a higher CBAM charge.
Yes. Although the charge and administrative responsibilities in the UK don't begin until 1 January 2027, there are preparations we see businesses making now.
1 Set your CBAM strategy
If you have direct or indirect exposure to CBAM, you need to understand what forms that exposure takes and what costs the business may incur. Implementing a strategy which mitigates those costs will require careful consideration of supply chain, legal and contractual obligations, decarbonisation strategy and internal systems.
2 Governance
Setting up the policies, people, processes and controls to manage CBAM (and other environmental costs and cost-saving opportunities) should be high on your agenda now. A robust governance process can identify risks and opportunities as they emerge, giving you time to react.
3 Emissions
When estimating CBAM exposure, your first step is to understand the emissions profile of the goods you use, the suppliers which provide these and the countries you import from. For those with reporting obligations, there's an additional layer of decision making around emissions measurement and verification.
4 Reporting
If you import CBAM-covered goods, you need to understand now whether you have a reporting obligation and will pay the CBAM charge. This is, of course, in addition to ensuring your CBAM strategy is set and implemented, governance processes are in place and emissions are known.
Getting ready for CBAM or other carbon pricing changes demands coordinated and strategic efforts across various business functions. Engaging operations, tax, procurement, sustainability and legal teams collaboratively enables a comprehensive understanding of forthcoming changes, pressures, and opportunities, empowering proactive measures to mitigate unexpected challenges.
For further insight and guidance on preparing for CBAM, contact Becky Knight or Dan Dickinson
