Whilst the direct obligations under UK Carbon Border Adjustment Mechanism (CBAM) will fall primarily on importers of construction products, the effects are likely to be widespread. Higher education institutions planning major estate projects should therefore consider now whether their budgets, supply chains, sustainability objectives, procurement processes and contractual arrangements are prepared for the changes that CBAM may bring from 1 January 2027.
Background
CBAM will come into force on 1 January 2027 and will apply to certain imported goods, namely aluminium, cement, fertiliser, hydrogen, and iron and steel. It forms part of the UK's wider strategy to support decarbonisation and prevent carbon leakage; where production of carbon-intensive goods shifts to countries with less stringent carbon pricing requirements compared to that borne by UK manufacturers. As many of the products within scope are commonly used in construction projects, the introduction of CBAM may have implications for the procurement and delivery of estate developments for higher education institutions (HEIs).
The obligation to comply with CBAM falls on businesses importing more than £50,000 of in-scope goods over a rolling 12-month period. In-scope businesses will generally need to register with HMRC, pay an import levy and submit CBAM returns detailing, amongst other things, the volume of imports, their embodied emissions and any applicable relief for carbon prices already paid overseas.
Certain imports are excluded from the regime, including goods of UK origin, returned goods and some goods imported under temporary admission arrangements. Relief may also be available to businesses that have already paid a carbon price overseas. The Government has recently identified a number of potential overseas carbon pricing schemes that may qualify for carbon price relief, including the EU Emissions Trading System and schemes operating in countries such as Australia, Canada, Japan, New Zealand and Switzerland.
What are the practical implications for HEIs?
Increased construction costs
Construction materials such as steel, aluminium and cement are imported goods under the regime. Although HEIs are unlikely to be directly liable for CBAM charges, contractors and suppliers importing CBAM goods may incur additional costs which are likely to be ultimately passed down through the supply chain.
As a result, project budgets and cost estimates may need to take account of potential CBAM-related price increases and fluctuations in carbon pricing.
Greater supply chain transparency
CBAM will require importers to obtain information regarding the origin and embodied emissions of imported goods. This is likely to increase demands throughout construction supply chains for reliable emissions data and evidence of carbon prices already paid overseas.
HEIs can obtain this information as part of procurement exercises and sustainability due diligence. As HEIs increasingly seek to understand and reduce emissions across their estates portfolios, greater visibility of construction supply chains may support wider sustainability reporting and carbon reduction initiatives, particularly where HEIs have published net-zero or environmental commitments.
Changes to procurement strategies
The need for greater supply chain transparency may influence procurement decisions. HEIs may increasingly favour contractors who use suppliers who can demonstrate lower embodied carbon, provide reliable emissions data or operate in jurisdictions with recognised carbon pricing mechanisms.
HEIs may also consider incorporating sustainability-related requirements into tender processes when assessing bids for future development projects. This could involve considering whether existing tender documentation adequately captures information regarding carbon emissions, material sourcing and supply chain sustainability.
What should HEIs do now?
HEIs should consider whether construction contracts adequately allocate the risk of any increase in material costs arising from the introduction of UK CBAM and whether contractors are entitled to recover additional costs resulting from changes in law. Early engagement with contractors and suppliers will be instrumental in helping to reduce cost uncertainty and minimise disruption to future construction projects. Institutions with projects due to commence or continue beyond 1 January 2027 may wish to review procurement strategies and contractual arrangements now.
How can Mills & Reeve help?
The introduction of the UK CBAM presents more than just a tax issue. It is likely to affect procurement, supply chain management and contractual arrangements across the construction sector.
We can assist HEIs by:
Advising on the allocation of CBAM-related costs and risks within construction contracts.
Drafting contractual provisions in procurement documentation and tender requirements requiring suppliers and contractors to provide emissions data and to ensure appropriate information is obtained regarding the origin, carbon footprint and sustainability credentials of construction materials.
Reviewing existing construction contracts to assess whether additional costs arising from CBAM may be recoverable.
Advising on supply chain due diligence and governance procedures.
Supporting institutions in aligning their procurement practices with wider sustainability and net-zero objective.
For further information on how CBAM may affect your organisation and supply chain, please contact Rob Biddlecombe, Callum Ross, or Alysha Patel.
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