CBAM: What It Is & How It Affects Your Industry

The Carbon Border Adjustment Mechanism (CBAM) is an environmental policy instrument introduced by the European Union (EU) to support its climate neutrality objective by 2050. In simple terms, CBAM puts a price on carbon emissions embedded in certain imported goods, ensuring that non-EU producers face similar carbon costs to EU manufacturers covered by the EU Emissions Trading System (ETS).

CBAM’s primary objective is to prevent carbon leakage, which occurs when production shifts to countries with weaker climate policies or when EU-made goods are replaced by more carbon‑intensive imports. By pricing carbon at the border, CBAM incentivizes cleaner industrial production both inside and outside the EU.

In a significant development, the European Commission has proposed measures to strengthen and expand CBAM, based on feedback from industry, international partners, and experience gained during the transitional phase.

The proposals aim to close loopholes, extend CBAM’s scope, and support EU producers exposed to carbon leakage risks, while reinforcing CBAM’s role in promoting decarbonisation beyond EU borders.

Extension to Downstream Products

The CBAM currently targets basic materials such as aluminium, cement, electricity, steel, fertilisers, and hydrogen. From 1 January 2028, the Commission plans to expand CBAM’s scope to include 180 steel‑ and aluminium‑intensive downstream products, including machinery, industrial equipment, and selected household appliances.

The vast majority (94%) of these downstream products are industrial supply‑chain goods with a high average steel and aluminium content (around 79%), such as base metal mountings, cylinders, industrial radiators, and machines for casting. A smaller share (6%) consists of household goods.

This expansion is intended to ensure that emissions are reduced rather than relocated, preventing production shifts to countries with weaker climate policies and avoiding substitution of EU goods with more carbon‑intensive imports.

Additional Anti‑Circumvention Measures

Building on lessons from the transitional period, the European Commission is reinforcing measures to address circumvention risks identified through stakeholder consultations and the Steel and Metal Action Plan.

To promote lower‑emission production, pre‑consumer aluminium and steel scrap will now be incorporated into CBAM calculations. This ensures fair carbon pricing for both EU‑made and imported goods.

Additional measures include stronger reporting requirements to improve traceability of CBAM goods and prevent misreporting of emission intensity. Where emissions data is unreliable, the Commission will have the authority to request additional evidence or apply default country‑specific values in clearly defined cases.

Temporary Decarbonisation Fund

To mitigate carbon leakage risks and protect EU producers in third‑country markets, the Commission has announced a Temporary Decarbonisation Fund.

The fund will reimburse a portion of EU ETS carbon costs for CBAM‑covered goods that remain exposed to carbon leakage risks, provided companies can demonstrate credible decarbonisation efforts. This approach rewards cleaner production rather than business‑as‑usual practices.

Financing will come from:

• 25% of CBAM certificate revenues generated in 2026 and 2027
• 75% from EU Own Resources

International Cooperation and Carbon Price Equivalence

Responding to concerns raised by trusted international partners, the Commission is introducing additional flexibilities within CBAM. These include recognition of equivalent foreign carbon pricing systems, allowing verified carbon prices paid in the country of origin to be deducted from CBAM obligations.

The proposals also enable mutual recognition of accredited verification bodies, negotiated trade facilitation measures, and expanded technical assistance and outreach, particularly for developing countries. These steps aim to support global decarbonisation while maintaining fair and predictable trade relations.

The Carbon Border Tax requires EU importers to purchase special certificates to cover the carbon footprint of the goods they bring into the union. The process is designed to mirror the costs faced by local producers.

Here is a step-by-step breakdown of the CBAM process:

Step 1: Purchase CBAM Certificates

Importers must buy CBAM certificates corresponding to the carbon price that would have been paid if the goods were produced under the EU's carbon pricing rules.

Step 2: Declare Annual Emissions

Each year, importers must declare the total volume of goods imported and their embedded greenhouse gas emissions for the preceding year.

Step 3: Surrender Certificates 

Importers will surrender the corresponding number of CBAM certificates to cover the declared emissions.

Step 4: Deduct Foreign Carbon Prices

If a carbon price has already been paid in the producer's home country, that amount can be deducted from the final CBAM cost. If emission data is unavailable, default values will be applied.

