Understanding EU Carbon Border Adjustment Mechanism (CBAM EU)

Businesses exporting to the EU are mandated to submit their carbon emissions data on a quarterly basis to European importers from January 2026 to avoid CBAM tax or penalties.

What is the Carbon Border Adjustment Mechanism (CBAM EU)?

The Carbon Border Adjustment Mechanism (CBAM) is an environmental trade policy introduced by the European Union. In simple terms, it is a carbon tariff on imports of specific carbon-intensive goods into the EU.

EU carbon border adjustment mechanism is aimed at putting a fair price on the carbon emissions embedded in imported or exported goods to the EU, ensuring that the EU’s climate efforts are not compromised by importing products from countries with less stringent environmental regulations.

This levels the playing field between EU producers, who already pay for their carbon emissions under the EU Emissions Trading System (EU ETS), and foreign competitors who may not.

Why the EU Introduced CBAM?

The EU introduced CBAM to address a critical challenge known as “carbon leakage.” Carbon leakage occurs when EU-based companies move their production to countries with weaker climate policies, or when EU products are replaced by more carbon-intensive imports. This would simply shift emissions outside of Europe, negating the global environmental benefit of the EU’s green transition.

CBAM was introduced for three primary reasons:

Prevent Carbon Leakage: Protect the integrity of the EU’s climate agenda by ensuring that emission reductions within the EU are not compromised or offset by increased emissions outside its borders.
Level the Playing Field: Ensure that EU industries, which bear the cost of compliance with the EU ETS, can compete fairly with imports from regions without equivalent carbon pricing.
Encourage Global Ambition: Incentivise non-EU countries to adopt greener manufacturing processes and more robust carbon pricing mechanisms.

Sectors Covered Under the EU CBAM

Initially, CBAM EU applies to imports of the most carbon-intensive goods from specific sectors. The transitional phase, which began in October 2023, covers the following sectors:

Cement
Iron and Steel
Aluminium
Fertilisers
Electricity
Hydrogen

This focused scope allows for a smoother rollout, with the intention to expand to all sectors covered by the EU ETS by 2030.

How the EU carbon border adjustment mechanism Works?

CBAM functions by requiring importers of covered goods to purchase and surrender CBAM certificates.

Here’s a step-by-step breakdown of the process:

An EU importer brings goods from a non-EU country into the EU market.
The importer calculates the embedded direct (and later indirect) greenhouse gas emissions in those goods, following EU methodologies.
The importer declares the total embedded emissions in their quarterly CBAM report.
The importer purchases CBAM certificates corresponding to the declared emissions. The price of these certificates is linked to the weekly average auction price of EU ETS allowances.
The importer surrenders the required number of CBAM certificates to the national authority annually.
A key feature: If a non-EU producer can prove they have already paid a carbon price for the manufacturing of the imported goods in their home country, the corresponding cost can be fully deducted for the EU importer.

CBAM Implementation Timeline

CBAM EU is being rolled out in two phases:

Transitional Phase (October 1, 2023 – December 31, 2025)
- Objective: Data collection and testing of the mechanism.
- Requirement: Importers must submit quarterly CBAM reports declaring the embedded emissions in their imports. The first report was due by January 31, 2024.
- Financial Cost: No financial payments are required during this phase, only reporting.
Definitive Phase (Starting January 1, 2026) CBAM reporting becomes mandatory.
- Objective: Full implementation.
- Requirement: Importers must declare the embedded emissions annually and surrender the corresponding number of CBAM certificates.
- Phased Integration: As CBAM is phased in, the free allocation of EU ETS allowances to sectors covered by CBAM will be phased out.

Reporting and Compliance Requirements

Compliance is mandatory and administered by national authorities in each EU member state.

Who Reports?
The “authorised declarant” – typically the EU importer of record.
What is Reported?
Total embedded direct emissions (Scope 1) for each product, detailed by production facility. Reporting of indirect (Scope 2) emissions will become more important over time. And precursors emissions data (raw materials used to make another CBAM covered product).
How to Report?
Via the European Commission’s central CBAM Transitional Registry.
Penalties for Non-Compliance:
Failure to report or surrender certificates can result in financial penalties (€10-50 per tonne of unreported CO2e) and potentially other sanctions.

