I recently attended the Sheffield International Trade Conference, where a big topic of conversation was CBAM, one of the EU’s measures to tackle Climate Change. Although CBAM covers six energy-intensive industries, it is of particular interest to exporters from Sheffield. After all, Sheffield is the ‘Steel City’. Therefore, for businesses in Sheffield’s renowned steel industry, understanding CBAM is essential. This guide outlines the history, current roadmap, and potential opportunities CBAM presents for exporters.

 

History and Background of CBAM

 

The Carbon Border Adjustment Mechanism (CBAM) originates from the European Union’s long-term climate strategy. It began with the Kyoto Protocol in 1997, which committed the EU to reducing greenhouse gas emissions. The EU launched the Emission Trading Scheme (ETS) in 2005, the world’s first major carbon market. The ETS aimed to cap and reduce emissions from energy-intensive sectors by requiring companies to purchase allowances for each tonne of CO2 they emitted.

 

However, the ETS inadvertently caused carbon leakage. EU-based producers faced higher production costs due to carbon pricing, which led to the potential relocation of production to countries with lax carbon pricing mechanisms. This undermined the EU’s climate efforts and potentially increased global emissions.

 

To counter this, the European Commission proposed CBAM in July 2021 as part of the European Green Deal. The aim of this proposal is to reduce net greenhouse gas emissions by at least 55 by 2030 compared to 1990 levels. CBAM was designed to address carbon leakage and ensure that imported goods are subject to the same carbon costs as products produced within the EU.

 

Current Roadmap of CBAM

 

CBAM’s implementation is phased to allow businesses time to adapt. Initial reporting obligations began in October 2023, requiring importers to report the carbon emissions embedded in their goods quarterly without financial obligations yet. From 2024 to 2025, continued reporting and data collection will refine the mechanism. Full implementation will start in 2026, with importers required to purchase CBAM certificates for the carbon content of their imports, aligning the cost of carbon for imported goods with that of EU-produced goods under the ETS.

 

During the transitional period, it is crucial for importers to comply with reporting requirements to avoid penalties. As of July 31, 2024, failure to report as an importer can incur fines ranging between €10 and €50 per tonne of emissions not reported. This stringent regulation aims to ensure accurate and reliable emissions data during the transition.

 

Understanding the Mechanism and Measurements

 

CBAM requires importers to buy certificates corresponding to the carbon price that would have been paid if the goods were produced under the EU’s ETS. This ensures that the cost of carbon is factored into the price of imported goods, levelling the playing field for EU producers.

 

Calculating embedded emissions involves understanding both direct and indirect emissions. Direct emissions result from production processes, such as the combustion of fossil fuels in steel manufacturing, measured using data from production facilities. Indirect emissions come from the electricity used in the production process, calculated based on the carbon intensity of the electricity grid in the country of production, requiring detailed documentation of electricity consumption and the carbon intensity of the electricity source.

 

For businesses purchasing raw steel and processing it into more complex goods, understanding the embedded carbon content of these raw materials is crucial. Embedded carbon data refers to the total greenhouse gas emissions associated with producing the raw material, including extraction, processing, and transportation. Accurate reporting of embedded carbon requires collaboration with suppliers to obtain detailed emissions data, which may involve requesting lifecycle assessment (LCA) reports or carbon footprints from suppliers. Importers must integrate this data into their overall emissions reporting, ensuring that the carbon content of the final product reflects the combined emissions of all components.

 

Currently, during the transitional period (2023-2025), importers are required to report on the embedded emissions of their goods quarterly, but these reports do not require third-party verification. This period is intended to allow businesses to adapt to the new reporting requirements and gather the necessary data. However, starting from 2026, when full implementation begins, third-party verification will likely become a requirement to ensure the accuracy and reliability of the reported emissions data. This aligns with the European Commission’s objective to establish a robust and transparent mechanism that effectively prevents carbon leakage and promotes fair competition.

 

Opportunities for UK Steel Exporters

 

For Sheffield’s steel businesses, CBAM offers several opportunities despite the challenges. Companies that have already invested in low-carbon technologies will find their products more competitive under CBAM. Lower carbon content means fewer CBAM certificates, reducing the overall cost. Highlighting and marketing the low carbon footprint of products can attract eco-conscious consumers and businesses within the EU.

 

CBAM also creates an incentive for continuous innovation. Investing in energy-efficient technologies and renewable energy sources can not only reduce emissions but also lower operational costs in the long run. 

 

Aligning with the EU’s stringent climate policies positions UK businesses for long-term stability in a market increasingly focused on sustainability. Early compliance can create strategic partnerships with EU-based companies looking for low-carbon supply chain partners. Demonstrating a commitment to sustainability can enhance a company’s reputation and brand value, differentiating it from competitors who may lag in carbon reduction efforts. This can open up new market opportunities and partnerships with businesses and governments prioritizing green procurement policies.

 

Practical Steps for Businesses

 

To prepare for CBAM, UK steel exporters should stay informed about CBAM regulations and amendments by engaging with industry bodies and trade associations for the latest information and support. Participating in seminars, webinars, and training programs focused on CBAM compliance is also beneficial. Investing in technology is crucial. Businesses should adopt low-carbon technologies and practices, upgrade to energy-efficient machinery, and optimise production processes to reduce waste and emissions.

 

Enhancing reporting systems is essential. Developing detailed carbon measurement and reporting systems, using digital tools and software that can track emissions accurately and provide real-time data, and establishing clear protocols for data collection, management, and verification are key steps. Collaborating with suppliers to obtain accurate embedded carbon data for raw materials is crucial for comprehensive emissions reporting. This collaboration may involve requesting lifecycle assessment (LCA) reports or carbon footprints from suppliers. Working closely with EU customers to understand their reporting needs and streamline the compliance process is also important. Providing transparent and detailed documentation of the carbon content in products can help importers fulfil their CBAM obligations efficiently.

 

Seeking support is another vital step. Leveraging financial and operational support available for green investments, UK government grants, and private sector financing aimed at promoting sustainability can aid businesses in their transition. Engaging with consultants and experts specialising in CBAM and carbon management can help develop tailored strategies for compliance and competitiveness.

 

Final Thoughts

 

Understanding and preparing for CBAM is crucial for UK steel exporters looking to maintain and grow their market share in the EU. By staying proactive and investing in sustainability, businesses can not only comply with new regulations but also capitalise on the opportunities presented by the EU’s ambitious climate agenda.

 

 

With the transition period ending on 01 January 2026, Auditel supports businesses with:

 

•CBAM Readiness Assessments: Comprehensive evaluations to identify preparedness and critical gaps.

•Customized Training and Workshops: Tailored sessions to understand CBAM requirements and manage emissions reporting.

•Technology Solutions: Advanced IT tools for streamlined calculation, reporting, and documentation of carbon emissions per CBAM guidelines.

 

Andy is available to discuss your CBAM plans, his email is andy.procter@auditel.co.uk