7 minute read 21 Apr 2022
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Five proactive steps to prepare for expected carbon measures

Alwyn Hopkins
By Alwyn Hopkins

EY UK&I Advanced Manufacturing and Mobility Sustainability Leader

Making complex corporate footprints more sustainable. Jazz guitarist. Sports fan.

7 minute read 21 Apr 2022
Related topics Sustainability Tax Tax planning Energy and resources
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New carbon-pricing measures will require a structured and coordinated approach across business functions, and markets.

In brief
  • Policymakers in the UK and other major jurisdictions are looking to Carbon Border Adjustment Mechanisms (CBAMs) to mitigate the effect of ‘carbon leakage.’
  • To effectively respond to the cost and compliance implications, businesses must be highly coordinated — both functionally and jurisdictionally.
  • Our five-step approach enables proactive management of evolving carbon border initiatives.

To deter greenhouse gas emissions and apply a cost to their negative externalities, many authorities — including those in the UK and the EU — apply market-based approach pricing schemes. Initiatives, such as the UK Emissions Trading Scheme (UK ETS), aim to reduce industrial emissions to meet climate targets.

Challenges with domestic ETSs arise when businesses move manufacturing (or other emissions in the value chain) offshore, for example by making use of an international supplier rather than manufacturing domestically. In jurisdictions with less effective carbon-pricing regulations, a price akin to that which would have been levied domestically may not be paid, reducing the effect of the emissions deterrent. This is often called ‘carbon leakage.’ An example of this can be seen in the UK, where 43% of the consumption emissions arise from imports, which in many cases are not subject to effective carbon pricing.¹

CBAMs are the proposed answer to this challenge in many jurisdictions, including the EU. CBAM regimes aim to ensure a price is paid on carbon emissions ‘embedded’ in imported goods, where those emissions would have been subject to a pricing measure had they occurred in the domestic market. The regimes are also designed to encourage partner countries to establish carbon-pricing policies to fight climate change.

EU CBAM: a trailblazer

A CBAM (EU CBAM) is a key element of the European Commission’s Fit for 55 legislative package, which aims to reduce net greenhouse gas emissions by at least 55% by 2030 — from 1990 levels — as set out in the European Green Deal (EGD).²

Following a transitional period starting in 2023, from 2027³ the proposed EU CBAM will apply a charge based on ‘embedded emissions’ on products imported into the EU which have not been subject to effective climate change policies elsewhere.

The EU’s proposed policy is the first of its kind. Whilst California applies an effective CBAM⁴ to electricity imported from other US states, no country has implemented a CBAM.

The EU CBAM⁵ was initially proposed to cover products in the cement, aluminium, fertiliser, electric-energy production, iron and steel sectors, with the scheme being expanded to other products over time. Indeed, the latest proposals have added hydrogen, organic chemicals and polymers to the products covered.

UK CBAM: a work in progress

Coinciding with the opening of a consultation on proposed revisions to the UK ETS, in April 2022, the UK’s Environmental Audit Committee (EAC) published a report⁶, calling for work on a UK CBAM to commence immediately. The EAC — a cross-party committee of the UK House of Commons — said that the Chancellor of the Exchequer should provide an initial report on progress of a CBAM not later than Budget 2023. Whilst the UK Government is not obliged to follow EAC recommendations, it must respond to the report within two months of publication and may provide an indication of its approach. It may be informative that the UK ETS consultation document only makes a passing reference to CBAM, intimating that policy developments in the area of CBAM will be monitored.

Whilst it is unclear when a UK CBAM will ultimately be implemented, new measures to combat carbon leakage are clearly under way in the UK and elsewhere. Consequently, it is incumbent upon businesses to consider their responses.

The importance of a coordinated response to CBAM policies

For businesses responding to carbon-pricing initiatives in their markets, a coordinated approach to compliance and management is vital. This needs to be both cross-functional and cross-jurisdictional, with leadership engagement ensuring cost and demand ramifications are accounted for in strategic decisions.

Cross-functional demands

Delivering compliance with CBAM regulations is often a challenge for businesses due to atypical data requirements. Often, the required information is held on a decentralised basis — or not held at all. For example, data on transport emissions for the goods in question may be held by a logistics team; details of embedded manufacturing emissions may require a procurement team request to suppliers; whilst data on the tonnage imported and the commodity codes of goods may be held by the incoming goods department, the international trade team or indirect tax. Business functions must collaborate to deliver on CBAM reporting or face the costs of ‘default’ emissions values, or even noncompliance with regulations.

As ETS and CBAM policy is intrinsically interlinked, businesses impacted by both ETS and CBAM should ensure that teams managing the regimes are collaborating, and communicating effectively. This can help reduce the risk of duplication of carbon price paid, or duplication of compliance efforts.

Sustainability teams should actively engage with the response to CBAM and ETS initiatives as developments can further support the decarbonisation business case. Furthermore, well-managed decarbonisation activity can help optimise operating costs by reducing exposure to carbon prices under ETS and CBAM regimes.

