Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) is a regulatory tool developed by the European Union to prevent carbon leakage and promote global decarbonization.

Its main goal is to ensure that imported products into the EU are subject to a carbon cost equivalent to that paid by European producers under the EU Emissions Trading System (EU ETS).

What is the CBAM and why is it being implemented?

The CBAM aims to create a level playing field for European companies that are subject to strict environmental regulations. Without similar rules abroad, foreign companies could produce goods at a lower cost while generating higher emissions, effectively shifting pollution outside the EU—a phenomenon known as carbon leakage.

How the CBAM works

Importing companies must:

• Declare the embedded emissions in imported products.
• Purchase CBAM certificates equivalent to the EU ETS carbon price.
• Claim reductions if the country of origin applies its own carbon pricing mechanism.

Affected sectors

In its initial phase, the CBAM applies to sectors with high carbon intensity and risk of leakage, including:

• Cement
• Iron and steel
• Aluminium
• Fertilizers
• Electricity
• Hydrogen

Over time, the mechanism may expand to include additional products.

Implementation timeline

The CBAM is being introduced gradually:

• 2023–2025: Transitional phase with reporting obligations but no financial payments.
• From 2026 onward: Full implementation requiring the purchase of CBAM certificates.

Implications for business and sustainability

The CBAM is expected to encourage the decarbonization of global supply chains, promoting:

• Greater climate transparency.
• Investment in clean technologies.
• Alignment with the Paris Agreement’s climate goals.

Criticisms and challenges

Critics argue that the CBAM could create trade tensions or negatively affect developing countries. The EU, however, maintains that the mechanism complies with WTO rules and includes cooperation mechanisms for partner countries.