features
Talking point: Everyone's talking about CBAM
Although there’s a moral imperative to take action on environmental practices, the European Green Deal will soon make it legally enforceable, as the EU gears up to introduce the Carbon Border Adjustment Mechanism – a tax on raw materials and good sourced from outside the EU, as Kath Hudson reports
The European Union has ambitions to make Europe the first climate neutral continent by 2050, with no net emissions of greenhouse gases. By 2030, there are aims to reduce greenhouse gases by at least 55 per cent compared to 1990 levels and to have zero emissions from new cars by 2035.
As well as reducing emissions, it’s believed that these changes will create jobs and growth, address energy poverty, reduce external energy dependency, improve health and wellbeing, tackle inequality and strengthen the competitiveness of European companies.
Protecting biodiversity
They could also present a major opportunity for European businesses by creating markets for clean technologies and products and ending unsustainable forest harvesting, while also protecting areas of high-biodiversity value and promoting the uptake of renewable fuels. A necessary part of this climate ambition is to protect the EU’s efforts to decarbonise, by disincentivising the import of goods from countries with more lax climate policies.
To achieve this aim, the EU is gearing up to introduce a new set of carbon taxes on imports which will be payable by all companies importing into the EU from this October.
The new tax regime, called the Carbon Border Adjustment Mechanism (CBAM) will favour companies that manufacture within the EU and raise costs for those manufacturing beyond its borders – eventually, it’s also likely that the further goods have to travel before they reach the EU, the more tax will be charged.
CBAM will hit anyone manufacturing in Asia or the US, for example, and will hand a commercial advantage to anyone manufacturing in Europe.
What do these changes mean for the UK?
Although the UK is no longer technically bound by EU legislation, there are suggestions that non-alignment with the EU’s climate objectives would be damaging for the UK’s environmental agenda and make it more difficult for UK businesses to sell into the EU market.
There are even suggestions the UK might go further, with the Department for Environment, Food and Rural Affairs saying the UK will “go beyond the EU’s level of ambition” on the environment, although under Rishi Sunak, the current UK government does not seem committed to its sustainability targets or goals.
Although the impact of CBAM is unlikely to be felt by the fitness and wellness industries on day one, it’s likely to impact things such as the price of fitness equipment and company governance as it rolls out between October 2023 and January 2026.
CBAM will be implemented in tranches to allow importers to adjust to the new rules. From October 2023 to December 2025 importers only have to comply with certain reporting requirements for imports of iron and steel, refineries, cement, aluminium, organic-basic chemicals, hydrogen and fertilisers. From January 2026, importers will also be held to pay the actual CBAM levy.
Gradually, CBAM will expand its scope to cover all products, so we would advise companies to first check if they are caught by the rules entering into force in October 2023, but in any case continue to closely monitor any CBAM developments if they import products into the EU.
Aside from the companies directly affected by CBAM, prices will likely increase for other companies active in downstream industries, such as the chemical, energy and aerospace sectors. Even the price of products manufactured with raw materials such as steel and aluminium – fitness equipment, for example, is likely to rise. Supply chains will need to be re-evaluated.
It’s possible some supply chains that were set-up to avoid the EU Emission Trading System – in non-EU countries with less ambitious environmental policies – will return to Europe, as these supply chains will no longer benefit from an economic advantage from keeping their manufacturing process outside the EU when the end product is then exported back into the EU.
Although CBAM provides an offset mechanism for jurisdictions with a levy similar to the EU’s Emission Trading System (these are called EFTA countries), this will – at least in the short term – not apply to a lot of jurisdictions currently producing great quantities of these products.
Even when there’s no change in supply chains, it will be necessary to re-evaluate the role to be played by each one of the players in any given supply chain. For example, the ‘importer of record’ will be the entity bearing the administrative and – from 2026 onwards – the economic cost. However, each of the parties involved in the supply chain will need to be able to provide sufficient information to the next party. This is so the importer of record in the EU has sufficient data to report the emissions embedded in the products in question and to justify the emissions taxes already paid in the country of export.
Pricing carbon will inevitably push up costs for all industries and eventually consumers. This may change once sustainable methods of production become more readily available and consequently cheaper. However, extreme climate change will negatively impact most, if not all, businesses in the long term, so it’s the EU’s intention to have environmental concerns and costs coincide by levelling taxes on emissions.
The UK has an Emissions Trading System in place, akin to that of the EU, which will result in imports into the EU from the UK receiving a reduction on the CBAM levy (up to the amount paid in the UK).
In March 2023, the UK’s new Department for Energy Security and Net Zero launched a consultation to explore new climate policies. Among the options being considered is a carbon border adjustment mechanism. If implemented, the impact of the EU’s CBAM legislation on UK businesses will be adjusted.
