The world of international trade is no stranger to change, but a new regulation on the horizon, the Carbon Border Adjustment Mechanism (CBAM), promises to be particularly impactful. This blog post digs into the complexities of CBAM, its implications for global trade, and, crucially, how both trade and tax departments worldwide must prepare for this seismic shift.
What is CBAM?
The European Union’s Carbon Border Adjustment Mechanism (CBAM), set to be fully enforced from January 2026, is designed to address the issue of “carbon leakage” – the relocation of industries to countries with less stringent environmental regulations to avoid emission reduction costs. CBAM wants to make the market fair by setting a price for carbon content of certain goods brought into the EU. This will ensure that imported products have the same carbon pricing as goods made in the EU.
Initially, CBAM will apply to imports of cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. Importers will have to buy CBAM certificates that show the emissions of these products. These certificates are calculated based on the carbon price in the EU Emissions Trading System (EU ETS).
What does CBAM mean for global trade?
- Increased costs: Importers will face possible increased costs due to the purchase of CBAM certificates. This will likely affect pricing strategies and reduce demand for carbon-intensive imports from countries with less stringent environmental policies.
- Shift in trade flows: CBAM could redirect trade flows, favoring imports from countries with robust climate policies and cleaner production processes. This might lead to new trade partnerships and alliances.
- CBAM wants to make sure that competition is fair: But people are worried about how competitive industries in developing countries are, which could affect their exports to the EU.
- Innovation and Investment: CBAM is expected to drive innovation and investment in cleaner technologies. Businesses, both within the EU and globally, will be incentivized to reduce their carbon footprint to remain competitive.
To meet upcoming regulations on global trade, companies will likely need to invest in tools, such as global trade software, designed for gathering and compiling supplier data, calculating emissions, and generating reports for timely submission. Furthermore, exporters face the challenge of calculating their own carbon emissions and providing this data to EU importers. Most suppliers don’t know how to meet these requirements. This makes it important to adapt and use resources in a timely way.
6 steps to prepare for CBAM’s implementation:
CBAM’s implementation will significantly impact tax and trade departments globally. They will play a critical role in navigating this new landscape and ensuring compliance. Here’s how tax departments can prepare:
1. Understand the regulatory framework
A thorough understanding of the CBAM legislation, including its scope, calculation methodologies, reporting obligations, and potential penalties, is paramount. Tax and trade departments need to stay updated on any revisions or amendments to the regulation.
2. Data management and tracking
CBAM requires detailed tracking and reporting of embedded emissions in imported goods. Tax and trade departments will need to develop or acquire robust data management systems to collect, verify, and report emissions data accurately. This might involve collaborating with suppliers to obtain reliable emissions information.
3. Collaboration and communication
Effective communication and collaboration is essential. Tax and trade departments need to engage with internal stakeholders, including supply chain, procurement, and legal teams, to understand the potential impact of CBAM on business operations. Communication with external stakeholders, such as suppliers and customers, is crucial to managing expectations and ensuring compliance throughout the supply chain.
4. Process automation and technology adoption
Manual tracking and reporting of emissions data can be complex and prone to errors. Investing in technology solutions that make data collection, calculation, and reporting easier can greatly improve efficiency and accuracy. This will also ensure that CBAM requirements are met on time.
5. Risk assessment and mitigation
Conducting comprehensive risk assessments is essential to identify potential areas of non-compliance and financial exposure. Tax and trade departments should make plans to reduce the impact of CBAM. These plans can include looking into other ways to get products, investing in cleaner technologies, or changing pricing models to reduce the financial impact of CBAM.
6. Building expertise and training
CBAM introduces new concepts and complexities. Tax and trade departments need to invest in training programs to equip their staff with the necessary knowledge and skills to understand, explain, and implement CBAM requirements effectively. This might involve hiring new talent with specialized expertise in carbon accounting and reporting.
Embracing the future of trade with CBAM
CBAM signifies a significant shift in international trade, integrating environmental considerations into trade policy. While it presents challenges, it also offers opportunities for businesses to become more sustainable and competitive in a carbon-constrained world.
Tax and trade departments are on the frontlines of this change. By being ready ahead of time, using technology, and working together, tax and trade departments can successfully handle the challenges of CBAM. They can make sure their organizations are in compliance and are successful in the changing world of global trade.
The EU’s Green Deal is a sweeping set of policy initiatives aimed at making Europe climate neutral by 2050. The Carbon Border Adjustment Mechanism (CBAM) focuses on carbon leakage. Other parts, like the Corporate Sustainability Reporting Directive (CSRD) and European Sustainability Reporting Standards (ESRS) have broader implications for tax departments. The CSRD will likely require tax teams to play a more important role in collecting, checking, and reporting on environmental taxes and carbon pricing mechanisms. This is because the CSRD with its emphasis on comprehensive sustainability reporting will likely require tax teams to play a more prominent role in data collection, verification, and reporting on environmental taxes and carbon pricing mechanisms.

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