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

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

As part of its plan to become climate-neutral by 2050, the European Union is aligning its climate ambitions with its trade policy. Central to this approach is the Carbon Border Adjustment Mechanism (CBAM) - a system that puts a carbon price on imports of high-emission goods. By targeting carbon-intensive products entering the EU, CBAM aims to reduce carbon leakage, encourage greener manufacturing worldwide, and create a fairer, competitive landscape.

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

CBAM is a key component of the EU’s broader climate strategy, working in tandem with the EU Emissions Trading System (ETS). While the ETS imposes a carbon cost on domestic producers, CBAM ensures that imported goods are subject to a similar carbon price, particularly those from countries with weaker climate policies. In doing so, it helps prevent companies from relocating emissions abroad and reinforces the EU’s environmental standards at the border.

CBAM explained: purpose and context

CBAM is essentially a carbon border tax on selected goods entering the EU. It aims to prevent carbon leakage, which occurs when production shifts to countries with lower environmental standards, undermining the EU’s efforts to cut emissions. Without such a mechanism, EU industries subject to strict carbon rules risk being undercut by cheaper, high-carbon imports.

CBAM sits at the heart of the EU Green Deal. A comprehensive policy framework aimed at making Europe climate-neutral by 2050. As the bloc tightens its internal climate regulations, CBAM extends the principle of carbon pricing to imports, reinforcing the EU’s environmental objectives while safeguarding domestic industries.

How does the EU Carbon Border Adjustment Mechanism work?

CBAM operates by imposing a carbon price on imported goods, reflecting the costs that EU producers encounter under the EU Emissions Trading System. The concept is straightforward: if an EU manufacturer must pay for the carbon emitted during production, so should a foreign competitor entering the EU market.

From 2026, importers will be required to purchase CBAM certificates, the cost of which corresponds to the carbon price under the Emissions Trading Scheme (ETS). The mechanism ensures that imported goods are subject to equivalent climate costs, thereby aligning external trade with internal decarbonisation policies.

CBAM sectors and timeline: who and what is covered?

The mechanism is being rolled out in phases. The initial CBAM sectors include some of the most carbon-intensive industries:

• Cement

• Iron and steel

• Aluminium

• Fertilisers

• Electricity

These sectors were selected because of their substantial emissions profiles and the risk of carbon leakage. Over time, the EU intends to broaden CBAM to include other products, such as hydrogen, certain chemicals, and potentially downstream goods that utilise CBAM-covered materials.

This phased approach allows regulators to refine processes and provides businesses the opportunity to adapt to the new framework.

Who must comply with CBAM regulations?

CBAM has implications for a broad range of stakeholders. The most directly affected are:

• EU importers, who will be legally responsible for complying with CBAM rules.

• Non-EU producers, particularly in high-emission industries, must disclose emissions data for goods destined for the EU market.

• Traders and customs brokers, who will need to support compliance efforts and ensure goods are appropriately documented.

For companies involved in EU trade, CBAM compliance will become an essential part of their operations, with carbon reporting and certificate purchasing embedded into the import process.

CBAM reporting requirements and implementation timeline

CBAM is being implemented in two key stages:

1. Transitional phase (October 2023 – end of 2025):

During this period, reporting obligations apply, but no financial payments are required. Importers must submit quarterly CBAM reports, detailing:

• Embedded emissions in the imported goods

• The carbon price, if any, paid in the country of origin

• Production site and method information

This reporting regime allows the EU to collect baseline data and test the system before full implementation.

2. Definitive phase (from 1 January 2026):

Importers will be required to surrender CBAM certificates annually. These certificates will reflect the amount of greenhouse gas emissions embedded in their imports, adjusted for any carbon price already paid abroad. The cost of certificates will track the weekly average price of EU ETS allowances.

Failure to comply can result in financial penalties including fines and the potential suspension of import rights for persistent breaches.

Why CBAM matters for global trade and climate policy

CBAM represents a significant shift in how climate policy intersects with international trade. It is designed to prevent carbon leakage, ensuring that high-emission imports do not undermine the EU’s climate efforts. By equalising the carbon cost for domestic and foreign producers, it helps level the playing field.

However, CBAM’s impact is global. It sends a strong signal to trading partners that climate considerations are becoming embedded in trade policy. For countries exporting carbon-intensive goods to the EU, this means re-evaluating production practices, enhancing emissions transparency, and potentially adopting similar carbon pricing mechanisms to maintain market access.

CBAM may also promote wider adoption of carbon pricing globally. As more regions implement climate-related border measures, a more harmonised international approach to carbon regulation could develop.

However, CBAM is not without controversy. Developing nations, in particular, have raised concerns that the mechanism could act as a de facto trade barrier, disproportionately affecting their industries. The EU has responded by proposing financial and technical support to help partners decarbonise production and comply with CBAM standards.

The EU’s Carbon Border Adjustment Mechanism is a landmark policy aimed at aligning climate ambition with trade policy. By imposing a carbon price on imported goods, CBAM aims to reduce global emissions, shield EU industry from unfair competition, and spur climate action beyond European borders.

For businesses, CBAM compliance is no longer optional. Companies importing into the EU must understand and prepare for reporting obligations, emissions disclosure, and the financial implications of CBAM certificates. As implementation progresses, those who adapt early will be best positioned to navigate the transition and remain competitive in an increasingly climate-conscious market.

In essence, CBAM is not merely a border tax; it is a powerful tool for exporting climate responsibility and shaping a more sustainable global economy.