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The European Union is changing how international trade works. By launching the Carbon Border Adjustment Mechanism (CBAM), the EU wants to lower and ultimately end carbon emissions by placing tariffs on carbon-intensive imports from countries that aren't subjected to strict climate policies. By taxing the carbon footprint of goods entering the EU, this method aims to push all organizations to reduce their emissions.
While the CBAM is still widely debated, it comes into action in 2026 and will change the availability and cost of products in the EU.
To help you keep up, we’re showing you exactly how CBAM works, whether your business needs to comply, and what its introduction can mean for all global producers.
What is the Carbon Border Adjustment Mechanism (CBAM)?
The Carbon Border Adjustment Mechanism (CBAM) is a regulatory tool the European Union uses to address a lack of sustainability and poor production practices beyond the EU market. This tool places a carbon price on products brought into the EU from countries that don't adhere to strong greenhouse gas emissions (GHG) regulations. The tool is expected to generate €1.5 billion annually, supporting the EU’s green initiatives.
Once in action, the CBAM regulation will balance European and global producers. While those in the EU will have to continue adhering to stricter policies, the global organizations selling into Europe will either have to comply with the same emission standards or pay for the carbon they emit.
The CBAM timeline: When does CBAM start?
CBAM requirements roll out for the first set of industries in three phases:
Phase 1: Transitioning to CBAM reporting
Starting period: October 1st, 2023
What it involves: During this transitional period, importers of targeted goods must report the emissions associated with their products. Financial penalties won’t be imposed at this stage so businesses can learn and prepare for the changing regulations and reporting requirements.
Phase 2: Implementing all CBAM compliance recommendations
Starting period: 2026
What it involves: EU CBAM will be fully operational, requiring importers to pay a carbon price on the emissions of their imports. This phase brings carbon-content-based tariffs as per the EU's Emissions Trading System (ETS).
Phase 3: Ongoing evaluation and expansion into new sectors
Starting period: After 2026
What it involves: The EU will constantly review the CBAM, possibly expanding its scope to include new sectors and products.
Who needs to ensure CBAM compliance?
The CBAM reporting requirements will gradually roll out to different industries starting with producers that trade carbon-intensive goods such as:
- Steel
- Cement
- Aluminum
- Hydrogen
- Electricity
- Fertilizers
In these industries, carbon emissions are a huge concern as they're often too high. At the moment, these are the only industries expected to declare and pay for the emissions that exceed EU climate standards.
However, the CBAM’s scope will likely expand beyond as the EU is constantly re-analyzing and expanding its climate policies. Industries that are likely to have to comply with CBAM include:
- The chemical sector that produces significant greenhouse gas emissions through petrochemicals and plastic production.
- All cement substitutes where production leads to considerable emissions like with cement itself.
- The fashion space as the carbon footprint expands with production and transportation.
- Sectors such as meat and dairy production that emit methane or have a significant carbon footprint from livestock farming and food processing.
- Transportation and logistics for the transport of goods and people alike.
How to comply with the CBAM regulations?
To comply with the Carbon Border Adjustment Mechanism demands, your first step is to understand if its scope applies to your businesses. We’ve covered an extensive list of the impacted industries above. If your sector is there, it’s time to assess the carbon footprint of your products for the entire production and supply chain.
You can use emission tracking systems to monitor and report on GHG across your entire operations chain (including suppliers). Additionally, it’s worth looking into building a plan for using alternative materials or tactics that can reduce your carbon emissions and lower your costs.
Your team should also be aligned with the changes brought by CBAM requirements. They should be prepared to submit the necessary reports on emissions and compliance status to the relevant authorities. A knowledgeable team is a must to successfully tackle CBAM regulations and sustainability practices. In fact, your entire company should stay committed to the goal of mitigating potential climate and financial impacts.
Understanding how to calculate CBAM also plays an even bigger role in how efficiently you navigate these regulations.
When importing products into the EU, both direct and indirect emissions of these goods should be reported. Since the mechanism was introduced recently, we're still in the transitional phase where default emission values should be used.
To further calculate emissions, start by collecting the data on quantities and types of imported goods under the Carbon Border Adjustment Mechanism regulations. Use either actual data or the EU's approved default values to calculate embedded emissions. Lastly, report these emissions via the CBAM Transitional Registry.
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