What is CBAM? The Carbon Border Adjustment Mechanism explained

CBAM extends the EU carbon price to imported goods. An importer bringing steel, cement or electricity into the EU must now account for the emissions generated in their production and pay a price linked to what an EU producer would have paid under the Emissions Trading System. 

The mechanism moved from reporting to compliance on 1 January 2026. Emissions embedded in goods imported from that date incur a financial liability, even though the certificates covering them are not purchased until 2027. 

Why the EU introduced CBAM 

The problem CBAM addresses is carbon leakage: the risk that a carbon price applied only to domestic production pushes production and its emissions to jurisdictions without one. The climate gains nothing, and the EU loses the industry. 

The EU’s original approach was free allocation. Sectors deemed at risk of leakage received EU ETS (EU Emissions Trading System) allowances free of charge rather than buying them at auction, thereby protecting competitiveness but weakening the price signal. A steelmaker receiving most of its allowances free had comparatively little incentive to decarbonise. 

CBAM is the mechanism that allows free allocation to be withdrawn. Rather than shielding EU producers from the carbon price, it applies an equivalent cost to imports, so domestic producers face the full price while remaining competitive with goods produced elsewhere. 

The two are directly linked. As free allocation is phased out for covered sectors, CBAM obligations phase in proportionally - the phase-in factor rises as free allocation falls, so importers face a larger share of the full carbon cost. 

That schedule has become politically contested. In July 2026, the Commission proposed slowing the phase-out of free allocation for CBAM sectors and extending it to 2038, reflecting concerns about industrial competitiveness. That proposal is not yet law, and the timetable remains one of the more uncertain elements of the regime. 

How CBAM actually works 

The obligation lies with the importer, not the overseas producer, though in practice the data must come from the producer. 

Four steps define compliance: 

• Authorisation, since only an authorised CBAM declarant may import covered goods above the threshold, and the application process takes time 

• Emissions accounting, requiring the embedded emissions of each consignment to be determined using actual installation-level data where available, or default values where it is not 

• Annual declaration, submitted by 30 September of the year following import, covering all covered goods brought in during the preceding year 

• Certificate surrender, with certificates purchased through a central EU platform and surrendered against declared emissions. 

The pricing link to the EU ETS is direct. For goods imported in 2026, certificate prices are based on the quarterly average of EU ETS allowance auction prices for the relevant quarter. From 2027, the reference shifts to a weekly average. Certificates cannot be traded between operators, so they function as a compliance cost rather than a market instrument. 

Importantly, certificate sales do not begin until 1 February 2027. Liabilities accrue from the start of 2026 but are settled retrospectively, so the exposure is real and must be provided for, even though no purchase has yet been possible. 

Where a carbon price has already been paid in the country of production, it can generally be deducted, so the CBAM adjusts for the difference rather than imposing double charges. 

The choice between actual data and default values accounts for most of the commercial variance. The Commission publishes defaults on a country- and product-by-country basis and deliberately sets them conservatively, reflecting relatively carbon-intensive production. An efficient producer using verified actual data can therefore face a materially lower liability than the same product assessed using defaults – but only if the emissions data can be gathered, calculated using the specified methodology, and verified. 

That verification requirement is what turns CBAM from a customs exercise into a supply chain project. It requires installation-level monitoring at facilities that may never have measured emissions before, with emissions reported in a format designed by a regulator in another jurisdiction. 

Which sectors and products are affected 

The mechanism currently covers six sectors: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. These were selected for their high emissions intensity and genuine trade exposure. 

The scope is defined at the level of individual customs codes rather than by sector description, which matters more than it sounds. Two similar products can fall on opposite sides of the boundary depending on their classification, so exposure has to be assessed against the actual code, not a general sense of what the business imports. 

A de minimis threshold established via the simplification package exempts importers with annual covered imports of 50 tonnes or less. This effectively excludes about 90% of importers from the regime while still accounting for roughly 99% of embedded emissions, balancing administrative simplicity with comprehensive coverage. If an importer exceeds the threshold at any time, all their imports for the entire year become subject to the regime. 

