A major overhaul of European Union trade and environmental policy takes effect today, introducing a new 'green tariff' that will significantly impact British exporters of high-carbon goods like steel and cement.
What is the Carbon Border Adjustment Mechanism (CBAM)?
The EU's Carbon Border Adjustment Mechanism (CBAM) is now officially in force. This system requires companies selling certain carbon-intensive products into the EU to prove they comply with the bloc's low-carbon regulations or face financial penalties. The primary goal is to create a level playing field and prevent 'carbon leakage', where production moves to regions with laxer environmental rules.
Initially, the rules cover iron and steel, aluminium, cement, hydrogen, electricity, and fertilisers. Exporters must buy certificates to cover the carbon emissions generated during their goods' production. Stéphane Séjourné, the European Commission's Executive Vice-President for Prosperity and Industrial Strategy, stated the reform is crucial to support EU industry's decarbonisation and secure its global competitiveness.
Implications for UK Industry and the Missing Deal
Despite the UK having its own carbon emissions regulations, the failure to secure a formal agreement with Brussels linking the two carbon markets means British companies are not exempt. This subjects them to potential new costs and a mountain of paperwork, despite hopes for a last-minute deal.
Wopke Hoekstra, the EU's Climate Commissioner, has downplayed the immediate financial impact on UK firms, suggesting the price would be "minimum". He indicated that once carbon market linkage is achieved, alignment with CBAM should be straightforward. A UK government spokesperson confirmed ongoing work to secure a linking agreement, which they claim would exempt British businesses from over £7bn in export charges.
The situation is particularly pressing for sectors like cement. Diana Casey, Executive Director of the Mineral Products Association, noted that UK cement imports have tripled to about a third of the market. "We need the CBAM to level that carbon cost playing field," she said, calling it "fundamental to securing the future of cement production here in the UK."
Broader Market Reactions and Future Expansion
The EU pressed ahead with CBAM despite protests from major economies like China, the US, and Australia. Analysts warn that Chinese steel, for example, could lose its price advantage in Europe, potentially creating a glut of steel that might be dumped at low prices into alternative markets like the UK.
While EU industries support the principle, some fear higher prices as they will transition from receiving free carbon allowances to having to purchase them. However, Adrien Assous of the Sandbag thinktank believes the initial impact on prices will be "quite mild," describing CBAM's effect on EU decarbonisation as "superbly beneficial."
Looking ahead, the EU plans to expand CBAM's scope from 2028 to include finished products like machinery and electric appliances that use steel and aluminium, aiming to stop manufacturers from circumventing rules by moving final assembly outside Europe. The UK is expected to introduce its own version of a CBAM next year.
