Decomplexifying EU CBAM

The EU CBAM applies to imports of certain goods to the EU, impacting producers exporting these goods to the eurozone – including those exporting from the Middle East. A key element of the EU Green Deal, which aims to reduce greenhouse gas (GHG) emissions by 55% by 2030¹, the mechanism currently applies to six product groups – aluminium, iron and steel, fertilisers, cement, hydrogen and electricity – and is expected to create a level playing field between EU and non-EU producers, who are subject to different levels of local carbon regulations and carbon taxation/pricing.

CBAM is expected to be extended to other products, such as polymers and organic chemicals, which will have an even broader impact on products exported from the region. By 2030, the scope of CBAM is expected to include products, such as crude petroleum, petroleum products, inorganic basic chemicals, industrial gases, synthetic rubber, non-ferrous metals and others². This will significantly impact Middle Eastern exporters, since the expanded scope includes several oil and gas downstream products.

Although EU CBAM is the first mechanism of its kind, other jurisdictions are considering implementation of similar levies. For example, the UK is considering implementing its own CBAM from 2027³. And in the US, there are currently several draft bills related to international trade and carbon emissions covering a wide range of industries.

More details on EU CBAM can be found in the PwC EU CBAM alerts for the Middle East producers

EU CBAM alert 1

EU CBAM alert 2

¹ _{European Council Policies “Fit for 55” https://www.consilium.europa.eu/en/policies/green-deal/fit-for-55/}
² _{European Parliament “Carbon Border Adjustment Mechanism” https://www.europarl.europa.eu/RegData/etudes/ATAG/2023/754626/EPRS_ATA(2023)754626_EN.pdf}
³ _{UK Revenue and Customs “Introduction of a UK carbon border adjustment mechanism from January 2027” https://assets.publishing.service.gov.uk/media/65fc11fef1d3a0001132ac6f/Introduction_of_a_UK_carbon_border_adjustment_mechanism_from_January_2027.docx.pdf}

Impact of CBAM on Middle East producers

In the CBAM transitional period leading up to 2026, there are requirements to provide information on GHG to customers in the EU. These will pose significant implications for the Middle East producers exporting affected goods to the EU.

Starting January 1, 2026, importing CBAM-covered goods to the EU will require the purchase of CBAM certificates⁴. These additional CBAM costs will influence both the EU market and producers of the concerned goods. Depending on the carbon intensity of the goods, CBAM costs might be material and could comprise a significant share of gross export revenue.

In order to effectively mitigate the impact and navigate this transformative landscape, businesses in the region currently exporting into the EU – or considering this move in the short to medium term – should start exploring the following points as an initial step:

Conduct a thorough assessment into the product portfolio to identify in-scope exports to prioritise efforts and allocate resources.
Implement robust systems and processes to ensure compliance with CBAM.
Assess the potential CBAM costs, as well as consider potential export market opportunities.

⁴ _{European Parliament “Carbon Border Adjustment Mechanism” https://www.europarl.europa.eu/RegData/etudes/ATAG/2023/754626/EPRS_ATA(2023)754626_EN.pdf}

The CBAM readiness framework: A strategic blueprint

When preparing for CBAM, organisations could be tempted to consider this as a compliance-specific change with limited impact and focus on the more apparent aspects of implementation, neglecting the comprehensive groundwork needed beforehand. However, upon delving into the integration, it becomes evident that the mechanism’s impact permeates various dimensions of an organisation, demanding a much broader perspective from strategy to people management.

While it is important to focus on the imminent requirements and make surgical adjustments to ensure CBAM compliance, especially during the transition period, we recommend businesses adopt a holistic approach to fully integrate CBAM requirements into the way they operate to avoid significant ramifications on their competitiveness and growth.

In our experience, there are six major areas that will be affected on a large scale across all impacted organisations, each with multiple interdependent issues to be tackled. Producers in the Middle East need to take a holistic approach to CBAM readiness to be able to navigate the transition across these six areas successfully.

Organisations will need to develop a comprehensive CBAM readiness strategy and align it with regulatory mandates and corporate objectives, which extends far beyond compliance.

Organisations may need to reevaluate critical decisions governing investment and supply chain strategies, market positioning, and product portfolio optimisation to factor in the EU CBAM’s potential impact. For instance, they might need to reallocate product basket volumes across different global markets to ensure revenue optimisation. Alternatively, to take concrete steps towards decarbonisation, companies could explore investing in low-carbon technologies, integrate carbon considerations into procurement strategies, and consider localising certain parts of the supply chain.

