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 encourage global decarbonisation. Its main goal is to ensure that goods imported into the EU bear a carbon cost equivalent to that paid by European producers under the EU Emissions Trading System (EU ETS).

What is CBAM and why is it being implemented?

CBAM aims to create a level playing field for European companies subject to strict climate rules. Without comparable rules abroad, production could shift to countries with weaker climate policies, moving emissions outside the EU rather than reducing them. CBAM addresses this by extending a carbon price to imports.

How CBAM works

Importing companies must:

• Declare the emissions embedded in imported products.
• Purchase CBAM certificates at a price linked to the EU ETS, where they are above the applicable thresholds.
• Claim a deduction where a carbon price has already been paid in the country of origin, avoiding double charging.

Affected sectors

In its current scope, CBAM applies to carbon-intensive goods at risk of leakage:

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

The mechanism may expand to further products in future.

Implementation timeline

CBAM has been introduced gradually:

• 2023 to 2025: a transitional phase with reporting obligations but no financial payments.
• From 1 January 2026: the definitive regime, which creates a financial obligation linked to embedded emissions. In practice, importers will buy and surrender CBAM certificates from February 2027 for emissions embedded in goods imported during 2026.

Ahead of the definitive phase, the EU adopted an Omnibus simplification in 2025 that introduced a 50-tonne annual exemption threshold per importer for goods such as iron and steel, aluminium and fertilisers. This removes most small importers from the obligations while still covering the large majority of embedded emissions.

Implications for business and sustainability

CBAM is expected to drive the decarbonisation of global supply chains by encouraging climate transparency, investment in clean technologies and alignment with the goals of the Paris Agreement. Companies importing into the EU need reliable data on the embodied carbon of their products, using methodologies consistent with standards such as ISO 14067.

Criticisms and challenges

Critics argue that CBAM could create trade tensions or place a disproportionate burden on developing countries. The EU maintains that the mechanism is designed to be compatible with World Trade Organization rules and includes engagement with partner countries. CBAM forms part of the European Green Deal and the Fit for 55 package.

At Manglai we help companies measure their carbon footprint and prepare their sustainability reporting and CBAM data. Discover how Manglai can help you.