Are you importing energy-intensive goods into the European Union? If so, the Carbon Border Adjustment Mechanism (CBAM) should already be on your radar. What began as a reporting exercise has now entered a phase where it will generate tangible economic consequences. For many businesses, this marks a fundamental shift in how carbon costs are embedded in cross-border trade.
CBAM is one of the key instruments of the European Green Deal. Its purpose is to ensure that carbon-intensive goods imported into the EU bear a carbon cost comparable to that imposed on EU producers under the EU Emissions Trading System (EU ETS). By that, CBAM aims to prevent so-called “carbon leakage” — the relocation of production to jurisdictions with less stringent climate policies; by that, it should safeguard the competitiveness of EU industry while advancing global climate objectives.
Within the EU, manufacturers in certain sectors must acquire emission allowances under the EU ETS corresponding to their greenhouse gas emissions. Historically, imports from third countries were not subject to an equivalent carbon cost, potentially giving non-EU producers a price advantage. CBAM is designed to address this imbalance. It effectively extends the carbon pricing logic to specific imported goods by requiring the purchase and surrender of CBAM certificates reflecting the embedded emissions of those goods.
From Transitional Reporting to Financial Obligation
Following the transitional period (autumn 2023 – end of 2025) during which affected businesses were required only to collect and report emissions data for statistical purposes, the current year represents a turning point. For the first time, CBAM will have a direct economic impact and importers must now prepare for the financial dimension of the regime. Throughout a calendar year (i.e. for 2026 for the first time), they will accumulate an obligation corresponding to the embedded CO₂ emissions in their imports. In the following year, they will be required to purchase and surrender CBAM certificates in the relevant volume. In practical terms, this transforms CBAM from a compliance exercise into a cost factor that must be integrated into pricing, procurement strategies, and contractual arrangements.
How Does CBAM Work in Practice?
CBAM currently applies to selected carbon-intensive goods, including cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen. The scope may evolve over time, and discussions are ongoing regarding potential adjustments and extensions.
The mechanism applies to imports of the covered goods from non-EU countries (excluding rest of EEA and Switzerland). The “authorised CBAM declarant” — typically the actual importer or a customs representative acting in its own name — is the primary obligated party.
The core of the system lies in calculating the embedded emissions of imported goods. This involves determining the direct (and in some cases indirect) greenhouse gas emissions associated with the production of the goods. Where reliable data from the non-EU producer is available, it must be used. In the absence of verified data, default values may apply, often resulting in less favourable outcomes.
Once the embedded emissions are established, the authorised declarant must acquire CBAM certificates corresponding to the calculated CO₂ equivalent. The price of CBAM certificates is linked to the weekly average auction price of EU ETS allowances. This ensures alignment between the internal carbon market and the border adjustment mechanism. Each year, declarants must surrender a number of certificates matching their verified emissions.
The administrative burden should not be underestimated. Registration, reporting, verification, certificate management, and potential audits all form part of the compliance framework. For many businesses, this will require new internal processes and coordination between procurement, logistics, finance, sustainability, and legal teams.
Who Is Affected — and How?
Importers are, naturally, at the forefront. For them, CBAM introduces both compliance complexity and additional cost. This may influence sourcing decisions, supplier negotiations, and long-term supply chain strategies.
However, the impact extends beyond importers. Distributors and other actors in the supply chain may see contractual adjustments and price revisions. Ultimately, some of the additional costs may be passed on to end customers, contributing to price increases in certain sectors.
For EU-based producers, CBAM represents a structural change in competitive dynamics. By levelling the carbon cost playing field, it reduces the price advantage of imports produced under less stringent environmental regimes. In this sense, CBAM addresses a long-standing market distortion.
Looking Ahead: Regulatory Developments and Strategic Considerations
The regulatory landscape remains dynamic. Even within the current year, further adjustments are possible. Discussions are ongoing regarding the precise scope of covered goods — for example, in relation to certain industrial fertilizers — and the technical parameters for emissions calculation.
Moreover, the relationship between CBAM and the EU ETS continues to evolve. Proposed reforms to the emissions trading system, including changes to allowance allocation and pricing mechanisms, may have a direct impact on the functioning and cost profile of CBAM. At the same time, CBAM must be understood within the broader ESG framework, where regulatory initiatives increasingly intersect with corporate reporting, supply chain transparency, and sustainability strategies.
In this environment, legal certainty and strategic foresight are invaluable.
Our Role
We closely monitor legislative and practical developments relating to CBAM, the EU ETS, and the wider ESG framework. Early preparation, clear internal responsibilities, and well-designed contractual frameworks can significantly reduce both legal and commercial risks related to this. We are ready to support you in navigating this new regulatory landscape — pragmatically, strategically, and with a clear focus on your business objectives.