Regardless of any adjustments that are implemented, an increase in compliance costs may well be a consequence of the introduction of CBAM.
Albert Arenas is associate at Baker McKenzie Barcelona. Thijs van Luijt is associate and attorney-at-law at Baker McKenzie, Amsterdam
Following COVID and the energy crisis, it’s understandable that many companies haven’t prioritised the reduction of their carbon footprint. However, with CBAM coming down the tracks it’s time to act.
Being unprepared when this legislation is enforced will affect business activity: the cost of reacting to legislation will end up being far higher than being prepared for it in the first place and those who are engaged with sustainability and carbon measurement will be better prepared for both CBAM and the legislation that will inevitably follow.
The best place to start is by understanding the carbon footprint of your business: conducting a comprehensive assessment of the emissions associated with your operations, supply chain, and services, then identifying the areas with the most significant emissions and potential for improvement.
Solutions such as the sustainability management platform FuturePlus (www.future-plus.co.uk) can help you understand what you need to do and communicate this to your customers and stakeholders, even if you’re only just beginning on your sustainability journey.
Investing in carbon reduction strategies for your own business can often save you money and have a much greater effect than just offsetting your emissions. Remember, the global net-zero plans suggest that 80 per cent of emissions should be reduced, and only 20 per cent offset, not the other way around.
Offsetting can help a business achieve carbon neutrality; but it’s not the answer to our bigger problem, and it doesn’t help us reach net zero. Reduction is the key. We believe a company can reduce their footprint more quickly if they use the money spent on offsetting to make infrastructural or operational improvements.
If you have to offset some carbon, it’s essential that you consider the environmental cost of your reduction strategies, as poor sequestration programmes can have catastrophic environmental consequences and negatively impact biodiversity. Always look at the offsets you buy and get expert advice on how legitimate they are. This is a very complex market with a lot of dubious and downright fraudulent practices.
Although the launch is coming this October, CBAM’s final form and its impact on various industries is still to be confirmed. It’s likely to affect large manufacturers and distributors first, so the operational teams in these businesses should be learning techniques for sustainable procurement to make sure their partners are compliant. Remember, most of your suppliers are probably SMEs, who might not be as advanced as you in GHG measurement. Without them reporting to you, you won’t be able to report your Scope 3 emissions.
If CBAM imposes a carbon price on imports, it could affect the competitiveness of your products and services if they come from regions with weaker climate policies. Businesses may need to consider sourcing from suppliers with lower carbon footprints.
Implementing environmentally-positive strategies may involve upfront investment but can also lead to long-term cost savings and improved brand reputation, attracting eco-conscious customers and avoiding future eco-taxes and tariff.. Consumers are increasingly drawn to responsible brands and may be willing to pay a premium for eco-friendly products and services.
Cost is often cited as a reason not to implement improvements, but the cost of not adapting is far higher in the medium term – both in monetary and planetary terms. In the short term, adapting to regulations and optimising supply chains to comply with CBAM requirements might incur some small transitional costs, but in the long term there will be huge cost savings.
Policymakers often consider the potential impact on businesses and the economy when designing new legislation, so they can strike a balance between environmental goals and economic interests, while also giving businesses due warning. CBAM is that warning.
Lucy Brialey is founder and director at Sustainable Wellness
Sign up for updates on CBAM and related environmental regulations. Stay in touch with industry associations, government bodies and reputable news sources to keep updated
Keep track of regulatory requirements and timelines for CBAM implementation. Ensure your business is compliant with the necessary reporting and documentation obligations
Engage with a third-party sustainability specialist, like FuturePlus, to drive forward improvements
Calculate the potential economic and environmental risk to the business, particularly if you rely on imports or have suppliers from regions with weaker climate policies. Understanding the financial impact can help you plan for adjustments
Start adopting sustainable practices within your business to reduce carbon emissions. This may include energy-efficient technologies, waste reduction measures and using eco-friendly products and materials
Collaborate with suppliers and partners to encourage them to adopt sustainable practices to measure and reduce their carbon footprint. Insist your suppliers show proof of their engagement
experiences to attract environmentally-conscious customers. Highlighting your commitment to eco-friendly practices can be a competitive advantage
Take part in discussions with relevant authorities and industry bodies. Find a smooth transition to more sustainable practices for your business
Take the time to educate your customers about your sustainability efforts and the importance of supporting businesses which are environmentally responsible.
HCM expects CBAM to have a major impact on the market for second hand products, given they’re already physically within the EU, don’t need to be imported or manufactured and their refurbishment is artisanal work.
We think major fitness equipment suppliers will ramp up the reuse of their existing equipment to create a new margin, while also earning eco tax credits and expect to see a raft of new services emerging over time as CBAM impacts the sector.
Equipment that can’t be reused will increasingly retain value, as the materials can be cannibalised.
