What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is a policy introduced by the European Union in October 2023 that places the import duty on the greenhouse gas (GHG) emissions in the production of selected imports. The industries currently covered under this policy include aluminium, cement, steel, fertilisers, electricity, and hydrogen. CBAM represents one of the most significant developments in international climate policy, marking a new era in how trade and carbon regulation intersect.
The primary aim of CBAM is the prevention of carbon leakage — when companies move production to countries with weaker climate rules and thus lower cost of production. By ensuring fair competition between EU producers who face carbon costs under the EU Emissions Trading System (EU ETS) and non-EU producers who may not face equivalent carbon pricing, CBAM levels the playing field. This ensures that imported goods carry the same carbon cost as those produced within the EU. Imports from countries already in the EU ETS (such as Norway, Liechtenstein, Iceland, and Switzerland) are exempted.
In essence, CBAM extends the EU's climate ambitions beyond its borders. It sends a clear signal to trading partners that carbon-intensive production methods will no longer enjoy a competitive advantage when exporting to the EU market. For businesses involved in the production or export of carbon-intensive goods, understanding CBAM is not optional — it is a strategic imperative.
CBAM Timeline
CBAM is being implemented in two distinct phases, allowing businesses and regulatory bodies to gradually adapt to the new requirements. Understanding this phased timeline is critical for compliance planning.
Transitional Phase (October 2023 – December 2025)
From October 2023 to the end of December 2025, companies are obligated to report on their emissions. There are no financial obligations within this period. EU importers of CBAM-covered goods are required to submit quarterly CBAM reports detailing the embedded emissions of their imported products. Importers do not need to purchase CBAM certificates during this phase.
The quarterly reports must include information on the volume of imported goods, the direct and indirect embedded emissions, and any carbon price already paid in the country of origin. This phase allows importers, producers, and regulators to test reporting systems, identify data gaps, and refine methodologies before the financial mechanism takes effect. Reports are due within one month after the end of each quarter.
Definitive Regime (2026 Onwards)
Starting from January 2026, the definitive regime introduces stricter CBAM reporting, where companies will be financially obligated. EU importers must submit annual CBAM declarations, detailing the total embedded emissions in their imported goods for the preceding calendar year. They are also required to purchase and surrender CBAM certificates corresponding to the embedded emissions declared.
The price of CBAM certificates is linked to the weekly average auction price of EU ETS allowances, ensuring alignment with the carbon price faced by EU domestic producers. The companies importing CBAM goods need to apply from January 1, 2025, to become Authorised CBAM Declarants. The restrictions will be imposed from January 1, 2026, allowing only registered declarants to import CBAM goods. Without this authorisation, importers will be unable to clear CBAM-covered goods through EU customs.
2025 EU Omnibus Simplification Package Updates
The EU's 2025 Omnibus simplification package introduced several important changes to the CBAM framework, designed to ease the compliance burden while maintaining the policy's environmental objectives. Businesses must incorporate these updates into their compliance planning.
50-Tonne Exemption Rule
Importers bringing in less than 50 tonnes of a CBAM product annually are exempt from reporting and certificates, but must track volumes. This exemption is designed to reduce the administrative burden on smaller importers while ensuring that significant volumes of carbon-intensive imports remain subject to CBAM requirements.
Narrowed Emissions Scope
CBAM now covers only direct emissions, including electricity use. The emissions scope does not cover steam, heat, and cooling, easing reporting requirements. This narrowing simplifies the calculation process for producers and importers while still capturing the most material emission sources.
Simplified Authorisation
Third parties can now file on behalf of companies, and a single EU portal has been established to streamline the authorisation and reporting process. This simplification reduces the administrative complexity for businesses operating across multiple EU member states.
New Deadlines
Tracking begins in 2026, but the first certificates are due in 2027. The new deadlines for reports are 31 August and for certificates are 31 October. These extended timelines give businesses additional time to gather verified data and ensure accurate compliance submissions.
