Navigating the Financial Impacts of CBAM: A Call to Action for European Importers

In this article, RESET Business Development Manager, Sam Nunn, examines the need for greater action by European companies in the face of the Carbon Border Adjustment Mechanism (CBAM). He explores the importance of compliance to avoid financial and strategic costs – and how companies can ultimately leverage the opportunity to get ahead of their competitors . This is the second of three articles in our series ‘CBAM in Asia: A Golden Opportunity’.

Despite the European Union’s clear directives under the Carbon Border Adjustment Mechanism (CBAM), compliance rates remain very low; initial reports show that only a small fraction of expected submissions were received by the deadline, with major economies like Germany and Sweden reporting just 10% compliance. It’s clear that companies are underestimating the need to take CBAM more seriously.

CBAM reporting is not only a logistical challenge but also a significant operational burden. Many companies have expressed concerns regarding the overwhelming amount of detailed information required for CBAM reporting, much of which they do not directly control. Indeed, the taxing requirement for data collection and the unexpected depth of information needed has taken many by surprise, contributing to delays and non-compliance.

“The level of detail required for CBAM compliance was completely unexpected, leaving us scrambling to gather information last minute.”

So, in light of these challenges, why should companies be investing the time to execute their CBAM reporting well?

Failing to comply carries both financial and strategic penalties.

The stakes are high; ignoring CBAM regulations will lead to fines ranging from 10 to 50 euros per tonne of unreported emissions. This can accumulate to substantial amounts for a business to bear.

The higher the carbon intensity of a business’ suppliers, the more it will have to pay in CBAM certificates. For example, steel produced by different suppliers can have different levels of carbon intensity based on energy management or technological maturity for example. Even if they are essentially producing the same product, the production process is different. Therefore, the CBAM charges will be higher.

Factors affecting carbon intensity are as follows:

  1. Supplier carbon intensity: More carbon-intensive products incur higher CBAM costs.
  2. Energy mix: Countries reliant on fossil fuels for electricity will see a sharper increase in CBAM costs due to higher carbon emissions associated with their energy sources.
  3. Manufacturing efficiency: More modern and efficient manufacturing facilities will likely face lower CBAM costs due to reduced emissions.
  4. Regulatory environment: Stricter environmental regulations in the manufacturing country can mitigate CBAM charges by incentivizing cleaner manufacturing technologies.
  5. Manufacturing country carbon price: Lower carbon prices in the manufacturing country, in comparison to the EU, will increase CBAM charges.

The financial implications of CBAM are varied and significant. Let’s take a more detailed look into who will be primarily affected and why.  

Affected Sectors and Countries

The steel and aluminium sectors are going to experience substantial cost increases:

  • Steel: The cost of steel imports from major non-EU countries could rise by as much as 56% for India and 49% for China by 2034, depending on carbon price fluctuations.
  • Aluminium: The import cost of aluminium from China could increase by around 17%, and by more than 40% from India, due to CBAM.

Why such a significant cost increase?

Countries with higher product emission intensity are expected to experience a higher increase in price. Financial analysts warn that EU countries importing from regions like Russia, Turkey, India, and China are likely to see significant rises in input costs across various sectors, including cement, lime, fertilizers, iron and steel, and aluminium.

  1. Decarbonize the supply chain: to mitigate the impact of CBAM, companies are advised to invest in decarbonizing their supply chains. This involves enhancing energy efficiency and switching to cleaner fuel sources, for example, switching regular steel for green steel – a lower carbon alternative.
  2. Support supplierss: to mitigate the impact of CBAM, companies are advised to invest in decarbonizing their supply chains. This involves enhancing energy efficiency and switching to cleaner fuel sources, for example, switching regular steel for green steel – a lower carbon alternative.  
  3. Relocate suppliers: alternatively,  companies can consider finding suppliers with a lower carbon intensity, either in the same country, or a country where processes are generally cleaner (for example due to high grid renewable energy capacity) to reduce the overall carbon emissions from the production process. However, it is crucial to navigate this strategy carefully to avoid potential regulatory complications.

The financial implications of CBAM are profound and far-reaching, affecting every aspect of high-carbon-intensive imports into the EU. It’s also a golden opportunity; companies who act ahead of the curve will position themselves advantageously in front of slower-moving competitors left facing the costs of inaction. To most effectively leverage the approaches we’ve outlined in this article, companies will need to do two things well: 1) build a strong collaborative relationship with suppliers, and 2) have robust data-gathering capacity.

While CBAM poses a significant logistical and operational challenge, effective compliance will be key to good governance and smart financial management. If your company needs support navigating the complexity of CBAM, get in touch with our team here