The Carbon Border Adjustment Mechanism (CBAM)
Introduction
The Carbon Border Adjustment Mechanism (CBAM) is one of the climate policies introduced by the European Union (EU). It reflects the EU's commitment to reducing greenhouse gas emissions while ensuring that its industries remain competitive.
CBAM aims to prevent carbon leakage, a phenomenon where companies relocate production to countries with weaker environmental regulations or import cheaper goods from such regions. As this undermines the EU’s climate goals and global efforts to decarbonize.
It is part of EU’s "Fit for 55" package, which seeks to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.* It also contributes to the EU's long-term objective of achieving climate neutrality by 2050.
What is carbon leakage?
Carbon leakage is an issue that arises when companies relocate production outside the EU or when domestic products are replaced by imports from countries with weaker environmental regulations.
Carbon leakage undermines global climate efforts by shifting emissions rather than reducing them. For example, if an EU-based steel manufacturer relocates production to a country with lower environmental standards, global emissions may increase despite reductions within the EU.
General principles: how CBAM works
CBAM imposes a carbon price on imports of specific goods, aligning their cost with EU-produced goods under the Emissions Trading System (ETS). Importers must purchase CBAM certificates priced at the EU ETS weekly average auction rate (€/tonne of CO₂) to cover embedded emissions. If non-EU producers already paid a carbon price, importers can deduct this amount.
Phased Implementation
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Transitional Phase (2023–2025)*
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Definitive Regime (2026 onward)*
*https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
Purpose and history of CBAM
Historically, the EU addressed carbon leakage through free allocations under its Emissions Trading System (ETS). These allowances were granted to industries at risk of carbon leakage, ensuring that they could compete globally without bearing excessive costs. However, this approach was transitional and limited in scope, as it did not incentivize non-EU producers to adopt cleaner technologies.
CBAM represents a more comprehensive solution. By imposing a carbon price on imported goods based on their embedded emissions, it ensures that imports face similar costs as domestic products under the ETS. This levels the playing field for EU industries while encouraging non-EU producers to adopt sustainable practices.
Who is affected?
CBAM has implications for multiple groups of stakeholders:
- EU importers: Companies importing goods covered by CBAM must adapt to new reporting
requirements during the transitional phase (2023–2025). From 2026 onward, they will need to purchase certificates based on their imports' embedded emissions. - Non-EU exporters: Producers outside the EU must provide detailed data on their production processes and emissions intensity. Those operating in countries with lower environmental standards may face higher costs unless they adopt cleaner technologies.
- Global supply chains: CBAM encourages greater transparency across supply chains as businesses are incentivized to track emissions data rigorously.
For businesses operating in regulated sectors like steel or cement, compliance with CBAM means adapting operations to meet reporting requirements and bearing additional costs associated with purchasing certificates. While these changes may increase operational complexity and costs, they also present opportunities for innovation in sustainable production methods.
The CBAM transitional period
The transitional phase (October 2023–December 2025) serves as an adjustment period for businesses affected by CBAM. During this phase:
- Importers must submit quarterly reports detailing embedded emissions in their goods without financial penalties.
- A centralized CBAM registry has been established for reporting purposes.
- Methodologies for calculating embedded emissions are being refined to ensure accuracy and consistency across sectors.
The transitional period allows businesses and authorities time to prepare for full implementation in 2026 when financial obligations begin. It also provides an opportunity for stakeholders to familiarize themselves with reporting systems and compliance requirements.
The current phase is critical for ensuring that CBAM operates smoothly once fully implemented. By allowing gradual adaptation, you minimize disruption while laying the groundwork for effective enforcement. A perfect way to start is by implementing a carbon emission management system.
A digital solution for CBAM
Specialized CBAM software that automates emissions data collection, calculation, and reporting is the best way to prepare for CBAM regulations. It helps to streamline the process and additionally gives an advantage towards the competition.
By adopting the right CBAM software, businesses can not only ensure compliance with CBAM but also position themselves as innovators in sustainable practices.
Benefits of adopting the right CBAM software:
- Streamlined compliance
- Improved supply chain transparency
- Sustainability leadership
- Enhanced stakeholder and investor trust
Take a look at a carbon emission management system
See how it works (infographic)
This guide not only provides insights into a digital CBAM solution, but also presents an integrated ESG suite designed to outperform industry standards.