As part of the Fit for 55 legislative package, the European Union’s ambitious strategy to reduce greenhouse gas emissions by at least 55 % by 2030 compared to 1990 levels, the Carbon Border Adjustment Mechanism (CBAM) is emerging as one of the most pivotal tools to combat carbon leakage and foster global decarbonisation. European Council
CBAM was legislated in Regulation (EU) 2023/956 and entered into force on 17 May 2023, but its full implementation begins in 2026, marking a major shift in how the EU handles carbon-intensive imports. Wikipedia
Why CBAM was created
The fundamental goal of the CBAM is to level the playing field between EU producers who must comply with strict emissions pricing under the European Union Emissions Trading System (EU ETS) and foreign producers that operate under less stringent climate regulations. Without such a mechanism, production could shift outside the EU to jurisdictions with weaker climate policies, a phenomenon known as carbon leakage. European Council
Under the current EU ETS, which launched in 2005 and covers around 40 % of the EU’s greenhouse gas emissions, domestic producers must acquire allowances for every tonne of CO₂ they emit. CBAM aims to extend comparable pricing to products imported into the EU, so that foreign suppliers also account for the carbon content of their goods. Wikipedia
How CBAM will work from 2026
During the transition period (2023-2025), importers were required only to report emissions embedded in their products without making payments. EUR-Lex From January 2026, however:
- Importers of goods covered by CBAM must purchase and surrender CBAM certificates based on the carbon emissions associated with those products. BDO
- The carbon price they pay will reflect the cost that would have been incurred under the EU ETS, replicating domestic carbon pricing for imports. National Law Review
- Parallel to CBAM’s phase-in, the free allocation of emissions allowances to carbon-intensive sectors under the EU ETS will be gradually phased out between 2026 and 2034. ICAP
Sectors and products in scope
Initially, CBAM applies to carbon-intensive goods that are at high risk of carbon leakage, including:
- Iron and steel
- Cement and fertilisers
- Aluminium
- Electricity
- Hydrogen and certain precursors (intermediate goods) European Council
These sectors contribute significantly to global emissions for example, steel production alone accounts for roughly 7 % of worldwide CO₂ emissions according to industry analyses (G20 Steel Climate Statement 2021). While precise EU import quantities vary annually, the share of these products in total trade remains substantial, making CBAM’s roll-out crucial for the EU’s climate impact.
Expected economic and environmental impact
Quantitative research suggests that CBAM could reduce emissions embodied in EU imports by around 4.8 % for directly covered products and about 3 % when including indirect emissions, highlighting its potential in cutting cross-border carbon flows. arXiv
By aligning carbon pricing globally, CBAM also provides an incentive for exporting countries to adopt stronger climate policies, helping to raise the global standard of carbon pricing. As covered imports are forecasted to contribute an increasing share of EU carbon pricing coverage potentially up to 48.5 % of allowances once fully phased-in the mechanism’s influence is expected to grow toward 2030. Global Markets Analysis
Challenges and controversies
Despite its environmental ambition, CBAM has faced criticism and logistical hurdles. Some industries argue that verifying embedded emissions in imported goods is administratively complex and could burden smaller companies without significant emissions data infrastructure. European Green Deal Radar Moreover, major trading partners such as China, India, Brazil, and the United States have raised concerns that the mechanism could act as a de facto trade barrier, leading to tensions and calls for clearer implementation frameworks. The Guardian
Recent legislative discussions have even proposed exemptions for smaller importers, potentially excluding more than 90 % of companies that import under 50 metric tons annually while still capturing over 99 % of emissions from covered imports by focusing on the largest players. Reuters
What this means for 2026 and beyond
As CBAM shifts from reporting to actual payments in 2026, its immediate effects will be felt across global supply chains. Importers will need new processes to calculate emissions and purchase the necessary certificates, while exporters to the EU may face revised pricing strategies to remain competitive.
In economic terms, early estimates see CBAM affecting approximately 3 % of total EU imports in terms of goods covered though this could expand significantly if downstream products are included in future updates. Le Monde
Ultimately, CBAM represents a landmark policy in aligning climate and trade policy: it not only seeks to protect EU industries against unfair competition but also to foster global decarbonisation by encouraging carbon pricing reforms beyond Europe’s borders. As it moves into full implementation in 2026, both businesses and policymakers will need to adapt quickly to its requirements and capitalize on the incentives it creates for cleaner production worldwide.
