In this blog, I will delve into the key differences between the UK and EU's Carbon Border Adjustment Mechanisms (CBAMs) and explain what this means for you as a customs professional.
What Questions I Will Answer in this blog:
What are the main differences between the UK and EU CBAM?
How do the UK and EU CBAMs affect importers and exporters?
What should you know as a customs professional about compliance with CBAM regulations?
Introduction
The introduction of Carbon Border Adjustment Mechanisms (CBAMs) by both the UK and the EU is a pivotal move in their efforts to address carbon leakage and incentivize decarbonization on a global scale. These mechanisms aim to level the playing field by imposing a charge on imports from countries with less stringent carbon pricing policies. As customs professionals, import and export managers, and consultants, understanding the key differences between these two systems is critical for ensuring compliance and strategic planning.
So why does this matter for you?
The impact of these CBAMs on your daily operations, particularly in customs clearance, is substantial. Whether you're managing imports or exports, navigating these new regulations will require attention to detail and a clear understanding of the rules. In this blog, I'll break down the key differences between the UK and EU CBAMs, providing you with the insights necessary to stay ahead of the curve.
"To succeed in today's rapidly evolving global market, it's not enough to simply comply with regulations — you must understand them and anticipate changes to ensure long-term success."— Arne Mielken, Managing Director of Customs Manager Ltd.
Abbreviations I Use in this Blog:
CBAM: Carbon Border Adjustment Mechanism
EU ETS: European Union Emissions Trading System
UK: United Kingdom
What is the Carbon Border Adjustment Mechanism (CBAM)?
Before diving into the specifics of the UK and EU CBAMs, let’s clarify the term. CBAM is essentially a carbon price that applies to imported goods, aiming to equalize carbon costs between domestic products (subject to carbon pricing) and imports from countries with looser carbon emission policies. This way, both domestic and foreign producers are subject to similar carbon costs.
How Do the UK and EU CBAMs Differ?
Let's break this down into the most crucial aspects:
1. Sectoral Scope: A Diverging Focus
The UK CBAM is initially focused on five specific sectors: aluminum, cement, fertilizers, hydrogen, and iron and steel. The UK plans to expand its coverage in the future, possibly including glass and ceramics.
In contrast, the EU CBAM casts a wider net from the outset, incorporating aluminum, cement, fertilizers, hydrogen, iron and steel, and electricity sectors. This broader scope means that more sectors will be impacted by the EU's carbon pricing, potentially affecting a larger number of businesses.
What does this mean for you as a customs professional? You must keep an eye on the evolving sectors included in the CBAM regulations. Whether you’re dealing with imports of materials like steel or energy products like electricity, understanding which sectors are targeted is crucial for customs clearance and ensuring your imports or exports comply with the regulations.
2. Emission Scope: Direct vs. Indirect
Another key distinction between the UK and EU CBAMs is how they handle emissions:
UK CBAM: Covers both direct and indirect emissions for all the sectors it applies to. This ensures that emissions at every stage of production — from extraction to manufacturing — are accounted for.
EU CBAM: While it requires reporting on both direct and indirect emissions across all sectors, only the cement and fertilizer industries are mandated to comply with indirect emissions standards immediately. For other sectors, indirect emissions are addressed at a later stage.
3. Default Values: A Phased Approach
Both the UK and EU CBAMs use default values to calculate the carbon embedded in imports. However, they differ in how they apply these values:
The UK CBAM doesn’t specify any thresholds or limits for the use of default values yet, meaning the approach remains somewhat flexible for the time being.
The EU CBAM, on the other hand, has outlined a phased approach. From Q2 2024, there will be no quantitative limits on the use of default values, but from Q3 2024 to Q4 2025, they can only be used for up to 20% of the embedded emissions in reporting.
What does this mean for your business?Understanding the timeline and limitations on default values will be important for managing the long-term impact of CBAM on your import and export operations. As a customs consultant or agent, you’ll need to advise clients on how they should manage their emissions data to stay compliant.
4. CBAM Rate: How the Price Is Set
When it comes to the price of carbon, the UK CBAM sets separate rates for each sector, which are adjusted quarterly based on the UK's domestic carbon price and Carbon Price Support policies.
Meanwhile, the EU CBAM has a universal rate for all sectors, mirroring the EU's Emissions Trading System (EU ETS). This price is adjusted on a weekly basis, ensuring it remains in line with current carbon market conditions.
Why is this important for you?
As customs professionals, it's vital to stay updated on both systems' pricing mechanisms. Fluctuating carbon prices could impact the costs of goods for both importers and exporters. You need to be prepared for these changes and advise your clients accordingly.
5. Third-Country Carbon Price: Recognition and Incentives
Both the UK and EU CBAMs consider third-country carbon prices, but they do so differently:
The UK CBAM only recognizes explicit carbon prices from third countries that have implemented them.
The EU CBAM doesn’t provide detailed information on third-country carbon pricing at this stage, making it less clear how these will be integrated.
How does this affect you?For importers, knowing whether or not a third-country carbon price will be recognized in the CBAM calculations is essential. This could influence decisions on sourcing materials from certain countries, particularly those that already have carbon pricing in place.
6. Minimum Threshold for Liable Importers
The UK CBAM applies a minimum threshold of £50,000 of imports over a 12-month period for importers to be liable for the CBAM. This means smaller companies may not be affected.
The EU CBAM, on the other hand, has a much lower threshold of €150 per shipment, which means a wider range of importers will be impacted.
What does this mean for you as a customs consultant or agent?
With the EU’s lower threshold, more companies could find themselves facing additional compliance costs. As a professional, your role will be to help businesses understand whether they will fall under these thresholds and guide them through the necessary steps for compliance.
Arne’s Takeaway
In conclusion, while both the UK and EU CBAMs aim to address the critical issue of carbon leakage, they do so with significant differences. As customs professionals, it’s crucial that we remain vigilant, adaptable, and proactive in understanding these changes. By keeping up with the specifics of each system, we can better advise our clients and ensure that their import and export activities remain compliant.
Expert Recommendations:
Stay Updated: Regularly check for updates on both the UK and EU CBAM regulations to ensure you’re compliant.
Educate Your Clients: Advise your clients on how CBAM may affect their costs and business decisions.
Consult with Experts: Engage with customs consultants or legal advisors to navigate the complexities of carbon pricing.
Fancy a Call?
I offer comprehensive support for CBAM compliance and would love to talk to you about your questions and challenges with customs regulations. I provide a free expert call of up to one hour, which you can book seamlessly here.
Where To Find More Information On the Topic
To dive deeper into CBAM methods and related legal frameworks, members can:
Subscribe to The Customs Watch – our weekly consolidation of updates on law, guidance, and policy.
Visit our Knowledge Hub at www.customsmanager.info, where I have a wealth of information on CBAM compliance.
Search our library for any topic here: https://www.customsmanager.info/search-results.
Learn With Me
I offer extensive training on CBAM and other customs topics. Please visit www.customsmanager.org/events to explore the course plan and book one of the following public courses.
About the Author
I (Arne Mielken) am a customs expert with over 20 years of experience. I have worked as an executive director for many years in Big 4 Consultancy, global trade management technology companies, and various international trade and export UK and EU trade associations. I am proud to be a Freeman of the City of London and a Liveryman of the Worshipful Company of World Traders, and I am a member of many customs and trade associations.
Connect With Me & My Team
You can learn more about me here and connect with me on LinkedIn. I also run a channel where you can get free tips and advice on customs clearance and import/export regulations.
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