Products Covered Under CBAM
CBAM currently covers six carbon-intensive product categories that have been identified as being at the highest risk of carbon leakage. These sectors were specifically chosen because they are energy-intensive and trade-exposed, meaning their production processes generate significant greenhouse gas emissions and they face strong international competition.
| Product Category | Key Details |
|---|
| Aluminium | Covers unwrought aluminium, aluminium powders, bars, rods, profiles, wires, plates, sheets, and foil. The aluminium smelting process is extremely energy-intensive. |
| Cement | Includes Portland cement, aluminous cement, and other hydraulic cements. Cement production is one of the largest industrial sources of CO2 emissions globally. |
| Iron and Steel | Encompasses a wide range of iron and steel products including crude steel, flat-rolled products, bars, rods, angles, shapes, and sections. Steel manufacturing involves high-temperature processes with significant emissions. |
| Fertilisers | Covers nitrogen-based fertilisers including ammonia, nitric acid, urea, and ammonium nitrate. Fertiliser production, particularly ammonia synthesis, is highly energy-intensive. |
| Electricity | Covers imported electricity where the carbon intensity of generation varies significantly by country and source. |
| Hydrogen | Includes hydrogen produced via various methods. Hydrogen production from fossil fuels without carbon capture generates substantial emissions. |
The EU plans to review and potentially expand CBAM coverage over time. By 2030, the scope may be extended to include more product categories and eventually cover the full range of products under the EU ETS. Businesses in adjacent sectors should proactively prepare for potential inclusion.
Understanding Embedded Emissions
Embedded emissions refer to the greenhouse gas emissions released during the production process of CBAM-covered goods. Accurately calculating these emissions is the cornerstone of CBAM compliance. Under the 2025 Omnibus updates, CBAM now focuses on direct emissions, including electricity use, while excluding steam, heat, and cooling from the emissions scope.
Calculation-Based Approach
The calculation-based approach determines emissions using activity data combined with established emission factors or the mass balance method. Under this approach, producers use data on the quantities of fuels, raw materials, and process inputs consumed during production, multiplied by standardised or facility-specific emission factors, to calculate total embedded emissions.
- Emission Factor Method: Multiplies activity data (e.g., fuel consumption, raw material usage) by published or facility-specific emission factors to quantify GHG emissions.
- Mass Balance Method: Uses the carbon content of all input materials (fuels, feedstocks, and raw materials) entering the production process and compares it with the carbon content of outputs (products, by-products, and waste) to determine emissions.
Measurement-Based Method
The measurement-based method uses real-time, continuous monitoring of actual GHG concentration and flue gas volume at the point of emission. This approach employs Continuous Emission Monitoring Systems (CEMS) installed at the facility to directly measure the quantity of greenhouse gases released during production.
While the measurement-based method can provide higher accuracy for specific installations, it requires significant investment in monitoring infrastructure. The calculation-based approach is more commonly used due to its broader applicability and lower implementation cost.
Direct vs. Indirect Emissions
- Direct Emissions: GHG emissions from the production process itself, including emissions from fuel combustion, process reactions, and any other on-site sources directly attributable to the manufacture of the goods. Under the updated CBAM framework, direct emissions including electricity use are the primary focus.
- Indirect Emissions: Emissions associated with the generation of electricity consumed during the production process. Under the 2025 Omnibus updates, the scope has been narrowed to exclude steam, heat, and cooling from the emissions calculation, simplifying reporting requirements.
CBAM Compliance Steps
Achieving and maintaining CBAM compliance requires a systematic approach across several key steps. Whether you are an EU importer or a non-EU producer supplying the EU market, understanding these steps is essential.
Step 1: Registration as Authorised CBAM Declarant
The companies importing CBAM goods need to apply from January 1, 2025, to become Authorised CBAM Declarants. The restrictions will be imposed from January 1, 2026, allowing only registered declarants to import CBAM goods. The application process requires detailed information about the importer's business operations, trade volumes, and supply chain relationships. Under the Omnibus simplification package, third parties can now file on behalf of companies through a single EU portal.
Step 2: Quarterly CBAM Reports (Transitional Phase)
During the transitional phase (October 2023 to December 2025), importers must submit quarterly CBAM reports to the European Commission's transitional registry. Each report must detail the volume of goods imported, the direct and indirect embedded emissions per product type, and any carbon price already paid in the country of origin. Reports are due within one month after the end of each quarter. Importers bringing in less than 50 tonnes of a CBAM product annually are exempt from reporting under the 50-tonne exemption rule, but must track volumes.
