The Carbon Border Adjustment Mechanism (CBAM) entered into application on the 1st of October 2023. The introduction of CBAM will make it possible to continue strengthening the EU Emissions Trading System (EU ETS) while ideally creating a level playing field between producers inside and outside the EU. The mechanism is intended to fight carbon leakage, to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries. CBAM applies to both raw materials and the products manufactured from them.
CBAM addresses the competitive distortion that arises when companies producing and selling goods within the EU must pay for their emissions while competing with imported goods from companies out-side the EU who are not subject to the same climate regulations. However, the mechanism does not address the equivalent situation when an EU company exports goods outside the EU. In this case, the company incurs costs due to the EU’s climate policies but competes with firms that do not face the same regulations or expenses. An export rebate or export scheme to compensate for these additional costs is being prepared by the Commission and was expected to be presented by end-2025.
Trade and competitiveness effects
Beyond trade implications, CBAM plays a critical role in the EU’s green transition. While it is expected to encourage sustainable practices, it also risks raising costs for European manufacturers reliant on import-ed materials. Companies operating in regions with cleaner energy sources, such as the Nordic countries, could gain a competitive advantage, as their products will likely be less affected by carbon tariffs. The ongoing phase-out of free emissions allowances under the EU ETS is expected to further strengthen CBAM’s influence, ensuring that the carbon footprint of a product is reflected more transparently in its price. However, the success of this transition will depend largely on how businesses and countries adapt. Companies that invest in clean technology will have the opportunity to strengthen their market position, while those in high-emission industries may face increased costs and trade restrictions.
National implementation and administrative requirements
The implementation of CBAM will differ across EU member states, not because of differences in reporting IT systems, but due to national administrative arrangements for guidance, access management, control and enforcement. CBAM reporting is conducted through EU-wide IT systems – the CBAM Transitional Registry and the CBAM Registry – which are operated by the European Commission. Differences in how Finland, Sweden and Denmark structure their CBAM administration, including the allocation of responsibilities between competent authorities and customs, the provision of guidance to companies, and the availability of support resources, could nevertheless lead to variations in compliance and ease of reporting for importers. Expanding CBAM will put additional administrative burdens on national authorities, particularly in terms of guidance, verification, coordination and enforcement, even though the underlying reporting systems are managed at EU level. Importers will need to collect more detailed emissions data from suppliers, and for product categories where applicable, pay an additional carbon fee, corresponding to the indirect emissions. Suppliers will have to ensure accurate reporting to avoid placing additional costs on their customers. The inclusion of indirect emissions is expected to have a substantial effect on total carbon costs, which in turn will influence the competitiveness of industries across different countries.
Transitional phase (2023–2025)
CBAM implementation happens gradually. It involves transitional phases and gradual extension of the system. The transitional phase has been from 1 October 2023, until 31 December 2025, and in this phase the companies have been mandated to report their imports and associated emissions, but not mandated to pay the associated carbon fee. During this transition, importers of covered products have been obliged to report the greenhouse gas emissions (GHG) embedded in their imports on a per-product basis, though no financial adjustments has been required. This period serves two key purposes: first, to provide a learning opportunity for all involved parties, including importers, producers, and regulatory authorities; and second, to collect data on embedded emissions to refine the methodology. While the reporting obligation falls on EU importers, exporters will also face a considerable compliance burden due to the need to compile and provide emissions data.
Currently, imports from six sectors must be reported within CBAM.
Cement
Fertilizer
Aluminium
Iron and steel
Hydrogen
Electricity
It is the EU’s intention to progressively increase the scope of CBAM to cover more sectors and product categories. The six sectors were chosen as they represent a significant risk of carbon leakage. By aligning import costs with carbon emissions, CBAM seeks to uphold the integrity of EU climate policies, most importantly the EU ETS, while encouraging investments in low-carbon technologies. At the same time, the policy introduces complexities in global trade, as it affects the competitiveness of both European industries and foreign exporters.
Definitive regime (2026–2034)
Between 2026 and 2034, the implementation of the CBAM will gradually coincide with the phase-out of free allowances under the EU ETS. Per 2026, affected companies must pay for the tonnage of embedded carbon in their imported products, effectively ensuring that high-emitting products imported from outside of the EU become more expensive. If the import has already been applied a non-EU carbon fee or tax, the amount paid can be deducted from the CBAM import fee.
The scope of emissions covered under the CBAM definitive regime is defined in Regulation (EU) 2023/956. From 2026 and until any amendment of the Regulation, it is clear which emissions must be calculated, reported and subject to the CBAM financial adjustment for each product category.
Under the current Regulation, direct emissions are included for all CBAM-covered products, while indirect emissions from electricity consumption are included only for selected product categories. Specifically, indirect emissions are included for cement and fertilisers, while for iron and steel, aluminium and hydrogen only direct emissions are to be calculated and taken into account.
Article 30 of the CBAM Regulation mandates the European Commission to assess, by 2025, whether the scope of CBAM should be expanded, including the possible inclusion of indirect emissions for additional product categories in the future. While this implies that the scope of CBAM may change over time, the applicable rules for the definitive regime from 2026 are clearly defined under the current Regulation.