Scope expansion has been proposed for downstream goods that are steel- and aluminium-intensive, on the reasoning that covering raw steel but not steel products simply moves the leakage one step along the value chain. 

What CBAM means for energy buyers and importers 

Electricity’s inclusion makes this directly relevant to power market participants. Imports into the EU from neighbouring non-EU systems incur a CBAM liability based on the exporting system’s carbon intensity, which alters the economics of cross-border flows. 

Where an exporting country’s generation mix is more carbon-intensive than the EU average, the adjustment can be significant enough to reverse flow on some interconnectors. Where a country’s carbon pricing is linked to the EU ETS, the adjustment falls away - which is why linkage arrangements matter commercially as well as diplomatically. 

The complication specific to electricity is that a megawatt-hour cannot be traced to a particular generator. Physical flows follow the network, not the contract, so attributing embedded emissions requires a methodology based on the exporting system’s mix rather than on the actual source. This yields a workable but approximate figure, and it means an efficient, low-carbon generator in an otherwise carbon-intensive system may be assessed against the system average rather than on its own performance. 

For traders, the practical effect is the introduction of a new component into cross-border spread analysis. The relevant comparison is no longer simply the price differential between two bidding zones, but that differential adjusted for a carbon cost that applies in one direction only. 

For industrial buyers, three practical consequences follow. 

1. Cost pass-through is the first. CBAM costs will move through supply chains, but unevenly, depending on contractual terms and negotiating position. Contracts silent on carbon costs leave the allocation unresolved until the liability crystallises. 

2. Supplier data is the second and, in most organisations, the harder problem. Actual installation-level emissions data produces a more accurate and often lower liability than default values, but obtaining it requires overseas suppliers to measure and report to EU-specified methodologies. Many are unwilling or unable to do so, and the fallback defaults are deliberately conservative. 

3. Contract terms are the third. Newer supply agreements increasingly specify who bears CBAM costs, who provides emissions data, and what happens if that data is unavailable or fails verification. 

Key dates and deadlines to know 

The transitional period ran from 1 October 2023 to 31 December 2025, requiring quarterly reporting of embedded emissions but no payment. It was intended to build data infrastructure before money was at stake. 

The definitive regime took effect on 1 January 2026. From that date, importers must hold authorised declarant status, and emissions embedded in covered imports create a financial liability. 

Certificate sales open on 1 February 2027 through the central platform, with 2026 liabilities settled retrospectively at the relevant quarterly average price. 

The first annual declaration, covering 2026 imports, is due on 30 September 2027, with certificates to be surrendered at the same time. This deadline was moved back from 31 May as part of the simplification package. 

The free allocation phase-out was legislated to run from 2026 to 2034, with CBAM obligations rising as free allowances fall. The July 2026 proposal to extend that to 2038 remains under negotiation, and anyone modelling long-term exposure should treat the back end of the schedule as provisional. 

Conclusion 

CBAM is best understood not as a tariff but as a mechanism to ensure the EU carbon price applies consistently, regardless of where a product is made. Its real significance lies in what it does to the EU ETS: by neutralising the competitiveness argument for free allocation, it allows the carbon price to reach sectors that have been substantially shielded from it. 

Three things will determine how heavily it bites. Scope expansion into downstream products would widen the affected population considerably. Verification rules will determine how many importers can use actual emissions data rather than conservative defaults, which is often the difference between a manageable cost and a material one. And the certificate price path follows the EU ETS, so carbon market movements now transmit directly into import costs for anyone in scope. 

The wider effect may be outside the EU altogether. Several trading partners have accelerated their own carbon pricing, partly because a domestic carbon price is deductible against CBAM – revenue that would otherwise flow to Brussels can be retained at home instead. Whether that spreads carbon pricing globally or hardens into a trade dispute is not yet settled.