The Rationale for a Carbon Border Adjustment
The EU's ambitious climate policy — particularly the tightening of the EU Emissions Trading System (ETS) under Fit for 55 — raised legitimate concerns about carbon leakage: the risk that European producers, facing higher carbon costs, would lose market share to competitors in countries with less stringent climate regulation, or that production would simply shift to those countries, resulting in no net global emissions reduction.
The Carbon Border Adjustment Mechanism (CBAM), established under Regulation (EU) 2023/956, is designed to address this risk by placing a carbon price on imports of certain goods from outside the EU, equivalent to the carbon cost that EU producers bear under the ETS.
The Six Covered Sectors
CBAM initially covers the following six sectors, selected based on their carbon intensity and the significance of the carbon leakage risk:
- Cement
- Iron and steel
- Aluminium
- Fertilisers
- Electricity
- Hydrogen
The European Commission is required to review whether to extend CBAM to additional goods and sectors by 2030.
The Transitional Phase: October 2023 to December 2025
The transitional phase, which runs from October 1, 2023 to December 31, 2025, is a reporting-only period. During this phase, EU importers of CBAM goods must report the embedded greenhouse gas emissions in their imports on a quarterly basis, but are not yet required to purchase CBAM certificates. The purpose is to collect data, build administrative capacity, and allow third-country operators to prepare.
Key Reporting Requirements
- Quarterly reports submitted to the national competent authority
- Disclosure of direct and indirect embedded emissions per tonne of goods
- Identification of the country of origin and production facility
- Carbon prices paid in third countries (if any) can be deducted
Full Implementation from January 2026
From January 1, 2026, importers who have been authorized as CBAM declarants will be required to purchase and surrender CBAM certificates corresponding to the verified embedded emissions of their imports. The price of CBAM certificates will be linked to the weekly average auction price of EU ETS allowances.
CBAM effectively exports the EU's carbon price signal to the global trade system, creating an incentive for third-country producers to decarbonize or face competitive disadvantage in the EU market.
Strategic Implications for Carbon Markets
CBAM reinforces the primacy of the EU ETS carbon price and accelerates the convergence of carbon pricing globally. As of late 2023, the EUA price implied a CBAM levy of approximately EUR 50–80 per tonne of embedded CO₂, depending on the commodity. This price signal sends a powerful message to global producers and investors: the cost of carbon is becoming structural, not transitional.