Carbon Border Adjustment Mechanism EU

The Carbon Border Adjustment Mechanism (CBAM) is a European Union policy instrument that places a carbon price on imports of selected goods to match the price paid by EU producers under the EU Emissions Trading System (ETS). Its stated aim is to prevent carbon leakage—the relocation of production to jurisdictions with weaker climate rules—while incentivising cleaner industrial production globally.

CBAM was established by Regulation (EU) 2023/956, adopted on 10 May 2023. A transitional phase began on 1 October 2023, during which importers must report embedded emissions in covered goods but pay no financial adjustment. The definitive regime is scheduled to begin on 1 January 2026, when importers will need to purchase CBAM certificates priced on the weekly average ETS auction price.

In its initial scope, CBAM covers six sectors considered carbon-intensive and at high risk of leakage:

• cement
• iron and steel
• aluminium
• fertilisers
• electricity
• hydrogen

Importers can deduct any carbon price already paid in the country of production, which creates an incentive for trading partners to develop their own carbon pricing systems. The mechanism is designed to be phased in alongside the gradual withdrawal of free ETS allowances to EU industries between 2026 and 2034.

CBAM has prompted significant international debate. Trading partners including China, India, Brazil, South Africa, and Russia have criticised it as a unilateral trade measure, with some arguing it conflicts with the principle of common but differentiated responsibilities under the UNFCCC. Discussions on its compatibility with WTO rules—particularly the GATT's national treatment and most-favoured-nation obligations—remain ongoing. Least-developed countries have raised concerns about disproportionate impacts on their export earnings.

The European Commission is reviewing potential extensions of scope, including downstream products and indirect emissions, ahead of the definitive phase. CBAM is a central pillar of the EU's broader Fit for 55 package, which aims to cut net greenhouse-gas emissions by at least 55% by 2030 relative to 1990 levels.