Step 3: Annual CBAM Declarations (Definitive Regime)
From 2026 onwards, Authorised CBAM Declarants must file an annual CBAM declaration showing imports and related emissions from the previous year. Tracking begins in 2026, but the first certificates are due in 2027. The new deadlines under the Omnibus updates are 31 August for reports and 31 October for certificates. The declaration must include the total quantity of each type of CBAM good imported, the total embedded emissions (in tonnes of CO2 equivalent), and the number of CBAM certificates to be surrendered.
Step 4: Purchase and Surrender of CBAM Certificates
Importers must buy CBAM certificates that correspond to the amount of embedded carbon dioxide equivalent (CO2e) emissions. Each certificate represents one tonne of CO2 equivalent of embedded emissions. The price of certificates is calculated weekly based on the average closing price of EU ETS allowances. Declarants must surrender certificates equal to the embedded emissions declared, adjusted for any carbon price already paid in the country of origin to avoid double charging. Unused certificates can be repurchased by the national authority at the original purchase price.
Implications of CBAM
CBAM has far-reaching implications that extend beyond simple regulatory compliance. Businesses across the global supply chain must understand and prepare for the financial, operational, and strategic impacts of this landmark policy.
Financial Impact
The most immediate impact of CBAM is financial. Importers will face increased costs due to the requirement of CBAM certificate purchases, which directly adds to the landed cost of imported goods. The magnitude of this cost depends on the carbon intensity of the production process and the prevailing EU ETS carbon price. For carbon-intensive products like steel and cement, these costs can be substantial. Higher product prices in affected sectors are expected as importers pass on the additional carbon costs to downstream buyers.
Operational Changes
CBAM necessitates significant operational changes for both EU importers and their non-EU suppliers. Companies must adjust supply chains by working with suppliers who can provide verified emissions data. Importers must establish new data collection workflows, reporting systems, and internal controls to ensure accurate and timely compliance. Non-EU producers must be prepared to share detailed production and emissions data with their EU customers, which may require new monitoring systems, data management processes, and third-party verification arrangements.
Strategic Transformation
Beyond compliance, CBAM serves as a powerful catalyst for strategic transformation. Companies must accelerate their low-carbon transitions, invest in greener production technologies, and reorient sourcing toward lower-emission suppliers and regions. Businesses that proactively decarbonise their operations and supply chains will gain a competitive advantage in accessing the EU market.
Impacts on Developing Countries
CBAM has particularly significant implications for developing countries that export carbon-intensive goods to the EU. These nations may face reduced competitiveness in the EU market if their industries are unable to decarbonise at the pace required. The compliance costs can be significant for developing economies. This has sparked ongoing debates about the need for technical and financial support to help developing economies transition to cleaner production methods while maintaining their export competitiveness.
Penalties for Non-Compliance
The European Commission has established a clear penalty framework to ensure compliance with CBAM requirements. Non-compliance can result in significant financial and market access consequences for businesses.
Financial Penalties During Transitional Phase
During the transitional phase, reporting declarants may face penalties ranging between EUR 10 and EUR 50 for each tonne of unreported emissions. The exact penalty amount depends on the severity and duration of the non-compliance, as well as whether it is a first-time or repeated offence. Importers who fail to report or who submit incomplete or inaccurate data will be subject to corrective measures and potential enforcement actions.
Market Access Restrictions
Under the definitive regime, non-compliance with CBAM obligations can lead to market access restrictions. Importers who fail to register as Authorised CBAM Declarants or who do not surrender sufficient CBAM certificates may be restricted from importing CBAM-covered goods into the EU. Customs authorities have the power to block consignments from non-compliant importers.
Loss of EU Market Access
For persistent non-compliance, the consequences escalate significantly. Repeated failures to meet CBAM obligations can result in the revocation of Authorised CBAM Declarant status, effectively barring the importer from the EU market for CBAM-covered goods. Given the scale and importance of the EU market, this represents a severe business risk that companies cannot afford to overlook.
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