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How EY can help
UK CBAM: a work in progress
Coinciding with the opening of a consultation on proposed revisions to the UK ETS, in April 2022, the UK’s Environmental Audit Committee (EAC) published a report⁶, calling for work on a UK CBAM to commence immediately. The EAC — a cross-party committee of the UK House of Commons — said that the Chancellor of the Exchequer should provide an initial report on progress of a CBAM not later than Budget 2023. Whilst the UK Government is not obliged to follow EAC recommendations, it must respond to the report within two months of publication and may provide an indication of its approach. It may be informative that the UK ETS consultation document only makes a passing reference to CBAM, intimating that policy developments in the area of CBAM will be monitored.
Whilst it is unclear when a UK CBAM will ultimately be implemented, new measures to combat carbon leakage are clearly under way in the UK and elsewhere. Consequently, it is incumbent upon businesses to consider their responses.
The importance of a coordinated response to CBAM policies
For businesses responding to carbon-pricing initiatives in their markets, a coordinated approach to compliance and management is vital. This needs to be both cross-functional and cross-jurisdictional, with leadership engagement ensuring cost and demand ramifications are accounted for in strategic decisions.
Cross-functional demands
Delivering compliance with CBAM regulations is often a challenge for businesses due to atypical data requirements. Often, the required information is held on a decentralised basis — or not held at all. For example, data on transport emissions for the goods in question may be held by a logistics team; details of embedded manufacturing emissions may require a procurement team request to suppliers; whilst data on the tonnage imported and the commodity codes of goods may be held by the incoming goods department, the international trade team or indirect tax. Business functions must collaborate to deliver on CBAM reporting or face the costs of ‘default’ emissions values, or even noncompliance with regulations.
As ETS and CBAM policy is intrinsically interlinked, businesses impacted by both ETS and CBAM should ensure that teams managing the regimes are collaborating, and communicating effectively. This can help reduce the risk of duplication of carbon price paid, or duplication of compliance efforts.
Sustainability teams should actively engage with the response to CBAM and ETS initiatives as developments can further support the decarbonisation business case. Furthermore, well-managed decarbonisation activity can help optimise operating costs by reducing exposure to carbon prices under ETS and CBAM regimes.
Cross-jurisdictional synergies
Given the anticipated challenges of complying with CBAM regimes as they are introduced in the UK, the EU and elsewhere, businesses should look to deliver efficiency and longevity to their response by ensuring new processes and systems can be effectively built upon. This priority is evidenced by recent developments in countries including the US⁷, Canada⁸ and Turkey⁹, where CBAM regimes may be introduced. Businesses should consider taking the following actions:
- Analyse their international trade footprint to understand international emissions profiles and existing or upcoming carbon pricing regimes
- Build information requests into procurement processes to ensure supplier emissions data is accessible
- Ensure information technology (IT) systems are in place to manage both emissions and international trade data
- Ensure processes are in place to obtain emissions and international trade data
Leadership engagement
In many cases, CBAM impacts may be highly material. Where carbon-pricing regimes are anticipated to affect cost and compliance profiles, ensuring that supply-side and demand-side impacts are fully considered should be a key priority for strategic decision-makers. It is vital that stakeholders are kept informed and engaged with carbon-pricing policy.
For example, as the EU CBAM comes into effect, some UK businesses supplying EU customers will need to consider whether EU importers subject to EU CBAM on UK manufactured products will be able to claim any CBAM reductions. If the customer is required to pay the full CBAM on import, this could impact competitiveness and UK suppliers may reconsider their manufacturing footprint, pricing strategy or trade terms.