It is crucial to assume a proactive approach and integrate carbon considerations into every aspect of an organisation’s operations at this stage to ensure your operations remain competitive and resilient while mitigating the regulatory risks.

The EU CBAM usually requires joint cross-functional effort from several teams in an organisation, including ESG, marketing, finance and tax, customs and supply chain. Setting up a “CBAM function” would require a comprehensive assessment of roles and remits across the organisation. As the company refreshes its strategy, reevaluates business operations and defines new responsibilities, it might consider corresponding changes to its organisational structure, whether it is creation of new roles and teams or the redistribution of responsibilities to existing ones.

Optimising internal processes is imperative to ensure efficiency and compliance with CBAM requirements. This entails an examination and comprehensive mapping exercise of existing processes and workflows to seamlessly integrate the new requirements into various business operations, including procurement, production and logistics. At this stage, organisations might explore the adoption of internal carbon pricing mechanisms to create necessary incentives to have a meaningful impact on their carbon footprints.

Following the identification phase, companies will need to update their policies, procedures and guidelines. This may involve revising procurement protocols to prioritise suppliers with lower carbon footprints and implementing emission-tracking mechanisms at each stage of production. Moreover, organisations might leverage automation tools and technologies to streamline processes, reduce manual effort and minimise errors associated with CBAM compliance. In parallel, companies should establish robust control mechanisms to ensure the integrity and accuracy of data. This involves identifying processes for data management, verification, and validation and conducting regular audits to assess adherence to CBAM requirements.

To effectively navigate CBAM requirements, and considering cross-functional team involvement, it is important to include CBAM-related metrics in the performance management framework. This involves defining tailored key performance indicators (KPIs) that reflect the specific CBAM processes and objectives and are supported by benchmarks to facilitate performance evaluation.

Ultimately, an effective performance management approach will enable companies to monitor progress towards CBAM implementation, identify areas of strength and improvement, and make informed decisions to optimise their efforts and enhance overall competitiveness in the global marketplace.

The EU CBAM regulations have specific requirements to the GHG monitoring methodology, and it is important to ensure its timely implementation. We recommend starting with diagnostics of the current GHG accounting methodologies and processes to identify any “gaps” with the CBAM requirements. Then, a CBAM monitoring plan should be developed, which visualises the boundaries, production processes and routes. The CBAM monitoring methodology would typically include elements such as data collection procedures, calculations and formulae to be used, control activities, and data maintenance and archiving activities (including security to safeguard against manipulation). The methodology should also be supplemented with processes and written procedures.

Finally, organisations need to ensure that sufficient control measures and quality management practices are in place. This involves conducting a risk assessment and establishing effective controls in areas such as IT systems, segregation of duties in the data flow activities, internal reviews and data validation, as well as outsourced processes.

Companies need to identify skill gaps and develop an upskilling plan for impacted employees. As part of these efforts, organisations can define learning interventions for different employee groups, for example, offering short courses from relevant external education bodies. Organisations should also explore ways to create opportunities for staff to gain hands-on experience and practical insights through on-the-job training activities.

The way forward

To prepare for EU CBAM compliance, organisations should develop a CBAM readiness strategy that may include:

Aligning with regulatory mandates and corporate requirements – reevaluating investment and supply chain strategies, market positioning, and product portfolio optimisation to factor in the mechanism’s potential impact.
Establishing a cross-functional CBAM function that involves teams from ESG, marketing, finance and tax, customs, and supply chain, following a comprehensive assessment of roles and remits across the organisation.
Optimising internal processes to ensure efficiency and compliance with EU CBAM requirements – including by revising procurement protocols, implementing emission-tracking mechanisms, and leveraging automation technologies to streamline processes.
Building CBAM-related metrics into the performance management framework with clearly defined KPIs that reflect specific CBAM processes and objectives.
Including a GHG monitoring methodology while developing a broader CBAM monitoring plan that establishes control measures and ensures quality management practices are in place.
Identifying skill gaps and developing an upskilling plan for impacted employees, with defined learning interventions for different groups and opportunities for staff to gain hands-on experience.

For Middle East-based organisations navigating the complexities of EU CBAM compliance, it’s important to view this transition as an opportunity rather than a challenge. Organisational leaders can implement changes in a controlled manner by embracing the CBAM readiness framework. This approach will position thems for long-term success in a rapidly evolving regulatory landscape, enabling them to drive meaningful change and pave the way towards a sustainable future.

Contact us

Tatiana Shuldyk

Tax Director, International Tax & ESG, PwC Middle East

+974 5547 5784

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