Understanding the impact of EU-CBAM on global industrial value chains

EU-CBAM (EU-Carbon Border Adjustment Mechanism) is defined as an indirect border carbon tax on  aluminium, iron and steel, mineral products, electricity, fertilisers, inorganic chemicals and hydrogen. It is an essential part of the EU’s Green Deal and “Fit for 55” package which targets a 55% reduction in EU carbon emissions by 2030, with the EU hoping to exert global influence in combatting climate change and ‘carbon leakage’ to less ambitious jurisdictions through its implementation.

Having served in a variety of businesses and operational and financial leadership roles at Smiths for the past 25 years, since August 2023 I have had the privilege to lead our group-wide sustainability mission as VP of Sustainability and ESG. I am passionate and determined to deliver sustainable outcomes that create value for Smiths and reduce our company’s impact on the environment.

In 2022, with encouragement from Smiths, I joined the two-year part-time Masters of Sustainability Leadership programme at the University of Cambridge. The programme has been designed to empower individuals and organisations to take the lead in tackling critical global challenges. 

It has been a fantastic learning opportunity for me, and I bring new knowledge and skills back into the business. The course is now ending and I submitted a dissertation focused on the regulatory impact of EU-CBAM on global value chains (which are a characteristic of global industrial businesses like Smiths) using Smiths Detection as a worked example and research source. 

EU-CBAM has been applied from October 2023. Importers into the EU are required to collect EU-CBAM data on relevant raw materials and products in the form of quantities of embedded carbon emissions in products, and the carbon price paid in the origin country. Each tonne of carbon embedded in a product will attract an import charge based on the average weekly price of carbon permits under the separate Emission Trading System (ETS), with an import charge becoming payable. Failure to declare correct emissions will attract a fine. 

Objectively, this carbon import duty supports the EU’s ambitious environmental objectives and sustainable global trade by encouraging decarbonisation of global value chains and acts as a deterrent to moving to less ambitious/unregulated countries.  

My dissertation research aimed to analyse and determine how global value chains like Smiths Detection’s might best adapt to this critical environmental regulation.

My findings concluded that EU-CBAM introduces both challenges and opportunities for global value chains and that, though demanding, it will encourage significant behavioural shifts in driving greenhouse gas reductions alongside demanding emission reporting obligations.

The mechanism encourages companies to rethink and reconfigure their operations towards more sustainable practices. Key challenges include the need to manage an increased administrative burden and adapt supply chain design to accommodate the costs associated with procuring and utilising green materials such as green steel and recycled components. Key opportunities include developing more efficient processes and more transparent and environmentally friendly supply chains that appeal to customers.

Strategic adaptations to value chains span four key dimensions: location, design, process and governance with specific adaptations including:

•  Digitisation and process optimisation: Companies are focusing on digitising their value chains to streamline operations and enhance process efficiency. The research noted improvements in internal processes as a response to EU-CBAM, aiming to leverage these changes for greater operational resilience.
• Sustainable material integration: Long-term adaptation strategies involve integrating sustainable processes and materials such as green steel into manufacturing processes to reduce product embedded carbon. This involves redesigning products to decrease material usage and evolving sourcing.
• Supplier relationships and governance: Supplier collaboration and governance must be enhanced, emphasising sustainability goals and deeper integration for transparency and data gathering. Companies are already prioritising closer relationships with suppliers to ensure compliance with environmental and other standards and foster mutual sustainability goals.
• Location strategy: There is growing consideration of relocating or adjusting manufacturing sites based on regulatory environment and energy requirements. Decisions are increasingly influenced by the need to align with countries that support decarbonisation efforts and offer regulatory synergies with EU-CBAM.

The study provided valuable insights into the dynamic interplay between environmental policies and corporate strategies. To navigate this evolving landscape effectively, Smiths Detection and similar companies are advised to enhance their strategic planning, invest in technology to manage administrative loads, and deepen collaboration within their global value chains. 

These adaptations are critical if organisations are to leverage the opportunities presented by EU-CBAM and mitigate risk.

Ben MacDonald is VP of Sustainability and ESG at Smiths Group