How the EU Carbon Border Adjustment Mechanism (CBAM) Works
Aug 1, 2025
1. What is CBAM and why did the EU create it?
The Carbon Border Adjustment Mechanism is the EU’s new “carbon customs duty.” Importers of selected, carbon-intensive goods must account for the CO₂ emitted during production abroad, so those imports face the same carbon cost as identical goods made inside the EU under the Emissions Trading System (EU ETS). The goal is to stop carbon leakage—the offshoring of heavy industry to jurisdictions with laxer climate policies—and to keep the EU’s 2040 climate targets on track.
2. Legal foundation & evolution
Regulation (EU) 2023/956 – adopted May 2023, creates CBAM.
Implementing Regulation 2023/1773 – August 2023, sets detailed reporting rules for the 2023-25 transition.
“Omnibus Simplification Package” – published 26 February 2025; lightens rules for small importers and streamlines administration.
Political deal on the package reached by Parliament and Council on 18 June 2025.
3. Covered goods in 2025
Cement (CN 2523) – indirect electricity emissions counted from 2026.
Iron & Steel (CN 7206-7229, including DRI/HRC precursors).
Aluminium (CN 7601-7609).
Fertilisers (CN 3102-3105) – covers N₂O from nitric-acid route.
Electricity (CN 2716, ex-27.16) – imports via third-country interconnectors.
Hydrogen (CN 2804.10) – added in the final regulation.
Coming soon: A consultation launched 2 July 2025 explores adding downstream metal parts and other sectors.
4. Implementation timeline – milestones
1 Oct 2023 – Transitional phase begins; importers submit quarterly emissions reports only.
31 Dec 2025 – Transitional phase ends.
1 Jan 2026 – Definitive regime starts; importers must be authorised CBAM declarants and start buying CBAM certificates.
31 May 2027 – First annual surrender of certificates covering 2026 imports.
2026 → 2034 – Free EU ETS allowances for EU producers phase out while CBAM surrender obligations ramp to 100 %.
Q4 2025 – Commission’s Article 30 review report due; could propose more goods/sectors.
5. Transitional-phase obligations (2023-25)
Quarterly reports are due one month after each quarter (e.g., Q2 2025 report due 31 July 2025).
Reporting methods:
Full EU methodology (preferred).
Recognised equivalent method.
Default values (allowed only until July 2024).
Submission: via the CBAM Transitional Registry (XML/XSD or API).
Penalties: up to €50 per t CO₂e for late or inaccurate reports.
6. Definitive regime mechanics (from 2026)
Authorisation: Obtain “authorised CBAM declarant” status before importing.
Buying certificates: Member States sell CBAM certificates on a central platform at a price linked to the weekly average EU ETS (EUA) auction price.
Annual declaration (by 31 May): Declare verified embedded emissions for the previous calendar year and surrender matching certificates (you may re-sell up to one-third if you over-bought).
Deductions: If a verifiable carbon price was paid abroad, subtract that cost from the certificates due.
7. Calculating CBAM liability – worked example (steel coil, 2026)
Verified emissions intensity: 1.9 t CO₂e per tonne.
Import volume: 1 000 t → 1 900 t CO₂e embedded.
Average EUA price (reference week): €75 per t.
No foreign carbon price paid.
Liability = 1 900 t × €75 = €142 500.
8. Simplification & de minimis threshold (2025 reform)
Old rule: €150-per-consignment exemption (complex and rarely used).
New rule: 50 t of CBAM goods per importer per year – stay below that mass threshold and you are exempt.
About 90 % of importers (mostly SMEs) now fall outside CBAM, while 99 % of embedded emissions remain covered.
9. Enforcement & penalties in the definitive regime
Failure to surrender certificates: penalty equals price of missing certificates × 130 % (mirrors EU ETS).
Customs can block future imports for repeat offenders.
Member States may impose additional fines under national law.
10. Governance – who does what?
European Commission (DG TAXUD): Writes rules, operates the certificate platform and Registry, publishes the weekly CBAM price.
National Competent Authorities: Issue authorisations, audit declarations, impose penalties.
Customs authorities: Stop shipments if the declarant lacks authorisation or is in default.
11. Interaction with the EU ETS
As free EU ETS allowances for EU producers wind down between 2026 and 2034, CBAM obligations rise proportionally, ensuring that domestic and imported products face equal carbon costs.
12. Business implications – your action checklist for 2025-26
Map your supply chain. List HS/CN codes and verify whether you exceed 50 t of CBAM goods per year.
Collect primary emissions data. Push suppliers to provide cradle-to-gate CO₂ numbers using the EU method; better data means fewer certificates.
Register early & train staff. Secure CBAM Registry access and train teams to file quarterly XML reports.
Track the EUA price. Your certificate bill follows the EU ETS; consider hedging or building an internal carbon budget.
Update contracts. Insert clauses that allocate CBAM costs between buyer and seller.
13. What’s next? (H2 2025 → 2030)
Article 30 review (Q4 2025): Expected to propose adding downstream metal products, certain chemicals, and indirect electricity emissions.
Export competitiveness: On 3 July 2025 the Commission floated a carbon-leakage mitigation tool for EU exporters (e.g., export rebates).
Global convergence: The UK, Canada, and others are drafting their own border measures; coordination talks likely in 2026-27.
14. Key take-aways
CBAM is already live in its reporting-only phase—companies must gather data now to avoid trouble later.
Certificate costs mirror EU ETS volatility, so cutting embedded emissions is a direct cost hedge.
The 2025 simplification spares most SMEs, but large importers remain fully exposed.
Scope creep is inevitable: the Commission aims to cover most EU ETS sectors by 2030.
Companies that measure, verify, and reduce embedded emissions will gain both cost and market advantages in a carbon-constrained trade environment.
