By Alwyn Hopkins, EY Sustainability Leader for Industrials and Energy

With the EU’s Carbon Border Adjustment Mechanism (CBAM) – the “carbon tariff” – entering its “definitive” period on Jan. 1 this year, thousands of businesses across the EU and beyond have been thrust into the scope of carbon pricing.

This now requires many companies to pay a mandatory price for greenhouse gas (GHG) emissions for the first time, and has already had major financial and diplomatic impact. EU trade partners have raised concerns at the World Trade Organization (WTO) and COP30, and there have been calls to exempt certain products from the regime to help mitigate market price shock. Physical trade flows have also been disrupted as supply chain actors get acquainted with the new compliance requirements.

Discussion around CBAM has, however, distracted from wider fluctuations in international policy. There have been numerous measures introduced which make it imperative that businesses examine their carbon cost exposure now.

Carbon pricing developments across the world

The World Bank recently reported that the proportion of global emissions covered by a pricing regime has risen from 14% in 2019 to more than 27% across 95 jurisdictions. A significant driver of this increase is expansion and reform of the China Emissions Trading System (China ETS).

Growth in global coverage will progress further in coming years, with headline upcoming developments including:

July 2026

• Addition of maritime emissions into scope of UK Emissions Trading Scheme (UK ETS)

Jan. 2027

• UK CBAM enters force
• Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) Phase 2 begins

Jan. 2028

• EU Emissions Trading System II (EU ETS II) expected to enter force

Future – date TBC

• India Carbon Credit Trading Scheme (CCTS) compliance system to be launched
• Brazilian Greenhouse Gas Emissions Trading System to be enacted
• UK ETS and EU ETS to be linked
• Various further updates to China ETS (e.g. further sectors)
• International Maritime Organization (IMO) GHG Fuel Intensity targets
• South Africa Mandatory Carbon Budgets, with more changes expected post-2030.

Divergence in compliance requirements and effective costs

The way in which these regimes impact businesses varies drastically. For example, the EU CBAM puts a carbon-linked cost into the supply chain, requiring importers to buy “CBAM Certificates” to account for “embedded emissions”. In contrast, CORSIA requires international aviation operators to pay in other ways, such as by buying certain types of carbon offsets or Sustainable Aviation Fuel (SAF).

Price can also vary substantially. Examples of such discrepancy at the time of writing include pricing above €65 per tonne (~$75) for EU ETS Allowances (EUAs), compared to R308 per tonne (~$20) under the South Africa carbon tax. Costs will likely increase in South Africa when mandatory Carbon Budgets come into force, potentially next year.

Many of these regimes are also softened by “free allocation” of allowances, which reduces the effective liability for exposed businesses. For example, in South Africa, carbon tax rebates received through free allowances have historically represented an effective rebate of over 80% for some industries – with offsets available to further ease the tax burden. As another example, historically, a high allocation of free allowances been distributed under the China ETS using benchmarking. China’s latest allowance allocation plan was published late last year, as reported by Carbon Pulse.

Developing corporate impacts across the supply chain

It is easy for many businesses to overlook the risks associated with these regimes if they have experienced limited prior exposure to compliance obligations. However, as policy continues to evolve and strengthen, costs borne within the supply chain will be passed “downstream” – either explicitly or implicitly – and create more of an impact on companies’ profit and loss.

For instance, for supermarkets in the EU, increased fertiliser costs will affect margins on vegetable production, and direct compliance obligations and costs from EU CBAM may impact purchases of aluminium foil or white goods.

Meanwhile, for businesses further upstream, new compliance obligations may arise as their jurisdictions strengthen regimes, such as with changes to the ETS in China. Alternatively, they may need to begin providing compliance data on emissions to their customers importing into jurisdictions with a CBAM, and these customers may now find emissions-intensive products less cost competitive.

Seven steps for corporate response to new carbon pricing exposures

In practice, much of the market is yet to reshape supply chains and corporate footprints in response to future compliance carbon pricing exposures. However, as regimes develop, a clear financial case for doing so is expected to arise.

Businesses should therefore ensure they have completed the following steps:

1. Understand and monitor the direct or compliance exposure faced within their corporate footprint.
2. For direct exposures, obtain relevant authorisations and put in place compliance processes.
3. Identify indirect exposures in the supply chain – both upstream (typically ETSs) and downstream (typically CBAMs).
4. Plan for different cost and policy scenarios, and build procurement strategies and pricing strategies to manage new costs and passthrough.
5. Implement a hedging approach to manage allowance price fluctuation.
6. Incorporate cost exposures into decarbonisation planning, considering the impact on “marginal cost of abatement”.
7. Also consider the impact of developing carbon pricing regimes on corporate, footprint and supply chain strategy.

Alwyn Hopkins is Sustainability Leader for Industrials and Energy at EY UK.

Any opinions expressed in this commentary reflect the views of the authors and not of Carbon Pulse.

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