How carbon border adjustment mechanisms will reshape UK industry and cross-border supply chains

Why carbon border adjustment mechanisms matter now

Carbon border adjustment mechanisms (CBAMs) are moving from policy papers into day‑to‑day business reality. For UK manufacturers and companies that trade with the EU, they will quietly but decisively reshape costs, sourcing decisions, and the architecture of cross‑border supply chains over the next decade.

At their core, CBAMs are simple: if a country imposes a domestic carbon price on its industries, it can levy a related charge on imported goods from jurisdictions with weaker climate policies. The aim is to prevent “carbon leakage” – the relocation of production (and emissions) to countries with laxer rules – and to create a level playing field for domestic producers.

In practice, though, the implications are anything but simple. They cut across trade law, industrial strategy, ESG reporting, procurement, and digital traceability. For UK industry, the EU’s CBAM is already a fact of life, and a home‑grown UK CBAM is on the way. Companies that act early to understand and adapt to these mechanisms can gain strategic advantages not just in compliance, but in competitiveness and supply‑chain resilience.

What CBAMs are and how they work

A carbon border adjustment mechanism typically does three things:

• Measures embedded emissions in imported goods (e.g. the CO₂ emitted in making a tonne of steel or cement).
• Applies a carbon price aligned with the domestic emissions trading system or carbon tax.
• Requires data and verification from foreign producers or importers to substantiate reported emissions.

The European Union is currently the global frontrunner. Its CBAM entered a transitional reporting phase in October 2023, with full financial charges scheduled to apply from 2026. Initial sectors include:

• Iron and steel
• Cement
• Aluminium
• Fertilisers
• Electricity
• Hydrogen and some downstream products

Imports into the EU in these categories must now be accompanied by quarterly CBAM reports describing their embedded emissions. From 2026, importers will need to purchase CBAM certificates reflecting the EU carbon price, minus any verified carbon price already paid in the country of production.

Other major economies are watching closely or proposing similar ideas: the United States has floated several “carbon club” concepts; Canada, Japan, and others are exploring border carbon measures. This is no longer a Brussels‑only experiment; it is becoming a template.

Where the UK stands: between Brussels and the wider world

Post‑Brexit, the UK finds itself in a delicate position. It has its own Emissions Trading Scheme (UK ETS) and industrial decarbonisation targets, but its manufacturers continue to depend heavily on EU markets and supply chains.

In December 2023, the UK government announced its intention to introduce a UK CBAM by 2027, following a public consultation. While the final design is still being shaped, likely features include:

• Coverage of carbon‑intensive products such as steel, cement, aluminium, ceramics, glass, fertilisers and possibly some downstream goods.
• A carbon price based on the UK ETS, applied to imports from countries with weaker carbon constraints.
• Reporting and verification obligations for importers, similar in spirit to the EU system.

This means UK companies now face a dual reality:

• As exporters, especially to the EU, they must navigate EU CBAM rules and demonstrate the embedded emissions in their products, or risk being treated as “default high emitters”.
• As importers, particularly once the UK CBAM is live, they will be responsible for collecting emissions data from overseas suppliers and managing a new layer of cost and compliance.

For many, this will be as much a data and systems challenge as a regulatory one.

How UK industrial sectors will be reshaped

The impact of CBAMs will not be uniform. Some sectors will face direct pricing pressures, others indirect effects through material costs, procurement contracts, or customer expectations.

Steel and metals

Few sectors are as exposed as steel. The EU’s CBAM targets steel from day one, and the UK is proposing similar coverage. For UK steelmakers, the dynamic is complex:

• Exports into the EU will be under scrutiny for their emissions intensity, pushing producers to switch from blast furnaces to electric arc furnaces, adopt low‑carbon hydrogen, or increase scrap‑based production.
• Imports of cheaper, higher‑emission steel from countries without strong carbon pricing will become less attractive as border charges rise, potentially improving the relative position of low‑carbon UK and EU producers.

Downstream users – automotive, construction, machinery, white goods – will feel both price and availability impacts. They will increasingly differentiate suppliers not just on cost and quality, but on verified carbon intensity.

Cement, glass and ceramics

Cement and related materials are heavy, energy‑intensive and difficult to decarbonise. The EU’s CBAM already covers cement; the UK is likely to follow. This will encourage:

• Investment in alternative binders, clinker substitution, and carbon capture technologies.
• Regionalisation of supply, with more emphasis on local sourcing to reduce both emissions and transport costs.
• Tighter carbon requirements in public procurement for infrastructure, housing, and public buildings.

For glass and ceramics, a UK CBAM could reinforce the shift toward more efficient kilns, electrification, and fuel switching. Importers of cheap, high‑emission products will face rising landed costs, nudging buyers toward domestic or near‑shore suppliers with better emissions credentials.

Chemicals, fertilisers and hydrogen

Fertilisers and hydrogen are directly in scope of the EU CBAM. UK producers and traders face:

• Growing pressure to move away from unabated natural gas feedstocks.
• New business opportunities for low‑carbon ammonia and green or blue hydrogen exports into markets that value verified emissions reductions.

For the broader chemicals sector, even where CBAM coverage is initially limited, knock‑on effects will arrive through the cost and availability of inputs (e.g. ammonia, methanol) and the demands of downstream customers seeking low‑carbon supply chains.

