CBAM - Carbon Border Adjustment Mechanism

CBAM is a mechanism for adjusting prices at borders, taking into account CO₂ emissions, and is part of the European Union's climate policy. Its primary objective, in line with the Fit for 55 framework, is to reduce greenhouse gas emissions and support the EU's strategy to reduce net emissions by at least 55% by 2030, as well as to achieve climate neutrality by 2050.

CBAM operates in close connection with the EU Emissions Trading System (EU ETS) and aims to level the playing field between EU producers and non-EU importers, eliminating the phenomenon of carbon leakage.

CBAM is part of a broader EU legislative package known as Fit for 55, which aims to reduce greenhouse gas emissions by 55% by 2030 compared to 1990 levels. The key legal acts regulating the CBAM mechanism are:

• Regulation (EU) 2023/956 on the establishment of CBAM
• The amended EU ETS Directive.

What is the CBAM mechanism?

CBAM is a system that imposes additional fees on goods imported to the EU that generate carbon dioxide emissions during production. These fees are set in such a way that they reflect the costs incurred by European companies under the EU ETS.

We discuss the EU ETS in our article: EU ETS - Emissions Trading System in the European Union

Under the EU ETS, European producers must purchase CO₂ emission allowances for each tonne of greenhouse gas emitted. These allowances are partly allocated for free and partly purchased at auctions. For producers outside the EU, the lack of such burdens creates a competitive advantage and the risk of relocating production to countries with lower environmental standards. CBAM is designed to eliminate this difference by imposing the obligation to pay fees on importers of products with high emission intensity.

An important aspect of CBAM is its implementation in parallel with the withdrawal of free allowances under the EU ETS. As importers are required to purchase CBAM certificates, EU producers will gradually lose free allowances, which is intended to ensure competitive balance. However, restrictive climate regulations in the EU may lead to a decrease in the competitiveness of European companies on international markets.

"High costs related to emissions, resulting from the EU ETS and CBAM, may make products manufactured in the EU less attractive in terms of price compared to goods from countries with less stringent environmental standards. According to analyses by the European Commission, this may lead to an approximately 7 percent decrease in the value of goods exports.

According to the assumptions, the revenues from CBAM will amount to several billion per year. The European Commission will distribute funds obtained from the border tax between EU countries and the most affected trading partners, i.e., third countries. This is intended to promote global actions to reduce emissions and support the transition towards a low-emission economy." says Przemysław Kurylas, Operations Director at DB Energy.

CBAM implementation stages

The CBAM mechanism is being introduced in stages, allowing companies to adapt to the new requirements:

• Transition period (October 1, 2023 - December 31, 2025)

Importers are required to report quarterly emissions charged to imported goods (so-called embedded emissions) but are not required to pay fees yet. Failure to comply with the reporting obligation may result in administrative penalties.

• Target period (from January 1, 2026)

In the years 2026-2033, embedded emissions will gradually be covered by the obligation to purchase CBAM certificates. At the same time, free allowances under the EU ETS will be withdrawn. From 2034, 100% of emissions related to goods covered by CBAM will require the purchase of CBAM certificates. The free allocation system in the EU ETS will be completely abolished.

Who is required to report under CBAM?

CBAM covers sectors with high emission intensity that are most exposed to the risk of carbon leakage. In the initial period, these include:

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

What must be reported under CBAM?

Reporting under CBAM is a key element of its functioning. During the transition period, companies must provide data on:

• embedded emissions, i.e., the amount of greenhouse gases generated during the production of imported goods.
• domestic cost of emissions – if the exporting country applies its own emission pricing system, importers can deduct these costs from their CBAM obligations.

After the transition period, emission reporting will be supplemented by the obligation to surrender CBAM certificates.

Companies that import goods covered by CBAM are required to report in detail the emissions embedded in the imported products. The reports must include data on direct emissions resulting from production processes and indirect emissions, such as those related to electricity use. The reports should also include information on the quantity and type of imported goods, their country of origin, and the functioning of the carbon pricing system in that country.

During the transitional period until the end of 2025, companies are required to submit quarterly reports without having to pay the fees, while from 2026 they will need to redeem CBAM certificates, which reflect the costs of emissions embedded in imported goods.

CBAM and industrial companies

For industrial companies, CBAM means a thorough analysis of their supply chains and production-related emissions. To operate effectively in the new reality, companies must:

• Invest in more efficient production processes,
• Carry out environmental audits to better understand their carbon footprint,
• Consider locating part of their production in the EU to avoid CBAM fees.

Benefits of CBAM

• Equal competition – CBAM eliminates the price advantage of non-EU producers who do not bear the costs associated with reducing emissions.
• Reduction of global emissions – the mechanism is intended to encourage other countries to tighten climate regulations to make their products more competitive on the EU market.
• Stimulation of innovation – companies motivated to reduce emissions invest in new technologies, which accelerates industrial transformation.
• Support for EU climate goals – CBAM is one of the tools supporting the implementation of the climate neutrality goals by 2050.

Challenges related to CBAM

• Costs for companies – importers have to pay additional fees, which may increase the final prices of products.
• Complexity of reporting – the system requires detailed monitoring of emissions in the supply chain, which is associated with additional administrative obligations.
• Risk of trade retaliation – some non-EU countries may consider CBAM as a trade barrier and introduce their own retaliatory mechanisms.

Summary

CBAM is a groundbreaking mechanism aimed at protecting the climate and leveling the playing field on the international market. The introduction of CBAM is a challenge for importers who have to adapt to new reporting requirements and bear additional emission costs. At the same time, this mechanism creates an opportunity to increase global climate ambitions and accelerate the transition towards a low-emission economy. The full implementation of CBAM in 2026 will be a milestone on the EU's path to climate neutrality and will certainly influence the future of the industry both in Europe and worldwide.