CBAM: From Transition to Definitive Phase
The Carbon Border Adjustment Mechanism (CBAM), established under Regulation (EU) 2023/956, completed its transitional reporting phase on December 31, 2025. From January 1, 2026, importers of goods in the six covered sectors — steel and iron, cement, aluminium, fertilisers, electricity, and hydrogen — are required to purchase CBAM certificates corresponding to the embedded carbon content of their imports, priced equivalently to EU ETS allowances.
The transition period (October 2023 – December 2025) was limited to reporting obligations only. The definitive phase introduces the financial obligation, fundamentally changing the cost structure for carbon-intensive imports into the EU.
The Economic Logic: Closing the Carbon Leakage Loophole
CBAM addresses a structural weakness of the EU ETS: carbon leakage. Under the pre-CBAM regime, EU manufacturers faced carbon costs that non-EU competitors did not, creating an incentive to shift production outside the EU or to import from jurisdictions with weaker carbon pricing. CBAM corrects this asymmetry by ensuring that the carbon content of imports faces the same price signal as EU domestic production.
The immediate effect is a material increase in the cost of carbon-intensive imports. For sectors with significant embedded carbon — particularly steel from blast furnaces, clinker-based cement, and ammonia-derived fertilisers — CBAM certificate costs at current EU ETS prices (approximately EUR 55–70/tCO2 in early 2026) represent a meaningful percentage of product value.
Investment Calculus: Three Direct Effects
For investors, CBAM changes the calculus in three concrete ways:
- EU manufacturing re-onshoring incentive: CBAM reduces the competitiveness advantage of carbon-intensive imports, potentially making investment in EU-based, low-carbon manufacturing more attractive on a risk-adjusted basis. Companies with credible net-zero transition plans and low embedded carbon per unit of output gain relative competitive advantage.
- Demand acceleration for carbon removals: As CBAM raises the explicit cost of carbon across supply chains, the option value of verified carbon removals as a cost-management instrument increases. Companies can use high-quality removal credits to manage residual emissions in their supply chains, particularly as CSRD-driven value chain emissions disclosure becomes standard practice.
- Carbon price signal amplification: CBAM reinforces the EU ETS price signal and reduces the probability of future ETS price collapse due to political pressure for free allowance distributions. A more durable ETS carbon price benefits all carbon removal investment strategies that rely on the long-term creditworthiness of carbon pricing as a revenue backstop.
CBAM Expansion: The 2028 Horizon
The European Commission has announced a planned expansion of CBAM coverage to approximately 180 product categories by 2028. The expansion is expected to encompass downstream steel products, selected chemicals and polymers, and potentially agricultural commodities with significant production-phase emissions. This trajectory — from 6 sectors in 2026 to potentially 180+ categories by 2028 — signals a structural tightening of carbon cost across EU value chains that will persist regardless of shorter-term political cycles.
Implications for Nature-Based Investment Strategies
For agroforestry and land-based carbon removal investments, CBAM's significance is indirect but material. As corporate supply chain carbon costs rise under CBAM, the demand for voluntary and compliance-grade carbon removals strengthens. Companies that cannot fully decarbonise their upstream supply chains — including importers of materials from jurisdictions without equivalent carbon pricing — will increasingly seek certified carbon removals as a cost-effective offsetting mechanism.
This demand dynamic benefits agroforestry projects with CRCF certification readiness, particularly those offering additional co-benefits such as biodiversity enhancement, soil restoration, and water retention that qualify under multiple sustainability reporting frameworks simultaneously.
CBAM does not directly affect agroforestry investment returns, but it materially strengthens the demand side of the carbon removal market by raising the cost of inaction for corporate emitters across EU supply chains.