Download CBAM Fact sheet

Impact of CBAM on Global Trade

CBAM is poised to reshape global trade dynamics:

For EU Importers: Increased administrative burden and potential cost increases for covered goods, requiring new due diligence and reporting systems.
For Non-EU Exporters: Producers in countries without carbon pricing will face a new cost barrier to the EU market, creating a competitive disadvantage unless they decarbonize.
For Global Supply Chains: Companies worldwide will be incentivised to track and lower the carbon footprint of their products, pushing transparency and green manufacturing up the value chain.
Geopolitical Tensions: CBAM has been met with concerns from major trading partners who view it as a protectionist measure, potentially leading to trade disputes at the WTO.

Benefits and Challenges of the EU CBAM

Benefits:

Effective Climate Tool: Directly tackles carbon leakage.
Promotes Innovation: Drives investment in low-carbon technologies globally.
Global Standard-Setter: Encourages the global adoption of carbon pricing and emissions accounting.
Fair Competition: Protects EU industries committed to decarbonisation.

Challenges:

Administrative Complexity: The reporting and verification requirements are significant for businesses and authorities.
Trade Friction: Risk of retaliatory measures and disputes with trading partners.
Methodological Hurdles: Accurately calculating embedded emissions, especially in complex supply chains, is challenging.
Data Collection: Collecting accurate embedded emissions data is a big challenge as it involves third-party data gathering and maintaining data hygiene.
Equity Concerns: Potential disproportionate impact on developing economies.

How Businesses Can Prepare for CBAM

Proactive preparation is key to managing CBAM’s impact.

Conduct a CBAM Assessment: Determine if your imported or exported goods fall under the current or future scope.
Map Your Supply Chain: Identify all production facilities and their locations to understand your exposure.
Develop Emissions Accounting Capabilities: Invest in systems to accurately measure and report the embedded carbon in your products.
Engage with Suppliers: Start conversations with non-EU suppliers about their carbon footprint and emission reporting capabilities.
Explore Decarbonisation Strategies: Assess opportunities to reduce the embedded emissions of your products through efficiency improvements, fuel switching, and green technology.
Seek Expert Advice: Consult with sustainability and trade law experts to navigate the complex regulatory landscape.

Future of the Carbon Border Adjustment Mechanism

CBAM is not a static policy. Its future evolution is expected to include:

Expansion of Scope: The inclusion of more sectors, such as chemicals, plastics, and refined petroleum products, is highly likely post-2030.
Integration with Other Policies: CBAM will become more deeply integrated with the broader EU Green Deal framework.
Global Proliferation: Other jurisdictions, like the UK and Canada, are already considering similar border carbon measures, which could lead to a patchwork or eventual harmonization of global carbon pricing at the border.
Refinement of Rules: Methodologies for calculating embedded emissions, particularly for indirect emissions and complex goods, will continue to be refined.

FAQ

Who is affected by CBAM?

EU importers of covered goods are directly responsible for compliance. Indirectly, non-EU producers and exporters of those goods to the EU are significantly affected, as the cost and reporting requirements will flow down the supply chain.

How is the price of a CBAM certificate determined?

The price is not fixed. It is based on the weekly average auction price of EU ETS allowances (EUAs), expressed in €/tonne of CO2e.

Can I get an exemption from CBAM?

There are no blanket exemptions. However, the cost of a carbon price already paid in the country of origin is fully deductible. Goods from countries fully integrated with the EU ETS (like Iceland, Liechtenstein, Norway, and Switzerland) may be excluded.

What is the difference between the EU ETS and CBAM?

The EU ETS is a cap-and-trade system for emissions from installations within the EU. CBAM is a border carbon adjustment on the embedded emissions of specific goods imported into the EU. They are designed to work together.

Where can I find official information and guidance?

The European Commission’s Directorate-General for Taxation and Customs Union (DG TAXUD) is the primary source for official CBAM documentation and guidance.