Understanding the UK Carbon border Adjustment Mechanism

Understanding the UK Carbon border Adjustment Mechanism

In December 2023, The UK announced that it will implement a UK Carbon Border Adjustment Mechanism (UK-CBAM) BY 2027. This forms part of the UK’s strategy to minimise carbon leakage and follows the implementation of such mechanism in the EU by October 2026. This deadline is threatening UK firms with an uneven playing field if there is no similar scheme in the UK.

The government confirmed that the UK CBAM will apply a carbon price to imported goods from the following sectors: aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel. It will also apply to Scope 1, Scope 2, and select precursor product emissions embodied in imported products.

The announcement is good news for UK manufacturers of the above goods in scope, and selected semi-finished goods and articles, as it will create a level playing field between domestic industry, which is already facing the carbon price compliance burden, and imported products.

In our latest article we look into CBAM’s and their importance to manufacturers.

What is a CBAM?

A CBAM is designed to address carbon emissions that are associated with imported goods. A CBAM operates by levying a charge on imported products based on their carbon intensity, mirroring the carbon pricing mechanisms applies domestically. Internalising the environmental cost of carbon emissions, CBAMs aim to prevent carbon leakage, where industries relocate to regions with less stringent regulations, leading to a net increase in global emissions.

CBAMS are offered as a means of levelling the playing field for domestic industries that are subject to carbon regulations. They can also serve as a policy instrument to incentivise emission reductions, promoting innovation in clean technologies and supporting global climate objectives.

What is the importance of CBAMs to Manufacturers?

For UK business manufacturing the goods in scope and selected semi-finished goods and articles, the CBAM comes as great news, as it is designed to create a level playing field between domestic industries.

It is fair that imported raw materials and semi-finished products face similar carbon costs as UK industry to avoid the deindustrialisation of the UK manufacturing industry. For businesses in the UK importing the in-scope goods for their manufacturing, there could be a cost burden with an additional administrative burden for importers from a UK CBAM, once the UK CBAM is fully implemented.

A CBAM will only add additional costs if the in-scope raw material manufacturer has not already paid a carbon price in the jurisdiction of production.

If imported from the EU, it is highly unlikely there will be any additional costs as the EU carbon price has been higher than the UK price for the past year or so, which may change over time. If imported from Canada or New Zealand, which apply a lower carbon price, the CBAM impact will also be mitigated.

If the UK CBAM is applied to raw materials and semi-finished products only, as opposed to finished products, finished products would not be subject to the carbon tax. A finished product could still be more expensive to import than paying the tax on the semi-finished product itself.

Risks and Challenges of the CBAM

  • Trade tensions and disputes may arise from the implementation of Carbon Border Adjustment Mechanisms (CBAMs), especially if disagreements emerge over the calculation methodologies for carbon emissions. To prevent disputes and ensure smooth operation, it’s crucial to harmonise standards and address concerns regarding fairness and transparency.
  • Navigating the complexities of CBAM regulations involves complying with various carbon pricing schemes, reporting requirements, and verification processes. Given that manufacturing constitutes over 40% of UK exports and relies heavily on trade, ensuring compliance can be a daunting task, necessitating investments in monitoring, reporting, and verification systems.
  • There are valid concerns that CBAMs could disproportionately impact manufacturers in developing economies, where carbon-intensive industries often drive economic growth. Without sufficient support and transitional measures, these countries may struggle to adapt to the new regulatory landscape, potentially widening inequalities and impeding sustainable development efforts.

Alignment with the EU

CBAMs extend beyond the confines of the UK, emphasising the necessity of synchronising the UK-CBAM timeline with that of the EU-CBAM. Such alignment is vital to maintain competition with EU counterparts and to avert potential trade diversion scenarios. These scenarios involve high-emission industrial goods originally destined for the EU market being redirected towards open markets like the UK when faced with the EU CBAM.

Although the Government has yet to formally address this matter, it is anticipated to phase in the UK CBAM gradually. Following the example set by the EU, which plans to implement its CBAM over eight years starting from 2026, gradually reducing free allocations for EU installations until 2034. This phased approach allows domestic producers ample time to transition towards decarbonisation, adjust product portfolios as necessary, and enables importers to acclimate to evolving market dynamics.

The one-year disparity between the implementation timelines of the UK-CBAM (in 2027) and the EU CBAM (in 2026) poses heightened risks for domestic industries. High-emission industrial goods such as blast furnace steel or cement would face EU CBAM compliance obligations in 2026, potentially diverting these products towards other non-CBAM markets like the UK. This scenario could detrimentally impact domestic production in the UK, potentially leading to deindustrialisation. It is therefore imperative for the Government to synchronise the timelines of the UK-CBAM with those of the EU to mitigate trade distortions and safeguard its domestic industries.

What does this mean for recruitment in the manufacturing industry?

The announcement of the UK Carbon Border Adjustment Mechanism (UK-CBAM) has significant implications for recruitment in the manufacturing sector, particularly in industries affected by carbon emissions regulations. Let’s delve into how this policy may shape recruitment practices:

Specialised Talent Acquisition

With the implementation of the UK-CBAM, there will be a growing need for professionals well-versed in carbon pricing mechanisms, environmental regulations, and sustainability practices. Manufacturers will likely seek individuals with expertise in carbon accounting, compliance management, and emissions reduction strategies to navigate the complexities of CBAM regulations.

Sustainability-focused Roles

As the CBAM aims to incentivise emission reductions and promote innovation in clean technologies, there will be an increased demand for roles focused on sustainability within manufacturing companies. This may include sustainability managers, energy efficiency experts, and renewable energy specialists tasked with implementing initiatives to reduce carbon intensity and ensure compliance with CBAM requirements.

Policy and Regulatory Experts

Given the potential for trade tensions and disputes arising from CBAM implementation, manufacturers may seek professionals with a deep understanding of international trade regulations, as well as experience in navigating policy landscapes. Recruiting individuals with expertise in trade law, policy analysis, and government relations will be essential for companies to effectively advocate for their interests and ensure compliance with CBAM regulations.

Supply Chain Optimisation

With the CBAM impacting imported goods and raw materials, manufacturers will need to optimise their supply chains to minimise carbon costs and ensure competitiveness. This may involve hiring supply chain analysts, logistics specialists, and procurement managers with a focus on carbon footprint reduction and sustainability criteria when selecting suppliers.

Innovation and Technology Adoption

To remain competitive in a carbon-constrained market, manufacturers will need to invest in innovation and technology adoption to reduce emissions and improve energy efficiency. This could lead to increased recruitment of research and development (R&D) professionals, engineers, and technology experts with a focus on developing and implementing low-carbon technologies and processes.

International Expertise

Given the global nature of supply chains and trade dynamics, manufacturers may seek talent with international experience and cultural competency to navigate CBAM-related challenges in the global marketplace. Recruiting individuals with a diverse range of backgrounds and language skills can help companies effectively engage with international stakeholders and adapt to evolving regulatory environments.

The implementation of the UK Carbon Border Adjustment Mechanism will likely drive recruitment in the manufacturing sector towards roles focused on sustainability, compliance, innovation, and international engagement. By strategically investing in talent acquisition and workforce development in these areas, manufacturers can position themselves to thrive in a carbon-constrained economy while contributing to global climate objectives.

29th May 2024

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