The EU Carbon Border Adjustment Mechanism (CBAM)

The global momentum towards decarbonization demanded that major economies rethink not only internal carbon pricing, but also how international trade interacts with environmental policy. For the EU, this meant bridging the gap between strict domestic carbon regulations and often softer non-EU climate policies.

A Carbon Border Adjustment Mechanism (CBAM), which imposes a carbon cost on certain imported goods and aligns the carbon footprints of foreign-produced goods with those of EU-made equivalents, is the EU’s answer to bridging that gap. However, the EU's ambitions go even beyond this, as CBAM seeks to preserve the integrity of its climate goals, prevent carbon leakage, and encourage cleaner production globally. 

Legislative Evolution and Key Objectives of the CBAM

The CBAM emerged from broader climate legislation and the EU's ambitious goal to become the first climate-neutral continent by 2050. The 2019 European Green Deal provided a groundwork for this transition by combining tax, environmental, and industrial measures. Moreover, it laid the foundations for the Fit for 55 packages, which require EU countries to cut greenhouse gas (GHG) emissions by 55% by 2030 compared with 1990 levels.

The key element of the Fit for 55 is the reform of the EU Emissions Trading System (ETS), by broadening ETS's scope, increasing the annual emissions reduction rate, and gradually removing free allowances for sectors considered most at risk of carbon leakage. However, these changes also raised the cost of emitting carbon within the EU, potentially incentivizing companies to relocate production or source goods from countries with less stringent climate rules.

To address these issues, in July 2021, the European Commission formally proposed CBAM alongside a revision of the energy taxation directive. The CBAM, which requires importers of certain carbon-intensive goods to pay a carbon price equivalent to that faced by EU producers under the ETS, officially came into force in October 2023. In June 2025, EU regulatory bodies agreed on critical amendments to CBAM as part of the Omnibus I simplification package. 

How CBAM Works in Practice

Generally, CBAM applies to a defined set of carbon-intensive goods, and includes categories such as cement, iron and steel, aluminum, fertilisers, electricity, and hydrogen. The regulation initially affected a relatively narrow part of the trade. More specifically, it covered roughly 3% of EU imports from non-EU countries in 2022, and emissions embedded in those imports accounted for about 0.31% of global GHG emissions that year.

The way CBAM functions is relatively simple. The importers must declare the GHG emissions embedded in their imported goods. Starting in 2026, these importers will have to obtain and submit CBAM certificates for the embedded emissions. The cost of these certificates is directly linked to the price under the EU ETS, thus replicating the carbon cost that EU producers face.

In cases where a third-party producer has already incurred a carbon price under a domestic carbon-pricing mechanism, that cost can be deducted from CBAM liability. By setting this mechanism, EU regulators want to avoid double carbon charging and encourage other countries to implement emission regulations.

Transitional Phase (2023–2025): Lessons Learned So Far

From October 2023, when the CBAM came into effect, to December 2025, importers were required to report only embedded emissions. The obligation to submit reports started on January 31, 2024, demonstrating how the system will function before financial obligations take effect. Thus, no financial commitments were applied throughout this transitional phase. 

In this phase, the EU focused on a few previously mentioned sectors that are among the most emission-intensive and therefore face the highest risk of carbon leakage. The affected importers submitted their mandatory quarterly reports through the DG TAXUD’s CBAM Transitional Registry, accessed via their national competent authorities. The reports documented both direct and indirect emissions for imports covered by CBAM.

The first gathered and processed data showed that more than 15,300 CBAM reports have been submitted, while some 3,100 remain in draft status. The sector with the most submitted reports is iron and steel. However, the data showed that importers are having difficulties when obtaining reliable emissions data from non-EU suppliers. 

Additionally, these early stages of CBAM demonstrated that this mechanism is not only a regulatory burden but also a complex coordination exercise requiring the engagement of purchasers, customs representatives, upstream producers, and non-EU companies. After reviewing the feedback, EU regulators proposed further amendments to enhance CBAM for the final implementation phase. Thus, in February 2025, the European Commission adopted the Omnibus I legislative package, which simplifies specific CBAM rules. 

Primarily, the amendments introduced a de minimis mass threshold for small importers. Under this new rule, importers whose total annual imports of CBAM goods do not exceed 50 tonnes will be exempt from CBAM obligations. However, this exemption does not apply to the electricity and hydrogen sectors. Other changes include simplifying the authorization procedure for CBAM declarants, streamlining emissions calculation and reporting requirements, and enhancing anti-abuse provisions.

Full Implementation Starting 2026

On January 1, 2026, the CBAM implementation will move from the purely reporting phase to its final phase or definitive regime. The final phase is the financial phase, where importers will need to submit CBAM certificates corresponding to the embedded emissions of CBAM-covered goods. According to the 2025 amendments, only authorized CBAM declarants will be permitted to import CBAM goods. The only exemption from these requirements is provided under the de minimis rule.

Importers without declarant status have until March 31, 2026, to apply. Notably, while the registration process is ongoing, they will be able to CBAM goods under certain conditions. The deadline for submitting certificates and paying carbon costs for the previous years is set for September 30. On February 1, 2027, the EU central platform opened for the sale of CBAM certificates, managed by the European Commission. The first annual CBAM declarations and payments for all 2026 imports are due by September 30, 2027.

Strategic Preparation for Companies

As 2026 approaches, which will mark the start of the full CBAM regime, companies exposed to CBAM goods, including importers, processors, or traders, must take all the necessary steps to be prepared. First of all, companies must assess whether their imports fall within the CBAM-covered categories: cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. For those in doubt, the European Commission has provided a self-assessment tool.

Companies covered by the CBAM should map their supply chains and identify upstream suppliers in non-EU countries. Moreover, they must communicate with those suppliers to obtain precise data on GHG emissions embedded in products. In cases where suppliers cannot deliver the required data, companies should consider whether default emission values apply and what carbon liability might result.

Other critical steps in the CBAM strategy include registering as a CBAM declarant, verifying whether the de minimis exemption applies, and ensuring that all teams coordinate effectively. Based on resources and needs, companies may build an internal workflow or outsource compliance to specialized firms when planning administrative compliance.

Ultimately, companies must evaluate and set their long-term CBAM strategy. In the long run, companies may consider shifting to more carbon-efficient suppliers, investing in cleaner technologies, or even relocating parts of the supply chain if the carbon cost under CBAM threatens competitiveness. It is anticipated that more countries will follow the EU's example and introduce CBAM or CBAM-equivalent regulations. Companies that adapt early and efficiently may pay a higher price in the short term, but gain a competitive advantage in the future. 

Conclusion

Without any doubt, the EU's CBAM is a landmark mechanism in environmental-trade policy. It not only sets the example but also puts pressure on other countries to implement similar rules. Moreover, with the CBAM, the EU pushes global industries and companies toward cleaner production. With a clearly set goal and agenda, the EU might redefine how trade, climate policy, and competitiveness intersect, thereby influencing global carbon pricing beyond the EU’s borders.

Source: European Commission - Taxation and Customs Union, OECD - EU Carbon Border Adjustment Mechanism, European Commission - Carbon Border Adjustment Mechanism (CBAM), KPMG, PwC, European Commission - CBAM Guidance and Legislation, European Commission - EU Emissions Trading System