Carbon Border Adjustment Mechanism

The primary objective of CBAM is to prevent carbon leakage—a phenomenon where domestic industries relocate production to jurisdictions with less stringent climate policies, thereby increasing total global emissions. By imposing a carbon cost on imports equivalent to the domestic carbon price, CBAM removes the economic incentive for offshoring emissions. This ensures that climate ambition does not come at the cost of deindustrialization.

CBAM obligations are calculated based on embedded emissions—the total greenhouse gases released during the production of a good. This includes both direct emissions (Scope 1) from production processes and, in later phases, indirect emissions (Scope 2) from purchased electricity. The methodology requires granular, facility-level data, moving beyond default values to verified actual emissions to reward cleaner producers.

Importers must purchase CBAM certificates corresponding to the total embedded emissions of their imported goods. The certificate price is pegged to the weekly average auction price of EU Emissions Trading System (EU ETS) allowances. This creates a direct financial link between the cost of carbon for domestic producers and foreign exporters. Certificates are non-tradeable and must be surrendered annually.

CBAM is not applied universally from day one. It targets carbon-intensive, trade-exposed (CITE) sectors initially. The first phase covers:

• Iron and Steel
• Cement
• Aluminium
• Fertilizers
• Electricity
• Hydrogen This phased approach allows for administrative learning and supply chain adaptation before expanding to downstream products.

The mechanism is explicitly structured to comply with World Trade Organization (WTO) rules. It operates on the principle of non-discrimination, treating imported goods identically to domestic products under the EU ETS. A key design feature is the deduction of any explicit carbon price already paid in the country of origin from the CBAM obligation, preventing double taxation and respecting foreign climate policies.

Only authorized declarants registered with national competent authorities can import CBAM goods. They must submit an annual CBAM declaration by May 31st, detailing the quantity of imported goods, their embedded emissions, and the number of surrendered certificates. Verification by accredited third-party bodies is mandatory to ensure the integrity of reported emissions data, mirroring the rigorous monitoring of the EU ETS.

The core methodology for quantifying the total greenhouse gas emissions released during the production of a good. For CBAM compliance, this includes direct emissions from manufacturing processes and indirect emissions from electricity consumption. The calculation relies on verified actual emission data from producers, defaulting to reference values only when primary data is unavailable. Accurate calculation requires a detailed lifecycle assessment of the production process, mapping every energy input to its corresponding emission factor.

The financial instrument at the heart of the EU's mechanism. The price of a CBAM certificate is pegged to the weekly average auction price of EU Emissions Trading System (EU ETS) allowances, expressed in €/tonne of CO2e. Importers must purchase certificates corresponding to the total embedded emissions of their goods. The number of certificates required is reduced by any carbon price already paid in the country of origin, preventing double taxation. Certificates are non-tradeable and must be surrendered annually.

The legal responsibilities placed on importers under the CBAM regulation. An authorized declarant must:

• Apply for CBAM authorization from national competent authorities
• Calculate and verify embedded emissions for imported goods
• Purchase and surrender the required number of CBAM certificates annually
• Maintain detailed records of reported data for audit purposes
• Submit an annual CBAM declaration by May 31st for the preceding calendar year Non-compliance results in penalties proportional to the unpaid carbon price.

The industrial sectors initially covered by the CBAM regulation, selected for their high carbon intensity and trade exposure. The transitional phase covers:

• Iron and Steel: Including articles like screws, bolts, and structural components
• Cement: All hydraulic cements and clinkers
• Aluminium: Unwrought and semi-finished products
• Fertilizers: Nitrogen-based compounds like ammonia and urea
• Electricity: Imported electrical energy
• Hydrogen: Both pure and in mixtures The scope is designed to expand to other ETS sectors over time.