The EU Carbon Border Adjustment Mechanism: Impacts and Strategies

Read | Nov 16, 2023

AUTHOR(s)

A WNS Perspective

Key Points

In line with the Paris Agreement's climate goals, the European Parliament introduced Regulation (EU) 2023/956, known as the Carbon Border Adjustment Mechanism (CBAM), on May 10, 2023. The CBAM is a critical part of the European Union's (EU) mission to achieve carbon neutrality by 2050, aiming to address "carbon leakage" by imposing a carbon levy on certain imports from non-EU and non-European Free Trade Association (EFTA) countries. This levy will be implemented in 2026 and is set to cover a wide range of products, including steel, cement, fertilizers, aluminum, electricity and hydrogen.

The CBAM will require importers to declare and obtain authorization for covered goods, report yearly emissions associated with these imports and pay levies based on the European Union Emissions Trading System (EU ETS) allowances' weekly average auction price. Given the scale of operational and financial implications, conducting a thorough CBAM impact assessment is becoming essential for organizations to understand exposure, anticipate cost pressures and adjust production and sourcing strategies accordingly.

The construction and industrial manufacturing industries will experience high impacts due to direct emissions associated with goods like steel and cement. Agriculture may also be heavily affected since the CBAM covers emissions related to fertilizer production, potentially impacting sourcing choices for growers. Logistics companies will face challenges and potentially reduced demand for their services due to increased bureaucracy.

To prepare for the CBAM's introduction, organizations should carry out an initial impact assessment, establish processes for collecting emissions data and build reporting processes. These steps are foundational not only for regulatory readiness but also for strengthening carbon reporting and advancing broader ESG compliance goals.

Long-term approaches to mitigate disruption include monitoring price fluctuations, logistics challenges and shifts in production strategies and staying informed about changes in CBAM regulations, which may expand to cover additional goods over time. Maintaining high-quality supply chain data will be crucial to avoid reporting challenges and costly fines.

To delve deeper into this topic and stay ahead of market and production shifts, read the full blog here.