CBAM — EU Carbon Border Adjustment Mechanism Explained for Importers

The Carbon Border Adjustment Mechanism (CBAM) is the European Union's landmark policy to prevent carbon leakage — the practice of moving production to countries with weaker climate regulations. CBAM ensures that imported goods pay a carbon price equivalent to what EU producers pay under the Emissions Trading System (ETS).

CBAM entered its transitional phase on October 1, 2023, requiring quarterly reporting of embedded emissions. Starting January 1, 2026, importers must purchase CBAM certificates at the ETS carbon price to cover those emissions. The regulation currently covers six sectors: iron and steel, aluminium, cement, fertilisers, hydrogen, and electricity.

CBAM operates alongside the EU ETS. When goods enter the EU customs territory, the importer must declare the embedded greenhouse gas emissions of those goods and purchase CBAM certificates to cover them.

The certificate price is linked to the ETS auction price — updated quarterly. Importers can claim a deduction for the carbon price already paid in the country of origin, preventing double taxation.

A critical component is free allocation. To protect EU industry during the transition, CBAM provides free allowances based on product benchmarks. These free allocations phase out gradually: 97.5% in 2026, declining to 0% by 2034. Importers pay for emissions above their free allocation.

CBAM currently covers six product categories, identified by their Combined Nomenclature (CN) codes. Each sector has specific benchmark values, default emission factors, and free allocation rules.

The CBAM calculation follows three steps: first, compute total embedded emissions (direct + indirect per product). For steel (CN 72xx), indirect emissions are exempt from free allocation, while aluminium, cement, and fertilisers include full emissions.

Second, apply free allocation: benchmark × tonnage × (1 - phaseOutRate). The benchmark represents the EU average emission intensity for that product type. The phase-out rate starts at 2.5% in 2026 and reaches 100% by 2034.

Third, calculate payable emissions: chargeable emissions − free allocation. The final CBAM cost is payable emissions × ETS certificate price. If default values are used instead of actual data, a markup of ×1.10 (2026), ×1.20 (2027), or ×1.30 (2028+) applies.

CBAM follows a phased implementation timeline. Importers must prepare for each stage:

Transitional Period (2023–2025): Quarterly reporting required. No financial payments. First declaration due September 30, 2027 (covering 2026).

Permanent Regime (2026 onward): Certificate purchasing begins. Free allocation phase-out starts at 2.5%. Reports shift from quarterly to annual, though quarterly tracking remains essential for accurate annual declarations.

Full Phase-Out (2034): Free allocation reaches zero. Importers pay full CBAM certificate price on all covered emissions.