Embodied carbon now an established core pricing variable for construction materials

The introduction of Carbon Border Adjustment Mechanisms (CBAM) marks a fundamental shift in how the construction industry values its primary materials. This is a policy tool designed to address the issue of carbon leakage, which occurs when production shifts to countries with less stringent climate policies.

By imposing a carbon cost on imports of certain goods, CBAM seeks to align the carbon price of imported products with that of those produced domestically. With the European Union’s CBAM entering its definitive phase in January 2026 and the UK’s equivalent launching in January 2027, carbon intensity has been transformed into a direct financial liability.

For construction cost project managers and wider construction teams, this means that the embodied carbon of a structure is no longer just an environmental data point; it is now a pricing variable that must be managed with the same rigour as currency fluctuations or commodity price hikes.

According to benchmarks from the London Climate Change Leaders (LETI) and the Chartered Institution of Building Services Engineers (CIBSE), embodied carbon accounts for 44% of a building’s whole-life emissions.

The primary goal of CBAM is to level the playing field for domestic manufacturers. It specifically targets sectors with high carbon emissions, including steel, aluminium, cement, hydrogen, and electricity. Under CBAM, importers are required to report the embedded carbon in these products and pay a levy that reflects the difference between the carbon price paid in the country of origin and the price paid in the EU or UK.

During the construction phase, embodied emissions, covering materials manufacturing, transportation, and on-site installation, usually dominate, accounting for 80% to 90% of total greenhouse gas emissions. In a typical building project, steel and concrete (including cement) together account for 70% to 75% of the initial embodied carbon. When looking specifically at the building’s structural frame, where these materials are primarily used, these emissions often represent over 50% to 60% of the total initial footprint.

Since January 2026, the EU has required importers to purchase and surrender certificates based on the verified emissions of their products. The price of these certificates is tied to the weekly average of EU Emissions Trading System (ETS) allowances.

The UK system will function as a tax administered by HMRC. It applies to any importer bringing in more than £50,000 of in-scope goods over a 12-month period.

While the two systems share a common goal, they are not identical. A critical technical difference lies in the emissions boundary. The UK regime will initially focus only on direct emissions from the manufacturing process. In contrast, the EU system includes indirect emissions, such as the carbon footprint of the electricity used during production, for certain sectors.

The materials most relevant to the UK construction industry under CBAM are steel, cement and aluminium. These products are widely used in infrastructure, commercial, and residential projects, impacting the backbone of most schemes.

Structural steel is the most immediate concern for large-scale projects, such as rail and aviation. The method of production now determines the financial risk. Traditional blast furnaces (BF-BOF), which rely heavily on coal, carry significantly higher carbon liabilities than scrap-based electric arc furnaces (EAF). This chemical reduction process releases roughly 1.8 to 2.8 tonnes of CO₂ for every single tonne of virgin steel produced.

In the UK construction sector, steel accounts for roughly 22% to 24% of total material-based embodied carbon. This includes structural I-beams, steel decking, and steel reinforcement bars.

Cost increases attributable to the implementation of the UE CBAM are already evident. Structural steel prices in the UK rose by 2.7% from December 2025 to January 2026, as contractors bought in advance of the EU CBAM implementation. Additionally, steel-based products such as taps and valves for sanitaryware and central heating boilers experienced sharp monthly increases of 3.5% and 2.8%, respectively, during the same period.

While concrete itself is not directly taxed under the UK CBAM, the cement and clinker within it are. Because cement is a high-volume, low-value product, even a modest carbon charge can represent a high percentage of its total market price. Nearly 85% to 90% of concrete’s total carbon footprint comes directly from cement manufacturing. Globally, cement production alone is responsible for roughly 8% of all CO₂ emissions. Since process emissions from chemical reactions (calcination) cannot be entirely designed out, engineers must look to structural efficiency and cement substitutes like Ground Granulated Blast-furnace Slag (GGBS) or Pulverised Fuel Ash (PFA) to reduce financial exposure.

Aluminium production is intensely reliant on electricity. Because the EU CBAM accounts for indirect emissions, the carbon intensity of a country’s national power grid is now a commercial factor. If a manufacturer uses a coal-heavy grid, their product will face a higher levy when entering the EU market.

CBAM is likely to influence demand in several ways. With imports facing higher carbon costs, UK-made materials may become more competitive. This could stimulate demand for domestic steel, cement, and aluminium, provided UK producers can demonstrate lower embedded carbon. The UK Steel Strategy, launched in March, sets an aim for up to 50% of steel used in the UK to be made in Britain, up from around 30% today, backed by up to £2.5bn on direct support to steel companies.

CBAM may also encourage the use of alternative, less carbon-intensive materials. For example, engineered timber or recycled aggregates could gain traction in structural applications.

The introduction of these levies creates several hidden risks that go beyond a simple tax payment.

To comply with CBAM, importers must provide verified, installation-level emissions data. If this data is missing, authorities apply default values. These are intentionally conservative and often based on the highest-emitting producers, meaning they will almost always result in a much higher cost than verified data. Sourcing from suppliers who cannot provide transparent data is, therefore, a material cost risk.

The UK’s decision to implement its own CBAM in 2027 is partly defensive. Without it, the UK risked becoming a pollution haven where high-carbon materials, rejected by the EU due to high levies, would be dumped into the UK market. Until a formal agreement links the UK and EU carbon markets, professionals must assume the two systems operate independently.

Currently, CBAM covers raw and semi-finished materials. However, a proposed expansion in 2028 could see the EU include roughly 180 downstream products. This would bring finished goods, such as prefabricated buildings, lifts, and industrial robots, into the tax net. For a UK contractor importing a modular hospital wing from outside the EU, the carbon price of every tonne of steel in that frame would eventually need to be accounted for.

CBAM links material costs to the price of carbon allowances, which can fluctuate. This introduces uncertainty in material pricing, complicating cost estimation and risk management. Fixed-price contracts may expose contractors to unexpected cost increases if CBAM charges rise during the project lifecycle. Some suppliers may exit the UK market if CBAM makes their products uncompetitive, leading to shortages or delays. Contractors who adapt quickly by sourcing low-carbon materials, improving carbon reporting, and renegotiating contracts will be better positioned. Those slow to respond may face higher costs and reduced margins.

The biggest risk for a project team is believing CBAM is only the importer’s responsibility. In reality, these costs propagate through the supply chain and will appear in tender prices and risk premiums.

The most effective way to manage CBAM risk is through design innovation. Every tonne of steel or cement removed from a design now represents a direct financial saving on carbon taxes. Early-stage decisions, such as specifying EAF steel or low-carbon concrete mixes, should be viewed as commercial strategies to protect the project budget.

Standard contracts, such as JCT or NEC4, do not yet contain explicit or boilerplate clauses that fully address the specific regulatory obligations, financial liabilities, or data-sharing requirements of CBAM. If a contract remains silent on who bears the cost of these levies, the client may assume the risk by default. Procurement teams should now ask suppliers for verified product-level emissions data and evidence of whether a carbon price has already been paid in the country of origin to avoid double taxation.

Importers must accurately declare the embedded carbon in materials and maintain records for audits. Errors or omissions could result in penalties or delays. The need for detailed carbon accounting may strain procurement and compliance teams, especially for smaller contractors.

The EU CBAM and the upcoming UK CBAM represent a significant shift for the UK construction industry. Contractors must adapt by reviewing supply chains, engaging with suppliers, and updating procurement practices. While CBAM introduces risks such as compliance challenges and market volatility, it also offers opportunities for innovation and competitive advantage through low-carbon sourcing.

Pablo Cristi Worm is a construction economist at Aeco.