The European Union Carbon Border Adjustment Mechanism (CBAM) is a landmark environmental policy designed to uphold the EU’s ambitious climate objectives while preserving fair competition in international trade. Its core aim is to prevent “carbon leakage”, a phenomenon in which strict climate regulations in one region, such as the EU, incentivise emissions-intensive production to relocate to countries with laxer environmental rules. By levying a carbon charge on the emissions embedded in imported goods, CBAM brings foreign producers into alignment with the carbon costs already borne by EU producers under the EU Emissions Trading System (EU ETS).

Initially, CBAM covers a defined list of 303 energy-intensive products, including iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen, which together represent around 3% of EU imports. CBAM is not a conventional tariff; it is a strategic climate policy tool that prices carbon embedded in goods based on their production emissions. This ensures that importers cannot bypass EU climate standards by sourcing cheaper, high-emission goods from abroad.

CBAM's Phased Rollout: A Roadmap for Importers

CBAM is being implemented through a phased approach, starting with a transitional period focused on reporting, followed by a definitive phase that introduces financial obligations. For European importers, understanding and preparing for each phase is essential.

The transitional period, running from October 2023 to December 2025, focuses on data reporting requirements. During this time, importers must submit quarterly reports outlining the volume of goods imported and their associated embedded emissions. These reports must specify the type and quantity of goods, country of origin, production site, embedded emissions (direct and, where applicable, indirect), and any carbon pricing already paid in the country of origin.

An important update is that, from 1 January 2025, only the EU’s official calculation methodology may be used for determining emissions, phasing out simplified methods such as default values or third-country equivalents. Crucially, there is no financial obligation to purchase CBAM certificates during this period, offering businesses a grace window to adapt their operational and financial systems. However, underestimating the complexity of data collection and emissions verification could result in a steep learning curve and financial disruption in 2026.

The definitive period begins on 1 January 2026. From this point, importers must purchase CBAM certificates to cover the embedded emissions of their goods. The cost of these certificates will mirror the average auction price of EU ETS allowances, ensuring that domestic and foreign producers face equivalent carbon costs. Reporting will shift to an annual format, with one verified report due by 31 May each year for the previous calendar year.

To ease financial pressures, the EU has reduced the certificate holding requirement to 50% of total emissions at the end of each quarter (down from 80%). Additionally, CBAM recognises carbon pricing paid abroad at any point in the supply chain, helping to prevent double charges and promote equitable treatment. A proposal adopted on 26 February 2025 seeks to simplify CBAM further by exempting companies importing fewer than 50 tonnes of CBAM-covered goods annually, thereby alleviating the administrative burden for smaller importers.

Key Compliance Strategies for European Importers

To comply effectively with CBAM, European importers must adopt a series of proactive strategies:

1. Register as an Authorised CBAM Declarant
   This is the initial step for all importers of in-scope goods. The new digital CBAM Registry enables formal registration, data uploads, and facilitates streamlined information exchange, reducing administrative load.
2. Accurate Emissions Calculation and Data Collection
   Importers must work closely with their non-EU producers to secure accurate data on direct, and in some cases, indirect (e.g. electricity use for cement or fertilisers), CO₂ emissions. From 1 January 2025, the use of the EU’s official emissions calculation method is mandatory, necessitating transparency throughout the supply chain. Suppliers may require support in building capacity to meet these new expectations.
3. Third-Party Verification
   Embedded emissions figures must be independently verified by an accredited verifier, potentially involving site visits to facilities outside the EU. Only actual emissions data must be verified; default values are exempt, streamlining the process and removing redundant verification steps.
4. Financial Planning for Certificate Procurement
   From 2026, companies will need to budget for purchasing CBAM certificates. The delay in financial obligation, purchases for 2026 emissions are due in 2027, provides time for financial strategy alignment, but the cost is expected to be substantial and linked to EUA prices under the EU ETS.
5. Internal Awareness and Training
   Procurement and finance teams must be fully briefed on CBAM regulations to avoid errors and delays. Training should extend across procurement, finance, compliance, and operations to ensure a harmonised approach.
6. Ongoing Monitoring of Regulatory Developments
   CBAM is a dynamic framework, with further updates to implementation rules, thresholds, and guidance expected. Keeping abreast of these developments is essential for timely adaptation and continued compliance.

Supply Chain Adjustments and Strategic Sourcing

CBAM necessitates more than compliance, it calls for structural supply chain changes and a reassessment of sourcing strategies.

The mechanism incentivises EU importers to prioritise low-emission suppliers, particularly those in countries with carbon pricing schemes or low-carbon production methods. Engaging suppliers now to collect emissions data is critical, as many may not yet have the necessary systems in place. Importers may need to provide technical or financial support to bring suppliers up to standard.

The policy’s impact also extends beyond directly covered sectors. EU industries relying on inputs from CBAM-affected sectors, downstream industries, will experience higher input costs. These sectors, which account for 95% of the EU’s total value added, may face declining competitiveness both within the EU and in export markets. Industries such as electrical equipment and machinery are particularly exposed.

This interdependence highlights the domino effect of carbon pricing: businesses in non-covered sectors must analyse their supply chains to assess indirect exposure to CBAM and develop contingency plans accordingly.

While CBAM aims to combat carbon leakage and drive global decarbonisation, there is a risk of “creative compliance”, for instance, where countries export only their cleanest products to Europe, while using high-emission ones domestically. Nonetheless, CBAM strongly incentivises global adoption of carbon pricing, as countries would prefer to retain the associated revenue internally rather than see it collected at the EU border. Companies investing early in clean technologies stand to benefit, while those that lag may find themselves at a competitive disadvantage.

How AFS Energy Supports Clients

AFS Energy offers comprehensive support for European importers adjusting to CBAM. The firm provides strategic guidance to help businesses interpret CBAM regulations and apply them correctly to imported goods. Their services include:

• Real-time insights into regulatory updates
• Support in emissions data collection and third-party verification
• Procurement planning and financial impact modelling
• Strategic supply chain review to identify CBAM exposure

AFS Energy positions CBAM not merely as a regulatory hurdle but as a strategic opportunity. Companies that take full advantage of the transitional period, by building robust data infrastructures, engaging their suppliers, and simulating the financial effects of certificate purchases, will emerge more resilient and competitive.