Cross-jurisdictional synergies

Given the anticipated challenges of complying with CBAM regimes as they are introduced in the UK, the EU and elsewhere, businesses should look to deliver efficiency and longevity to their response by ensuring new processes and systems can be effectively built upon. This priority is evidenced by recent developments in countries including the US⁷, Canada⁸ and Turkey⁹, where CBAM regimes may be introduced. Businesses should consider taking the following actions:

  • Analyse their international trade footprint to understand international emissions profiles and existing or upcoming carbon pricing regimes
  • Build information requests into procurement processes to ensure supplier emissions data is accessible
  • Ensure information technology (IT) systems are in place to manage both emissions and international trade data
  • Ensure processes are in place to obtain emissions and international trade data

Leadership engagement

In many cases, CBAM impacts may be highly material. Where carbon-pricing regimes are anticipated to affect cost and compliance profiles, ensuring that supply-side and demand-side impacts are fully considered should be a key priority for strategic decision-makers. It is vital that stakeholders are kept informed and engaged with carbon-pricing policy.

For example, as the EU CBAM comes into effect, some UK businesses supplying EU customers will need to consider whether EU importers subject to EU CBAM on UK manufactured products will be able to claim any CBAM reductions. If the customer is required to pay the full CBAM on import, this could impact competitiveness and UK suppliers may reconsider their manufacturing footprint, pricing strategy or trade terms.

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Next steps for business leaders

The EU CBAM is only the first in a likely wave of new carbon-pricing and other environmental-fiscal measures with compliance and cost impacts. These will require a timely business response.

We have developed a five-step approach to proactively manage these evolving initiatives:

1. Identify impact

Through a business footprint review, examine potential exposure to carbon-pricing measures and other related environmental taxes. This should include:

  • ETSs
  • CBAMs
  • Other emissions-focussed and environmental taxes (both direct and indirect)
2. Assign responsibility

Once relevant measures have been identified, determine who will manage them and how they will engage with other key stakeholders across the business, including:

  • Sustainability teams
  • Teams responding to other carbon-pricing measures
  • Teams holding data required for management of carbon-pricing measures
  • Tax and customs functions
  • Strategic leadership
3. Assess exposure

Model the cost implications of upcoming regimes to understand the international cost impact of carbon-pricing measures, relevant stakeholders within the value chain and potential opportunities to reduce operating cost impacts. Opportunities may range from decarbonisation of supply chain restructures to streamlining relevant compliance activities.

4. Plan and implement response

Led by responsible stakeholders, plan and implement an internationally and functionally coordinated response to existing and new measures impacting the business. This may include:

  • Optimising the supply chain to reduce emissions footprint and cost
  • Implementing new IT systems to manage data requirements
  • Engaging with external stakeholders to solicit data or operational changes
  • Developing new internal processes and controls for compliance and monitoring
  • Reporting to internal and external stakeholders on cost and strategic implications
5. Monitor developments

Continue active monitoring of global carbon pricing — and other — regimes impacting the business footprint, to ensure the business is able to rapidly respond to new or evolving policies through stakeholder engagement, strategic decision-making, or operational change.

  • Show article references#Hide article references

    1. House of Commons Environmental Audit Committee, “Greening imports: a UK carbon border approach,” 4 April 2022, © 2022 Parliamentary Copyright House of Commons.
    2. “European Green Deal: Commission proposes transformation of EU economy and society to meet climate ambitions,” European Commission press release, 14 July 2021, © 2022 European Union.
    3. Dates per legislation adopted by European Parliament in June 2022
    4. “Carbon Border Adjustment Mechanism: Questions and Answers,” European Commission press release, 14 July 2021, © 2022 European Union.
    5. “European Parliament provides recommendations on EU Carbon Border Adjustment Mechanism.” EY Global, https://www.ey.com/en_gl/tax-alerts/european-parliament-provides-recommendations-on-eu-carbon-border, accessed 12 April 2022.
    6. “UK Parliamentary committee calls for development of UK Carbon Border policy,” EY Global, https://www.ey.com/en_gl/tax-alerts/uk-parliamentary-committee-calls-for-development-of-uk-carbon-border-policy, accessed 12 April 2022.
    7. “United States lawmakers are at a CBAM tipping point,” EurActiv.com, 31 March 2022, via Factiva, © 2022 EurActiv.com.
    8. “Canada releases plan for a 40 per cent cut in carbon emissions by 2030,” CBC News, 29 March 2022, via Factiva, © 2022 CBC/Radio-Canada.
    9. “Minister reiterates commitment to passing Climate Law,” Hürriyet Daily News, 1 April 2022, via Factiva, © 2022 Hürriyet Daily News.

The authors would like to thank Richard J. Albert, Partner, Indirect Tax, Global Trade, Ernst & Young GmbH for his contribution to this article.

How EY can help

EY Carbon

EY Carbon helps plan, implement and measure your decarbonisation strategy for net zero transformation.

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Summary

Policymakers are increasingly looking to new measures to drive decarbonisation. Following the EU’s CBAM proposals, a UK House of Commons committee has called for a UK CBAM to tackle carbon leakage and other jurisdictions are considering similar measures. As new carbon-pricing initiatives roll out, businesses must respond effectively. A coordinated approach is needed, ensuring leadership decisions factor in the cost and demand implications.

About this article

Alwyn Hopkins
By Alwyn Hopkins

EY UK&I Advanced Manufacturing and Mobility Sustainability Leader

Making complex corporate footprints more sustainable. Jazz guitarist. Sports fan.

Related topics Sustainability Tax Tax planning Energy and resources
Upvote