The EU Carbon Border Adjustment Mechanism explained

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Despite the UK leaving the European Union, UK businesses trading with the EU are caught by its Carbon Border Adjustment Mechanism (CBAM). But what is the EU’s CBAM, how does it work and how much is it likely to cost UK businesses?

The EU’s CBAM seeks to create a level playing field between EU producers and manufacturers with those from other countries that do not have the same strict environmental regulations.

It does this by imposing a carbon price on imports, effectively a tax, to prevent what is called ‘carbon leakage’ and to encourage producers to reduce emissions. Carbon leakage occurs when production is moved to other countries with differing levels of decarbonisation, pricing and regulation in order to reduce costs.

CBAM regimes are being explored by several countries around the world, with the UK government introducing its own CBAM regulations on 1 January 2027. You can read our article on the UK scheme here.

UK businesses that export certain products to the EU, including cement, iron and steel and fertilisers, are already caught by the regulations, having had to report embedded emissions in those products since January 2024.

The current light touch scheme will be extended from January 2026 with the requirement to purchase CBAM certificates based on embedded carbon emissions. The EU intends to further extend the CBAM mechanism between 2030 and 2032 to a much wider range of products.

The exact cost to businesses will depend on the carbon intensity of their imports and could mean significant additional expenses for industries such as cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Current estimates range from a 40% to 70% increase in the cost of importing these goods, depending on their carbon footprint.

Carbon reporting

The EU’s CBAM requires businesses to understand and report both on direct emissions through production processes and indirect emissions, such as electricity consumption and emissions through the entire supply chain.

This means UK businesses not only need to understand emissions from their activity, but also those of their suppliers – something that is often far from straightforward. Where actual carbon emissions values are stated, they will need to be independently verified by a certified testing body.

Reporting is currently annual, with the deadline for submission being 31 May in the following year. CBAM certificates will be required from 2026 with costs yet to be determined.

Businesses that export products caught by the EU’s CBAM regulations should now be capturing emissions data in advance of full reporting from next year.

How Hillier Hopkins can help

The EU and the UK CBAM schemes undoubtedly create an additional compliance burden for businesses. Yet it cannot be ignored.

Hillier Hopkins can help your business understand the compliance and reporting obligations, sign-posting technology platforms that can help quantify direct and indirect emissions, and forecasting current and future costs and their impact on cash flow.

Do you need extra information?

Ruth Corkin; Principal at Hillier Hopkins - VAT and Indirect Tax Advisory

Ruth has been involved with VAT for over 30 years. She started her VAT career as a Customs and Excise Officer in Essex and then moved into consultancy with a variety of well-known accountancy firms. She is well known in the VAT world and is the proud author of many articles and technical works.

Contact Ruth at ruth.corkin@hhllp.co.uk or on +44 (0)1908 713860

Based at the following office - Milton Keynes, Watford and London