Accountants will need to step in to help with the EU's Carbon Border Adjustment Mechanism

As the European Union’s Carbon Border Adjustment Mechanism (CBAM)unfolds, it heralds more than a policy shift—it’s reshaping the global trade landscape. In the United Kingdom, this evolution thrusts accountants into a pivotal role, transcending traditional boundaries.

No longer just guardians of financial integrity, they emerge as key players in strategic decision-making, helping businesses interpret and manoeuvre through the intricacies of carbon levies.

Their expertise in navigating the new terrain of environmental tariffs and sustainability metrics is swiftly becoming invaluable, placing them at the heart of corporate strategy in an era defined by environmental accountability.

Understanding carbon leakage and the CBAM

Carbon leakage refers to the situation where companies relocate carbon-intensive production to countries with less stringent climate policies. This phenomenon occurs when businesses seek to avoid the costs associated with carbon emissions, such as those imposed by carbon pricing systems. To address carbon leakage and promote a level playing field, the EU has introduced the CBAM.

The CBAM is designed to place a price on the carbon emissions of certain imported goods, aligning them with the carbon price of domestically manufactured goods in the EU. This mechanism aims to discourage businesses from shifting production to countries with weaker climate policies. By implementing the CBAM, the EU intends to support its goal of achieving climate neutrality by 2050.

Reporting obligations and implications for UK businesses

While the EU will not begin collecting charges at the border until 2026, the reporting obligations under the CBAM are already in effect. UK businesses exporting goods to the EU must be aware of the data requirements and ensure that they can provide the necessary information to their EU customers.

This includes commodity codes, country of origin, direct emissions from fuel combustion and process emissions, as well as indirect emissions from electrical energy consumed.

It is crucial for UK businesses to start collating the required data as soon as possible to avoid any last-minute rush to meet reporting deadlines. Failure to comply with the reporting obligations may result in significant penalties and potential disruptions to supply chains.

Additionally, UK businesses should consider the impact of incorporating carbon-intensive raw materials into their products and how this may affect the competitiveness of their exports to the EU.

Transitional and payment phases of the CBAM

The CBAM has two distinct phases: the transitional phase and the payment phase. During the transitional phase, which began on 1 October 2023, importers of goods within the scope of the CBAM are required to report greenhouse gas emissions embedded in their imports. However, no financial payments or adjustments are necessary at this stage.

In the payment phase, expected to commence in January 2026, authorised CBAM declarants will be required to submit an annual CBAM declaration and purchase and surrender CBAM certificates corresponding to the reported embedded emissions. The cost of CBAM certificates will be based on the price of EU Emissions Trading Scheme (ETS) allowances.

Potential challenges and concerns

The introduction of the CBAM has raised various challenges and concerns, both within the EU and among its trading partners. Some nations have criticized the CBAM as discriminatory, with concerns raised about its potential impact on international trade and geopolitical dynamics.

The effectiveness of the CBAM as a mechanism to address carbon leakage is yet to be fully tested and its implications on various industries are still being assessed.

UK businesses face specific challenges due to disparities in emissions pricing between the UK and the EU. The UK’s carbon market, known as the UK Emissions Trading System (UK ETS), has experienced significant fluctuations, with emissions prices falling below those of the EU ETS equivalent. This situation creates a double challenge for British exporters.

Firstly, they may face higher fees when exporting to the EU due to the lower carbon prices in the UK. Secondly, the reduced emissions price means that the UK Treasury will generate fewer revenues from carbon pricing.

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Importance for accountants and steps to assist clients

As legislative changes such as the CBAM have a profound impact on businesses, it is crucial for accountants to stay informed and assist their clients in navigating these changes. Accountants can play a vital role in helping businesses comply with the reporting obligations under the CBAM and ensuring the accuracy and timeliness of data submissions.

Accountants should consider the following steps to support their clients in adapting to the CBAM:

1. Stay Informed: Accountants should closely monitor developments related to the CBAM and keep up-to-date with the latest guidance and regulations issued by the EU. This will enable them to provide accurate and timely advice to their clients.

2. Data Collection and Reporting: Accountants should work closely with their clients to ensure the collection and organization of the necessary data required for CBAM reporting. This may involve collaborating with internal teams or engaging with external consultants to streamline data collection processes.

3. Compliance Review: Accountants should conduct regular compliance reviews to ensure that their clients are meeting the reporting obligations and deadlines set by the CBAM. This will help identify any potential issues or discrepancies and allow for timely corrective actions.

4. Financial Planning and Analysis: Accountants can assist their clients in assessing the financial impact of the CBAM on their business operations. This may involve conducting cost-benefit analyses, exploring decarbonization strategies, and evaluating the potential implications of higher carbon prices on profitability.

5. Strategic Guidance: Accountants should provide strategic guidance to their clients on how to navigate the changing landscape of carbon pricing and emissions regulations. This may include exploring sustainability initiatives, identifying investment opportunities in low-carbon technologies, and developing long-term sustainability plans.

By taking these steps, accountants can help their clients adapt to the CBAM and mitigate potential risks and challenges associated with the new legislation. Their expertise and guidance will be invaluable in ensuring compliance and supporting businesses in their transition to a more sustainable and low-carbon future.