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The ESG Review: The CBAM time bomb facing UK emissions reporting

The world’s first carbon border tax is creating a stir in the UK, raising questions about the scale of emissions reporting it will require and the headaches it will create for trade.

The Carbon Border Adjustment Mechanism (CBAM) gained approval last month, and amounts to an extension of the European Union’s Emissions Trading System (ETS) to imports into the bloc. It covers “industrial products” including cement, electricity, fertilisers, metals and hydrogen, posing potential problems for the UK’s green energy transition.

It comes into force this October, kicking off a transition period that will be in place until 2025. The timing increases the pressure on companies to prepare to implement or align processes for recording their emissions and then reporting on them in detail. There is a public consultation process for taking feedback on the practicalities of introducing the measures, although that ends on 11th July.

It means time is very tight.

But according to the UK Government this week, the rules stand to create a bureaucratic tangle, particularly for the steel sector and electricity providers. It has pointed the finger at the EU for the complexity, whereas the EU would doubtless say the UK leaving the EU is the underlying cause.

The UK has its own ETS and intends to set carbon pricing. But the worry is that if the EU’s levels are set higher than the UK’s, it will give rise to the question of whether the difference should be paid and how that can be done easily. That would put the focus back on the reporting required to do so, which would theoretically see UK businesses and subsidiaries having to do far more legwork than their EU compatriots.

That might just seem like an extra piece of detail when exporting goods, but the problem becomes more vivid when it comes to things like electricity trading between the Republic of Ireland and Northern Ireland - although that is likely to be exempt, somehow.

This piece in Eco Business gives a good summary of the broader global implications, across major trading partner nations planning their own carbon taxes and developing nations likely to be squeezed by the new rules.

And meanwhile, the UK’s own equivalent of the CBAM is continuing both to rumble towards some decisions and, as Politico has pointed out, has Cabinet members seemingly at loggerheads over the imposition of tariffs.

The Financial Times reported at the tail end of last month that the EU and UK were stepping up efforts to co-ordinate how these carbon taxes will be introduced, stating that “the similar designs of the UK and EU emissions trading systems leaves open the possibility of formalling linking the two.”

A comment that will doubtless prompt both wry smiles and a degree of eye-rolling - but until the point at which progress is made on how to streamline the implementation of the legislation, UK businesses exporting to the EU face some painful complexity in reporting their emissions and managing tariff payments.

The ESG News Review is written by Steve Earl, a Partner at BOLDT.

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