Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM) was introduced on October 1, 2023, pursuant to Regulation (EU) 2023/956. As part of the European Union’s (EU) “Fit for 55” package, the CBAM aims to counteract the risk of carbon leakage and thus contribute to the implementation of the European Green Deal.
Following the transitional phase (October 1, 2023, to December 31, 2025), the CBAM has been in its regular phase since January 1, 2026, during which importers are subject to both reporting requirements and financial obligations.
Backround
A key instrument of the Green Deal is the European Union Emissions Trading System (EU ETS), which was introduced in 2005 and is designed to provide incentives for emission-intensive industries to reduce their emissions through the trading of emission allowances.
The EU ETS operates on the basis of the so-called “cap-and-trade” principle. A cap sets the maximum total amount of CO2 emissions or CO2 equivalents that emitters, such as energy or industrial companies, are permitted to release. EU member states* allocate a corresponding amount of emission allowances in the form of certificates to emitters. The total number of available certificates is reduced annually, thereby creating a targeted shortage and driving up the price of CO2.
Emission certificates entitle companies to emit CO2 and can be freely traded on the market. Thus, companies that need more allowances than they have been allocated can purchase them at auction or buy them from other companies that do not need them (trade). The cap-and-trade principle establishes a market price for greenhouse gas emissions.
* including Norway, Iceland and Liechtenstein
How does the CBAM work?
As the number of allowances available in the EU Emissions Trading System is gradually reduced, not only do CO2 prices rise, but so do the costs of emitting greenhouse gases. This creates an increased risk of CO2 emissions shifting to countries with lower climate protection standards (“carbon leakage”). To prevent carbon leakage and maintain the effectiveness of EU measures to reduce emissions, the CBAM was established as a complementary instrument to the EU ETS. The goal is to ensure that imported goods are subject to a comparable CO2 price as goods produced in the EU, in order to offset potential competitive disadvantages for domestic companies. The core element of the mechanism is the pricing of CO2 emissions from imports of certain goods into the EU.
Importers must submit CBAM certificates corresponding to their total emissions, taking into account any carbon price paid abroad. After the transition period ends, only authorized CBAM registrants will be permitted to import CBAM goods into the EU starting in 2026.
Following the transitional phase, the CBAM’s regular phase began on January 1, 2026. The CBAM will continue to be phased in gradually through 2034. At the same time, free allocation under the EU ETS for the affected sectors will be phased out gradually.
Who does the CO₂ border adjustment system apply to?
The CBAM primarily covers emission-intensive, trade-intensive sectors. These currently include:
- Cement
- Iron and steel
- Aluminum
- Fertilizers
- Electricity
- Hydrogen
Depending on the product group, certain upstream or downstream products are also included in the scope of application. This includes, for example, partially processed products (such as steel screws), provided they are listed in Annex I of the Regulation.
The European Commission is also examining a possible future expansion of the CBAM’s scope to include additional product groups (e.g., chemicals or plastics) as part of the planned review by 2027.
What does this mean for my business?
With the full implementation of the CBAM starting January 1, 2026 (the start of the regulatory phase), affected companies will face specific financial obligations and mandatory reporting requirements.
During the regulatory phase, CBAM declarations must be submitted annually for the respective reporting year (the first submission is due by September 30, 2027, for the year 2026). Based on these declarations, CBAM certificates must also be submitted annually in an amount equal to the reported emissions.
Furthermore, starting in 2026, CBAM-relevant goods may only be imported into the customs territory of the Union by authorized CBAM declarants.
Important simplification starting in 2026: 50-ton de minimis exemption
A key change under the CBAM regulatory phase is the introduction of a mass-based threshold of 50 tons per year. Companies that import a total of less than 50 tons of CBAM goods annually from the cement, iron and steel, fertilizer, and aluminum sectors are exempt from CBAM obligations.
Overview of CBAM-requirements:
1. Determining whether imported goods fall within the scope of the CBAM
2. Registration as an authorized CBAM declarant (customs declarant) with the competent authority
3. Determination and documentation of the embedded emissions of imported goods
4. Timely CBAM reporting (annually starting in 2026)
5. Purchase and surrender of CBAM allowances in accordance with import-related emissions
6. Documentation, supporting evidence, and, where applicable, verification of the reported emissions data
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