Carol Newham and Liz Harrowell share their top tips for how UK businesses can prepare now for the EU Carbon Border Adjustment Mechanism (EU CBAM).
In our previous blog we explored how the introduction of the EU CBAM is expected to reshape global trade at large, impacting UK exporters to the EU market. With the rules due to come into effect from 1 October 2023, UK businesses need to start taking steps now to prepare.
Below, we share our top tips for managing this change and for how companies can set themselves up for success.
Preparing for the EU CBAM can be daunting. Breaking this task down into manageable steps can help you kickstart your journey.
1. Identify your in-scope products. The scope of the CBAM is based on specific CN / HS (customs) codes. Companies should work with their customs departments to determine whether products exported to the EU fall within these product-specific codes. It is also a good time to review whether these CN codes have been correctly classified.
2. Understand your exposure. Map your and your suppliers’ production processes, so that you can calculate your baseline emissions. Start with a high-level view, and progressively build up granularity.
3. Identify key contributors in your supply chain. Accessing the relevant carbon data across the entire supply chain can be a significant barrier to accurate reporting. Segmentation and prioritisation of the supply chain will therefore be essential. Identify the biggest contributors to your in-scope emissions, and put your focus on them in the first instance.
4. Mitigate the financial impact. Identify the emissions hotspots in your production processes and supply chain. Develop carbon reduction strategies and plan their implementation – for example:
- using materials and production processes with lower emissions
- partnering with suppliers with strong carbon-reduction commitments
- using contractual mechanisms and procurement processes to protect against consequential price increases.
As your business prepares for the EU CBAM, keep in mind three key principles:
1. Ensure traceability and transparency
Traceability and transparency across the supply chain will be crucial to your ability to calculate, validate and report on emissions.
Increasingly, traceability and transparency are becoming the foundation on which to understand and manage your operational and supply-chain risks, and make positive change happen.
2. Leverage technology
The holy grail of carbon calculation will be a single source of truth. That will mean integrating financial and non-financial data, from your own organisation and your many suppliers.
This will almost certainly be done in your ERP system. You may need to expand its underlying capabilities to capture the necessary data – not just for CBAM, but to meet other regulatory requirements too.
The additional technology needed may already be in use within the business, or due to be deployed. So make sure you’re familiar with the firm’s digital transformation programmes.
3. Share responsibility
As is often the case with new regulation, there may be a lack of clarity over who ‘owns’ CBAM within the organisational structure.
CBAM doesn’t naturally fit into any single department: it’s an enterprise-wide priority. Consider setting up a cross-company working group, to bring all relevant teams (for example, finance, sustainability, procurement, tax) into the fold.
Preparing for the EU CBAM is a significant undertaking, and one that will need input and collaboration from across the business. The above steps are important to prioritise now, to get a handle on your systems, data and processes before the rules come into effect later this year.
However, it’s not going to be a one-off activity. Between ongoing compliance and reporting, anticipated future expansions to the rules and the possibility of similar regimes being introduced elsewhere around the world, UK businesses will need to stay abreast of the latest changes and be agile in this evolving landscape.
Remember our success factors above – not only will they support you in the initial stages of preparation, but can also underpin effective and agile processes fit for future changes.
So while these new rules may be daunting, there are a number of practical, actionable steps that UK businesses can take now to prepare and set themselves up for future success.
Listen to KPMG’s seminar ‘EU CBAM: Its impact on UK businesses’ here for further insights
Please get in touch to see how our Climate Risk & Strategy and Tax teams can help your organisation prepare for CBAM.