The European Union’s Carbon Border Adjustment Mechanism (CBAM) is not simply another layer of customs regulation; it represents a profound shift in global trade and climate policy. As a cornerstone of the European Green Deal and the “Fit for 55” package, CBAM is a strategic measure designed to prevent “carbon leakage”: a situation in which the EU’s climate ambitions could be undermined by external factors. Carbon leakage can occur in two ways: when EU companies relocate carbon-intensive production to countries with weaker climate policies, or when carbon-intensive imports displace EU-produced goods. CBAM is the EU’s direct response, applying an equivalent carbon price to certain imports to level the playing field and incentivise cleaner production worldwide.

A Two-Phase Implementation

CBAM is being introduced gradually, through a two-stage process that began in late 2023 and will be fully operational by 2026. This phased approach provides stakeholders with a predictable transition.

• Transitional Phase (2023–2025): Running from 1 October 2023 to 31 December 2025, this “pilot and learning phase” imposes reporting requirements but no financial obligations. Importers of covered goods must submit quarterly reports detailing the embedded greenhouse gas (GHG) emissions of their imports. The first report, covering Q4 2023, was due on 31 January 2024. Non-compliance can result in substantial penalties. To ease adjustment, companies initially had several reporting methodology options, but flexibility has since been curtailed, with default reference values only permissible until July 2024.
• Definitive Phase (from 2026): Beginning on 1 January 2026, this stage introduces the financial element. Importers will need to purchase and surrender CBAM certificates annually, equivalent to the emissions embedded in their imports during the previous year. This ensures equalisation of carbon pricing between EU domestic production and imports.

Linking CBAM to the EU ETS

The financial core of CBAM is directly tied to the EU’s Emissions Trading System (ETS). The price of CBAM certificates is pegged to weekly, volume-weighted ETS allowance prices. This guarantees that the carbon cost of imports matches that borne by EU producers. Importers can deduct any carbon price already paid in the country of origin. This policy coincides with the EU’s gradual phase-out of free ETS allowances between 2026 and 2034, ensuring a level playing field between EU and non-EU producers.

Scope and Coverage

Initially, CBAM targets six highly carbon-intensive sectors at risk of carbon leakage: cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. It also applies to selected precursors and downstream products, such as screws and bolts, making circumvention more difficult. Once fully phased in, CBAM is expected to capture over half of the emissions from ETS-covered sectors, significantly strengthening its impact.

Implications for Importers and Supply Chains

The burden of carbon pricing has shifted from EU producers to importers of covered goods, creating complex compliance and financial obligations. Importers are wholly dependent on emissions data provided by non-EU suppliers. As a result, they must actively engage with suppliers, often assisting them in gathering accurate data to avoid financial penalties of up to €50 per tonne of CO₂ during the transitional phase. In effect, CBAM externalises part of the EU’s regulatory framework, compelling non-EU suppliers to meet stringent data standards if they wish to maintain access to the European market.

Beyond Borders: CBAM’s Global Impact and the Challenges Ahead

Although CBAM is an internal EU policy, its implications are global. From Brussels’ perspective, it acts as a powerful catalyst for worldwide decarbonisation. By applying a carbon price to imports, CBAM pushes foreign producers to reduce emissions in order to remain competitive and encourages governments to adopt their own carbon pricing systems. Any proven domestic carbon payments are deductible, giving other countries a strong incentive to implement carbon taxes or trading schemes so revenues remain in their own treasuries rather than flowing to the EU.

However, CBAM has sparked considerable international criticism. Developing economies, in particular, face significant challenges. Many lack the institutional and technical capacity to implement the complex monitoring, reporting, and verification (MRV) requirements. The administrative burden and compliance costs may be prohibitive for small and medium-sized enterprises in low- and middle-income countries, risking their exclusion from global supply chains. As one expert has warned, the real issue is less the direct tariff than the “cascading effects” of enforcement and bureaucracy.

Looking forward, the EU intends to expand CBAM’s coverage. This will occur both vertically, to include upstream inputs such as scrap and coke, and horizontally, to new sectors including glass, ceramics, chemicals, and polymers. Legislative proposals are expected in early 2026, with new products phased in from 2027. By 2030, CBAM is anticipated to cover nearly all sectors included in the EU ETS.

Nevertheless, the policy faces vulnerabilities. Loopholes such as the “scrap loophole” (blending in recycled scrap to artificially reduce reported emissions) and “resource shuffling” (diverting lower-carbon products to the EU market while selling higher-carbon goods elsewhere) could weaken effectiveness. Ongoing consultations aim to close these gaps and preserve environmental integrity.

Ultimately, CBAM is a landmark in both international trade and climate policy. Its success will hinge on whether it drives genuine global decarbonisation without unduly penalising developing economies or sparking trade disputes.

How AFS Energy Can Support Businesses

The EU’s Carbon Border Adjustment Mechanism introduces unprecedented complexity and risk for businesses trading with Europe. Data collection, reporting, and financial compliance requirements pose major challenges, especially for companies with complex global supply chains.

AFS Energy is ideally placed to help organisations navigate this regulatory transformation. We provide:

• Strategic advisory services to clarify CBAM obligations and develop robust compliance strategies.
• Support for EU importers in establishing transparent emissions data frameworks, integrating new requirements into procurement, and preparing for financial obligations under the definitive phase.
• Guidance for non-EU producers to build MRV systems, understand data requirements, and safeguard market access.

Rather than treating CBAM as a threat, we can help you turn it into a strategic advantage, strengthening your competitiveness while contributing to a more sustainable future.