As the European Union accelerates its climate ambitions, businesses face a new frontier in carbon regulation: the Carbon Border Adjustment Mechanism (CBAM). While CBAM entered its transitional reporting phase on 1 October 2023, the clock is ticking towards full implementation, with financial obligations set to begin in 2026. By 31 December 2025, companies must be fully prepared to report and pay for the embedded emissions of certain imported goods. Proactive preparation is therefore essential to avoid significant financial and reputational risks.

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What is CBAM and Why Does it Matter?

CBAM is a landmark EU policy designed to apply a carbon price to specific imported goods, ensuring that foreign producers face similar costs to EU-based manufacturers operating under the EU Emissions Trading System (EU ETS). Its principal aim is to prevent carbon leakage, where companies relocate production to regions with weaker emissions regulations, undermining the EU’s climate goals.

Initially, the mechanism targets six carbon-intensive industries considered at high risk of carbon leakage:

• Iron and steel
• Cement
• Fertilisers
• Aluminium
• Hydrogen
• Electricity generation and distribution

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The Road to Full Implementation: Key Dates

• 1 October 2023 – 31 December 2025: Transitional phase. EU importers must submit quarterly reports on the embedded emissions of their imports, but without financial obligations.
• 1 January 2026: Full implementation. Financial obligations for embedded emissions will apply, coinciding with the gradual phase-out of free allowances under the EU ETS by 2034.

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Challenges in CBAM Implementation

While CBAM’s objectives are clear, implementation poses several challenges, particularly around supply chain transparency and data accuracy:

• Complex Supply Chains: In sectors such as iron and steel, tracking embedded carbon is difficult due to globally fragmented supply chains, where raw materials undergo multiple transformations before reaching end customers.
• Varying Energy Mixes: High-energy industries such as aluminium face inconsistencies in carbon pricing, as production relies on diverse energy mixes worldwide.
• Emissions-Intensive Production: Cement production is inherently carbon intensive, meaning non-EU exporters may incur significant compliance costs.
• Impact on Developing Countries: Fertiliser producers and other exporters in developing economies may struggle to meet CBAM requirements owing to financial and technological constraints.
• Data Accuracy: Precise data on embedded emissions across the supply chain is critical. Inaccurate reporting risks penalties and higher costs.

The EU intends to extend CBAM’s scope to cover all EU ETS sectors by 2030, further emphasising the need for comprehensive preparation. The UK has also confirmed the introduction of its own CBAM from 2027, reflecting the EU’s approach for comparable sectors. Yet with full implementation fast approaching, critical details on CBAM’s practical application remain unpublished by the European Commission, adding further uncertainty.

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How AFS Energy Can Help You Prepare

The tightening of the EU ETS, combined with CBAM’s implementation, creates a dual challenge for businesses: rising carbon costs and increasingly complex reporting obligations. AFS Energy’s expertise in carbon compliance and market access makes us a trusted partner in navigating this landscape.

We can support your business through:

• Strategic Advisory on CBAM Compliance: Tailored guidance to assess CBAM’s impact on your operations and supply chain, enabling the development of a robust compliance strategy.
• Mitigating Financial Risk: Strategic advice to manage rising carbon costs and minimise the risk of non-compliance penalties. We help design efficient purchasing strategies for CBAM certificates and exploit synergies with the EU ETS to hedge exposure effectively.
• Market Insights: Our deep expertise in environmental commodity markets provides critical intelligence on how CBAM will reshape trade flows and market dynamics, supporting informed and timely decision-making.

The complexity of CBAM implementation, particularly around accurate tracking of embedded carbon across global supply chains, underscores the need for specialist expertise. By partnering with AFS Energy, you can transform this regulatory challenge into a strategic opportunity: ensuring compliance, managing costs, and strengthening your competitive position in international markets.