Carbon Border Adjustment Mechanism (CBAM): Pricing CO2 at the Border

The Carbon Border Adjustment Mechanism (CBAM) is an EU instrument that imposes a CO2 price on imported goods that would be subject to a carbon price if produced within the EU. Its goal is to prevent carbon leakage—the relocation of carbon-intensive production to countries with lower or no CO2 costs. CBAM has been in a transitional phase since October 2023 and will become fully operational in January 2026.

For manufacturing companies, CBAM is more than an import tax; it is a data challenge. Anyone importing carbon-intensive precursors from third countries must prove their CO2 content—and anyone exporting to the EU must be able to verify their own production emissions.

Which Products are Affected?

CBAM initially targets six carbon-intensive sectors that are heavily regulated under the EU Emissions Trading System (ETS):

• Steel and Iron: Including downstream products like screws, bolts, and fasteners—a direct impact for metal processors.
• Aluminum: Primary and secondary aluminum as well as specific aluminum products.
• Cement, Fertilizers, Hydrogen, and Electricity: Completing the initial group.

The EU Commission intends to expand the scope gradually; organic chemicals and polymers are already under discussion. For manufacturers using steel and aluminum as primary raw materials, CBAM is an immediate operational topic.

How CBAM Works: Certificates and Documentation

Starting in 2026, importers of CBAM-relevant goods from non-EU countries must purchase CBAM certificates equivalent to the CO2 price paid for domestic production. If a carbon price was already paid in the country of origin, it will be credited.

Actual vs. Default Values

The number of required certificates is based on the actually embedded emissions of the imported goods. While importers can use "default values," these are intentionally set at the average emissions of the worst-performing 10% of EU producers. Proving actual, lower emissions is therefore a direct competitive advantage for exporters.

What CBAM Means for EU Manufacturers

For EU-based manufacturers, CBAM acts primarily as a competitive shield. However, it becomes operationally relevant in three scenarios:

1. Sourcing from Non-EU Countries: Importing steel or aluminum will incur certificate costs. Knowing your supplier’s exact CO2 footprint can significantly reduce these costs compared to using default values.
2. Exporting to Other Regions: Countries like the UK and Canada are developing their own CBAM-equivalent instruments. EU exporters must be ready to document their production emissions for these markets.
3. Supply Chain Pressure: Large buyers subject to CBAM will demand verified CO2 data from their suppliers, mirroring requirements under CSRD and the Digital Product Passport (DPP).

Required Production Data for CBAM Verification

To calculate the "embedded emissions" of a product, verifiable data from the shop floor is required:

• Energy Consumption: Per production line and process, broken down by energy source.
• Production Volumes: Accurate output per facility and time period.
• Emission Factors: For all used energy sources and fuels.
• Process Emissions: From chemical reactions (e.g., in steel production).
• Precursor Emissions: CO2 data for the materials used in production.

By 2026, estimates will no longer be sufficient. Verifiers will require data that can be traced back to actual meter readings and production logs.

CBAM Implementation Timeline

• October 2023 – December 2025 (Transition Phase): Importers must submit quarterly CBAM reports documenting import volumes and embedded emissions. No payments are required yet, but reporting is mandatory.
• January 2026 (Full Operation): Importers must buy and surrender CBAM certificates annually. Third-country exporters who can prove low actual emissions will enable their EU customers to save on certificate costs.

FAQ

Does CBAM apply to small and medium-sized importers?

Yes. There is no SME exemption. Every importer of CBAM-relevant goods from third countries must register as an authorized CBAM declarant and fulfill reporting duties, regardless of company size.

What are default emission values?

If an importer cannot provide verified data from their supplier, the EU applies default values. These are based on the average emissions of the 10% most carbon-intensive EU producers in that sector, making them significantly more expensive than most primary data.

How are embedded emissions verified?

Embedded emissions must be confirmed by an accredited verifier. The verifier checks if the calculation methodology follows CBAM rules and if the underlying shop floor data (energy/production volumes) is robust and documented.

What are the penalties for non-compliance?

During the transition phase (until 2025), failure to report can result in penalties of €10 to €50 per tonne of unreported emissions. From 2026 onwards, stricter sanctions aligned with the EU ETS penalties will apply.