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The CBAM regulation is being implemented gradually, initially targeting sectors with a high risk of carbon leakage. Companies that source materials from non-EU suppliers without a comparable carbon price will be most affected.

Initially Impacted Goods

The first phase of the CBAM applies to the import of specific goods, including:

• Iron and steel
• Aluminium
• Cement
• Electricity
• Fertilisers
• Hydrogen

Key Industries Facing High Costs

Based on the initial list of goods, industries that rely heavily on these materials will face the most significant impact. These include:

• Automotive
• Construction
• Packaging
• Heavy machinery and industrial equipment manufacturing

For example, analyses suggest that without changes, steel imports from some countries could see costs rise by over 30%. Businesses importing key components from regions without carbon pricing mechanisms in place, will need to reassess their sourcing strategies to avoid high costs.

From 2028, companies dealing in steel‑ and aluminium‑intensive downstream products will also be affected and should begin preparing now.

The CBAM is currently in its transitional phase, running through the end of 2025. During this period, importers must report the embedded emissions of covered goods, but no financial payments or penalties are required yet. 

From 1 January 2026, CBAM enters its definitive regime. Importers must then annually declare emissions and surrender CBAM certificates, aligned with the gradual phase‑out of free EU ETS allowances until 2034. From 2028, the scope will expand to include selected downstream products.

The CBAM is set to create significant shifts in global trade dynamics. It incentivizes the renegotiation of trade agreements to align carbon pricing with EU standards, potentially reducing the tax burden and giving new meaning to climate-aligned trade policies.

For EU-based manufacturers in carbon-intensive sectors, the CBAM helps level the competitive landscape. These companies, already subject to the EU ETS, often compete with importers from regions without such costs. By applying a carbon price at the border, the CBAM ensures fairer competition and encourages a global rise in environmental standards.

The most crucial step for any affected business is to identify and quantify emissions across the supply chain. With the majority of emissions hidden in Scope 3, gaining transparency is essential—not only for meeting CBAM reporting requirements but also for avoiding unexpected financial risks.

With Carbmee’s Environmental Intelligence System (EIS™) you can streamline data collection, gain full visibility into emissions hotspots, and strengthen your organization’s ability to forecast, manage, and reduce future CBAM-related costs.

Here’s how you benefit from carbmee EIS™:

Turn Carbon Data Into Cost Control: Automatically quantify embedded emissions across your supply chain to identify where CBAM fees will hit hardest - and how to reduce them through supplier or material choices.

Move Beyond Reporting to Tracking & Budgeting: Generate audit-ready CBAM reports while also monitoring emissions in real time, forecasting future carbon costs, and building carbon budgets directly into procurement and financial planning.

Turn Insights into Financial Advantage: Leverage granular product- and supplier-level insights to support strategic sourcing, evaluate alternative materials, and prioritize decarbonization initiatives that deliver measurable financial impact.

Take the first step towards CBAM compliance, carbon reduction and measurable financial impact. Talk to one of our industry experts today!

Why Was CBAM Introduced?

CBAM was introduced primarily to prevent "carbon leakage." This is the risk that companies might move their carbon-intensive production from the EU to countries with less ambitious climate policies, or that EU products are replaced by more carbon-intensive imports. The CBAM aims to ensure the effectiveness of the EU's climate policies.

When Does the CBAM Transitional Period End?

The CBAM transitional period, which focuses solely on reporting obligations without financial charges, is set to end on December 31, 2025. The definitive system, requiring the purchase of CBAM certificates, will begin on January 1, 2026.

Does CBAM Apply to the UK?

Yes, goods imported from the United Kingdom into the EU are subject to the CBAM regulation, as the UK is a non-EU country. However, the UK is also planning to implement its own Carbon Border Adjustment Mechanism by 2027, which may affect future trade dynamics.

How Are CBAM Certificates Priced?

The price of CBAM certificates is linked to the EU ETS allowance auction price, calculated as a quarterly average in 2026 and a weekly average from 2027 onwards, expressed in euros per tonne of CO₂ emitted. This ensures that the carbon price paid by importers closely mirrors the price paid by EU domestic producers.