On October 1, 2023, the European Union introduced a Carbon Border Adjustment Mechanism (CBAM), which will set a new precedent for carbon regulations shaping global trade. CBAM applies a price to the carbon emitted during the production of carbon-intensive goods imported to the EU and will come into full effect in January 2026. The regulation aims to balance the playing field by discouraging firms from ‘carbon leakage’ – the practice of relocating production to regions with less stringent emissions policies.
Similar CBAM initiatives are already accelerating beyond Europe. For instance, Canada and the UK have completed public consultations on CBAM-like policies, indicating that global corporations may soon encounter comparable regulations across multiple jurisdictions.
For corporate leaders committed to achieving net zero strategies, CBAM demands adjustments – particularly for multinationals with complex supply chains importing high-carbon goods such as cement, iron and fertilisers that regulations already apply to. As a result, organizations that fail to adapt face financial risks, regulatory penalties and reputational challenges. Here’s how firms can prepare:
- Conduct comprehensive emissions assessment.
Gaining visibility into emissions across firms’ supply chains is a key first step. It requires accurate tracking of Scope 3 emissions arising from suppliers and other indirect sources. By bolstering compliance and carbon accounting capabilities to meet CBAM reporting requirements, organizations can build resilient compliance infrastructure. - Realign supply chains.
A CBAM-compliant supply chain favours low-carbon sourcing. Firms should map out their suppliers’ carbon footprints, evaluating both geographic exposures and emissions intensity. With this insight, organizations should consider shifting to suppliers in low-carbon regions or reshoring certain production processes to control emissions. Additionally, where possible, bigger vendors should support smaller suppliers in decarbonizing their operations to maintain consistent, compliant production lines. - Invest in low-carbon alternatives.
CBAM offers an opportunity for firms to future-proof investments. They can reduce their exposure to potential CBAM costs by prioritizing low-carbon production methods and cleaner energy sources. Making such investments now can help avoid the regulatory penalties and costs associated with high-carbon imports into the EU, while positioning the organization as a climate-conscious leader. - Get familiar with the EU’s reporting methodology.
Starting in January 2025, only the EU’s own methodology will be allowed for firms to use to determine embedded emissions for CBAM reporting. Corporations should be sure to familiarize themselves with this methodology and ensure that their internal reporting systems align with these new standards. By proactively training compliance teams to adapt to the EU requirements, operations can be streamlined as CBAM measures become fully enforceable.
CBAM represents a turning point in carbon pricing, where emissions are not only a matter of internal responsibility but also increasingly a consideration in cross-border trade. As the EU implements policies that deter carbon leakage, with other countries to follow, organizations operating in or exporting to the EU must treat these measures as central to their strategic planning for net zero. In aligning supply chains with low-carbon standards, firms can both minimize CBAM costs and demonstrate commitment to sustainable, resilient business practices.
