Carbon Border Adjustment Mechanism (CBAM)

CBAM explained

Carbon Border Adjustment Mechanisms (CBAMs) address the climate challenge by imposing a carbon price on certain high-emission imports to prevent carbon leakage. These mechanisms encourage global businesses to monitor and reduce carbon emissions across operations while enabling fair competition within and outside the EU. Beyond the initial importers, users of these goods may face higher prices as suppliers pass on CBAM costs, affecting supply chain economics.

Several countries, such as the UK and Canada, are considering adopting CBAM. The EU has already implemented its CBAM, complimenting the EU Emissions Trading System (ETS). EU CBAM applies to goods like cement, iron and steel, aluminium, fertilisers, electricity, hydrogen, precursors and certain downstream products such as screws and bolts. The mechanism is a pivotal element in the growing suite of regulations and policies under the Green Deal, pushing companies towards greener practices and helping them navigate the complexities of the new sustainable business environment in Europe.

EU CBAM commenced in 2023, with the first report due beginning 2024, and full financial implications starting in 2026 and phasing in until 2034. As mechanisms like CBAM become more common, companies must innovate and adapt. Compliance not only aligns businesses with international sustainability standards, but also positions them competitively in a low-carbon economy.

Video 07/08/24

EU CBAM Explanatory

The EU’s Emissions Trading System (ETS) sets a price on carbon emissions. To reduce costs associated with carbon emissions, some industries relocated to outside the EU, leading to so-called ‘carbon leakage’. To counteract this, the EU introduced the Carbon Border Adjustment Mechanism (CBAM). This new regulation aims to level the playing field between EU and non-EU market participants, and to drive emission reductions outside the EU. It sets a price on the embedded emissions of certain goods imported into the EU and requires monitoring and reporting of these emissions.

The goods currently in scope are: aluminium, iron & steel, cement, electricity, fertilisers and hydrogen. The CBAM's reporting requirements are already in effect, with financial impacts starting in 2026. In practical terms, EU-importers will be paying a price for embedded emissions, this will of course also affect suppliers and supply chains in a broader sense.

CBAM presents challenges for exporters outside the EU and importers into the EU, both in terms of costs, but also when it comes to monitoring and reporting emissions correctly, in line with the EU rules. For non-EU suppliers in particular, there is a steep learning curve, as they will need to communicate correct data to their clients in the EU.

However, it also offers opportunities for businesses making efforts to deliver low-emission products, or use efficient technology. They will have a competitive edge against those lagging behind.

While the EU is leading the way with CBAM, other regions, like the UK, are considering similar measures. It's important for businesses to stay ahead of these developments and take action today:

Assess supply chains: Evaluate your supply chains to identify and address significant carbon emissions.

Implement decarbonisation strategies: Adopt technologies and practices that reduce your carbon footprint.

Stay informed and compliant: Keep up with regulatory changes, focus on compliance with reporting requirements, and be prepared for audits.

“We’re seeing that even for organisations at the forefront of sustainability, Carbon Border Adjustment Mechanisms, in particular the EU CBAM, present a considerable challenge, prompting a full reevaluation of their carbon emission strategies.”

Craig StevensonPartner, Sustainability & Climate Change Leader, Advisory , PwC Switzerland

Navigating the strategic landscape of CBAM to unlock sustainable growth

Unlocking value through sustainable supply chain reinvention

Embracing the challenges and opportunities presented by CBAM requires a comprehensive strategy for businesses aiming to align with evolving carbon emissions standards, and optimise their competitive edge in a carbon-conscious market.

At PwC, we understand the multifaceted challenges and opportunities CBAM presents to global businesses. Our dedicated team of advisors bring deep industry & supply chain knowledge and regulatory expertise to tailor solutions that not only achieve compliance with CBAM but also leverage it as a strategic asset. We don’t look at regulations like CBAM in isolation, instead we recognise the importance of aligning CBAM compliance with other regulatory requirements, such as the Corporate Sustainability Reporting Directive (CSRD) and EU Emission Trading System (EU ETS), finding synergies and unlocking value in the process. By harnessing advanced technologies and our global network of Alliance partners, we offer clarity and precision in navigating the complex data landscape of carbon emissions, transforming compliance into a competitive advantage.

Embracing CBAM goes beyond mere adaptation; it's about reimagining your business model in the context of a low-carbon economy. Our strategic approach focuses on:

Legal and regulatory guidance to navigate the evolving landscape of CBAM, ensuring your business remains ahead of compliance obligations and leverages regulatory incentives.
Comprehensive assessment of your current operations, supply chains, and product portfolios to identify direct impacts and opportunities for optimisation under CBAM regulations.

Integration of carbon management strategies with financial planning and risk management, enhancing resilience and uncovering new avenues for growth and innovation.
Development of a roadmap for net zero transformation, aligning with CBAM's phased implementation to progressively reduce carbon intensity and costs associated with carbon pricing.

Implementation of governance models and operational strategies that embed sustainability into the heart of your business, fostering a culture of innovation and environmental stewardship.
Providing practical administrative support from local offices, facilitating smoother adaptation to CBAM requirements and ensuring consistent implementation across the regions worldwide.

[Find out more about PwC Net Zero Transformation Services]