Wider manufacturing and assembly industries

Even if you do not produce steel, cement, or fertilisers, CBAMs will affect you indirectly:

• Component and material prices may reflect CBAM costs embedded upstream.
• Large OEMs, particularly those selling into the EU, will cascade emissions reporting requirements down the supply chain.
• ESG‑savvy customers will use CBAM data as an additional proxy for climate performance when selecting suppliers.

For UK manufacturers in automotive, aerospace, industrial machinery, electronics and packaging, this points towards a future where carbon accounting is as fundamental as financial accounting when bidding for long‑term contracts.

Cross-border supply chains: from lowest cost to lowest verified carbon

For thirty years, global manufacturing optimisation has revolved around cost, quality, and reliability. CBAMs add a fourth axis: verified carbon intensity. This will gradually redesign supply chains in several ways.

Near-shoring and regionalisation

When carbon costs and emissions reporting obligations are factored in, the advantage of long, complex supply chains may erode. UK and EU manufacturers may find that:

• Regional suppliers with higher labour costs but lower carbon intensity become more competitive overall.
• Dual‑sourcing strategies (e.g. one EU/UK source, one global source) become standard risk‑management practice.
• Logistics decisions increasingly balance freight emissions as well as cost and lead time.

Digital traceability and data transparency

CBAMs rely on data. That means the old model of opaque, tiered supply chains with limited visibility beyond direct suppliers is becoming untenable. Companies will need:

• Product‑level carbon footprint data for key materials and components.
• Standardised methodologies aligned with GHG Protocol, ISO 14067 or sectoral Product Category Rules.
• Systems capable of sharing emissions data securely across partners.

This is driving demand for specialist carbon accounting software, lifecycle analysis services, and supply‑chain mapping tools. For many UK firms, investment in these digital capabilities will be as critical as physical plant upgrades.

Procurement and contracting: new rules of the game

CBAMs will gradually reshape contracts and tenders. Expect to see:

• Mandatory reporting of product carbon footprints in RFPs, especially for public sector and large corporate buyers.
• Price adjustment clauses tied to future changes in carbon costs or CBAM rules.
• Inclusion of emissions performance guarantees and audit rights within long‑term supply agreements.

For suppliers, this makes robust internal carbon data a commercial asset. Those that can credibly prove low embedded emissions and provide auditable data will have a competitive edge when bidding for high‑value, long‑duration contracts.

What UK companies should do now

For many organisations, 2024–2026 is the critical preparation window. A practical response does not require immediate perfection; it does require structured action.

• Map your exposure
  Identify which of your products fall within or rely heavily on CBAM‑covered sectors (steel, aluminium, cement, fertilisers, electricity, hydrogen). Assess how much of your revenue depends on exports to the EU or imports of carbon‑intensive inputs.
• Build carbon data capabilities
  Establish processes to calculate and verify product‑level emissions. This may involve in‑house teams, external LCA consultants, or specialised software platforms that integrate with your ERP or MES systems.
• Engage your suppliers
  Start requesting emissions data from key suppliers, especially outside the UK and EU. Make it clear that future business will depend not only on price and quality but on reliable carbon information.
• Review sourcing options
  Run scenario analyses that incorporate carbon prices and CBAM fees into total landed cost. You may find that near‑shore or domestic suppliers become more attractive when future carbon costs are considered.
• Align with finance and ESG
  CFOs, sustainability teams and operations managers must work together. CBAM liabilities will hit margins and cashflow; decarbonisation investments may reduce both carbon and regulatory risk.
• Monitor policy developments
  The EU CBAM rules are still evolving; the UK CBAM is not yet final. Trade agreements, exemptions and sectoral expansions are likely over time. Assign internal responsibility or work with advisors to stay abreast of changes.

New markets, products and services emerging around CBAMs

Where regulation reshapes incentives, new market niches appear. Around CBAMs, several categories of solutions are already in demand, and UK firms either supplying or adopting them stand to benefit.

• Industrial decarbonisation technologies – from high‑efficiency electric arc furnaces and low‑carbon cement chemistries to waste‑heat recovery systems, green hydrogen solutions, and carbon capture equipment.
• Carbon accounting and LCA software – platforms that help calculate embedded emissions at product level, automate data collection from suppliers, and generate reports aligned with CBAM and other regulatory requirements.
• Verification and auditing services – third‑party verification of emissions data will become a routine part of trade. Specialist auditors and certification bodies are already seeing growing demand.
• Consulting and training – helping industrial firms redesign processes, train staff, and integrate carbon considerations into strategy, finance and procurement.
• Low‑carbon materials and components – from recycled metals to certified low‑carbon concrete and pre‑verified intermediate goods that make it easier for downstream users to meet CBAM requirements.

For readers looking to invest, partner, or buy, these categories are where the most immediate, CBAM‑driven opportunities are emerging.

A new competitive landscape for UK industry

Carbon border adjustment mechanisms are often presented as technical trade policy, but their impact will be strategic. They will influence where factories are built, which technologies are adopted, how contracts are written, and which suppliers win or lose in international markets.

For UK industry, sandwiched between a pioneering EU CBAM and its own upcoming regime, the stakes are high. Those that treat CBAMs as a narrow compliance problem will likely face rising costs and shrinking options. Those that treat them as a catalyst – a reason to modernise plants, digitise supply chains, and differentiate on verified low carbon – can turn a policy challenge into a competitive advantage.

The transition will not be frictionless, but it is underway. Firms that start restructuring their data, processes and supply chains today will be better placed to trade, grow and lead in a world where the carbon content of a product is as visible, and as important, as its price tag.