CBAM: An Opportunity To Take Action on Scope 3

In this article, RESET Business Development Manager, Sam Nunn, looks at the opportunities for corporates in the face of the evolving Carbon Border Adjustment Mechanism (CBAM). This is the first of three articles in our series “CBAM in Asia: A Golden Opportunity”.

In a previous article we introduced the Carbon Border Adjustment Mechanism (CBAM) and what it means for corporates in China. We also explored the mechanics of the EU Green Deal’s climate legislation’ and the impact on the European consumer goods companies manufacturing or sourcing large quantities of raw materials and semi-finished goods in China.

This new series – CBAM in Asia: A Golden Opportunity – examines why CBAM can provide a strategic opportunity for deeper engagement with the supply chain on carbon and catalyze action on scope 3.

At a glance: what is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is a policy tool introduced by the European Union (EU) to address the issue of carbon leakage in the context of the EU’s climate change mitigation efforts. CBAM is designed to combat carbon leakage by imposing a carbon price on certain imported goods, effectively aligning the carbon costs of domestic and imported products, to disincentivize outsourcing of production to avoid paying a carbon tax under the EU Emissions Trading Scheme (ETS). The intention is to create a trend away from carbon intensive products, towards products that produce less carbon, and force suppliers to address emissions within their supply chain.

Challenging the status quo: seeing beyond risk to reward

For many consumer goods companies sourcing in Asia, particularly those importing large quantities of steel or aluminum for assembly or finishing in Europe, CBAM is seen as a risk. The legislation has been enacted quickly and is highly complex, and therefore many companies are scrambling to respond and avoid any legal penalty. Typically, this is treated as a customs/tax challenge, and much attention is being paid to gathering lists of eligible affected products, assessing import quantities, and preparing first CBAM reports. Internally, the task often sits with the compliance, tax, customs, or logistics function, with limited involvement from the sustainability team. Here lies a missed opportunity!

While it is imperative for companies to prepare their first quarterly CBAM reports quickly, CBAM should not be seen as a tactical challenge, but rather a chance to engage strategically with their supply chain on carbon. Globally, this is the first time that a wide-ranging law has been put in place which will financially incentivize carbon reduction in global supply chains, and therefore presents an enormous opportunity for sustainability teams to progress their carbon agenda.

What are the opportunities for corporates operating in Asia?

CBAM will mandate transparency on carbon emissions for tier 1 and 2 suppliers based in Asia. This will present three major opportunities for European companies:

  1. Early engagement with suppliers on Carbon: there is early evidence that gathering primary supplier data rather than using the CBAM default carbon values will already lead to a significant reduction in CBAM certificate payments. Through the process of gathering primary supplier carbon data, companies will gain transparency on suppliers’ current carbon maturity and carbon management practices. This is an opportunity for companies to assess which suppliers can be engaged to reduce carbon emissions in their operations and start to plan reduction actions with them in order to reduce CBAM certificate costs after the transition period.
  2. Easier assessment of product carbon footprint: gathering supplier data is typically the most challenging part of preparing Life Cycle Analyses (LCA) for assessing product carbon footprints. CBAM will financially incentivize companies to do this, and therefore make the LCA process much easier. Companies should explore other opportunities resulting from transparency on carbon, such as communication of product carbon footprint to customers, detailed coverage of scope 3 actions within annual sustainability reports, and specific low-carbon product solutions.
  3. Financial incentivization for green material purchasing: for sustainability teams, a significant challenge in sourcing low-carbon materials is the real or perceived price premium, which must be absorbed within margin or passed on to customers. Many low-carbon materials are exempted from CBAM certificate payments. This may lead to price parity between green and traditional materials, which may help to accelerate adoption of these materials into products.

Action, now! How can sustainability teams capitalize on these opportunities?

To harness the full potential of CBAM, sustainability teams must be part of the conversation from early on. There are three measures that can be taken now to ensure organizations look at CBAM through a holistic lens:

  1. Set up a cross-functional steering structure to deal with CBAM: to fully assess strategic opportunities related to the new legislation, it’s important for sustainability teams to present the opportunities to a wide group of senior leadership who can see the topic from multiple angles. Whether as part of an existing sustainability steering committee, or a separate working group. What is important is to bring the tax, compliance, sustainability, and business leadership functions together.
  2. Work to understand the financial impacts: CBAM is fundamentally a financial issue, with penalties being paid for incomplete data or high carbon footprint. Companies should assess various scenarios early-on, for example the impact of supplier engagement to gather higher-quality data, or the savings from implementing a carbon reduction roadmap with key suppliers. Small investments in the next two years could lead to large savings post 2026.
  3. Assess additional strategic opportunities: marketing and product development teams should be involved in the CBAM process to understand the additional opportunities that carbon transparency presents in terms of customer engagement. This could be an opportunity for high-level brand communication on carbon roadmaps, or product-specific value propositions.

CBAM: setting a new precedent

The extraterritoriality of the regulation means that companies need to focus on carbon wherever their suppliers are located, and global suppliers will increasingly be forced to account for carbon to be able to do business with the EU. Although there are still questions from a lot of companies around the efficacy and enforceability around CBAM, it sets a clear precedent for other jurisdictions to follow. It’s a case of fortune favors the bold; companies who embrace the opportunities from CBAM will see significant strategic advantages in the coming years.

Taking action at the right time and in the right way is what sets industry leaders apart. If you need support turning CBAM into a golden opportunity, connect with our team today.

Our next article in this series will deep dive into the financial impacts of the CBAM regulation. Stay tuned.