British businesses warned over EU carbon taxby
The European Union has shown its intent to hit net zero greenhouse gas emissions with the launch of a new carbon border tax, however experts have said British businesses may be caught in the middle if the UK reverses its own climate ambitions.
Brussels has launched the world’s first carbon tax on imported steel, cement and other goods, and UK businesses have warned to be compliant or risk disrupted supply chains.
On Sunday, 1 October, the European Union (EU) rolled out the Carbon Border Adjustment Mechanism (CBAM) as part of efforts to stop polluting products undermining its green transition.
Carbon leakage occurs when companies based in the EU shift carbon-intensive production abroad to countries where less stringent climate policies are in place, or when EU products are replaced by more carbon-intensive imports.
Carbon tax red tape warning
The bloc will not be collecting charges at the border until 2026, however the reporting obligations now in place are likely to catch businesses out, BDO warned in a note to clients.
Affected EU importers must 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, BDO said.
During the first phase, the CBAM will only apply to imports of certain types of aluminium, cement, electricity, fertiliser, hydrogen and iron/steel. However, some processed goods such as fasteners such as nuts and bolts will have to be reported.
“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,” he said.
Importers may run the risk of significant penalties and interrupted supply chains if goods aren’t cleared through customs, he said.
“UK businesses will also need to carefully consider the impact of incorporating ‘cheaper’ carbon intensive raw materials into their manufactured products, and what impact this will have on the competitiveness of goods then being exported into the EU,” Clark said.
Phase 2 will see the payment obligations come into force, expected in January 2026, when only authorised CBAM declarants can import in-scope goods into the customs territory of the EU.
“These importers will be required to submit an annual CBAM declaration and to purchase and surrender CBAM certificates that correspond to the reported embedded emissions,” said Matthew Townsend of Allen & Overy law firm.
The cost of CBAM certificates will effectively match the price of EU Emissions Trading Scheme (ETS) allowances, expressed in euros per ton of CO2 emitted.
The European Commission still has to clarify details about the tax and it will use the initial phase to make changes. Amongst the information still to be revealed is how the annual average carbon price effectively paid elsewhere by an importer is converted into a corresponding reduction in the number of CBAM certificates to be surrendered.
“It’s the first such system in the world and its effectiveness is yet to be tested,” said EU trade expert Tim Figures, Boston Consulting Group associate director. “Nevertheless, it’s likely to have profound implications for international trade and geopolitical dynamics pertaining to carbon emissions, especially if other major economies adopt similar systems.”
Sunak rolls dice with watered down net zero pledges
The UK is one other economy mulling its own carbon tax. As such, businesses importing goods to sell in the UK will also need to keep a close eye on developments, Clark added.
Earlier this year, Rishi Sunak’s Conservative government launched a consultation on a potential carbon border tax in an effort to protect businesses against cheaper imports from countries with less strict climate policies.
Currently, the domestic emissions trading system (ETS) that charges power plants, factories and airlines for each tonne of carbon dioxide they emit is part of UK efforts to reach net zero emissions by 2050. Officials said they want to explore alternative ways to prevent carbon leakage.
The consultation also floated the possibility of a carbon credit scheme, designed to reward companies for reducing their emissions below a certain threshold. It would in theory provide an incentive for companies to invest in low-carbon technologies.
“These measures may have a significant impact on businesses, particularly those in high-emitting sectors such as steel, cement and chemicals,” said the ICAEW accountancy association.
However, a U-turn of several green policies by the under pressure Prime Minister Sunak, including a delay to the ban on the sale of new petrol and diesel cars, may have consequences for the future of the carbon tax and for import and export businesses.
A drop in UK emissions prices would make British exporters to the EU come liable for the EU tax when it comes into force in 2026.
“UK industry will still be paying for emissions on exports to the EU, but instead of taxes going to the Treasury, they will be heading to Brussels, which has earmarked these revenues for further investment into renewable industries,” said Marcus Ferdinand, chief analytics officer at carbon consultancy Veyt.