The Carbon Border Adjustment Mechanism (CBAM) is a tariff applied by the European Union on carbon-intensive goods imported from outside the bloc. Its purpose is to prevent "carbon leakage" by ensuring that imported products face the same carbon price as those produced under the EU's climate regulations.
The Carbon Border Adjustment Mechanism (CBAM) is a landmark environmental policy tool from the European Union, central to its "Fit for 55" package. It functions as a special tariff that targets the embedded carbon emissions of specific products imported into the EU. The primary goal is to fight climate change on a global scale by preventing carbon leakage—a situation where companies move their production to countries with less stringent environmental laws to avoid the costs associated with carbon pricing.
By imposing a cost on carbon-intensive imports, the CBAM ensures a level playing field for European industries that are already subject to the costs of the EU's carbon market. This mechanism encourages non-EU trading partners to strengthen their own climate policies, effectively extending the EU's climate ambitions beyond its borders. It is a critical component for maintaining the integrity and effectiveness of the [EU Emissions Trading System (EU ETS)].
How Does CBAM Work?
The implementation of CBAM is phased, starting with a transitional period for reporting that began in October 2023. The full financial obligations will apply from 2026. The process for affected importers will follow these key steps:
- Scope: Initially, CBAM applies to imports in specific sectors known for their high carbon footprint: iron and steel, aluminum, cement, fertilizers, electricity, and hydrogen.
- Reporting: EU importers of these goods must report the volume of their imports and the "embedded" greenhouse gas emissions associated with their production.
- Purchasing Certificates: Once the permanent system is in place, importers will be required to buy "CBAM certificates" to cover the embedded emissions of their imported goods.
- Price Alignment: The price of these CBAM certificates will be directly linked to the weekly average auction price of allowances on the EU's carbon market (EUAs). This ensures that the carbon price paid for imports mirrors the price paid by domestic producers.
- Surrender: Annually, importers must surrender the number of certificates that corresponds to the total embedded emissions of the products they imported during the previous year.
Concrete Example
Imagine a French construction company that imports steel from a country that does not have a carbon pricing system.
Under the CBAM, this French importer must calculate the total CO2 emissions generated during the production of that steel. They will then be required to purchase an equivalent number of CBAM certificates from EU authorities. The cost of these certificates will mirror the current price of EU carbon allowances, effectively making the imported steel subject to the same carbon cost as if it had been produced within France.
For more information on the official regulation, you can consult the European Commission's official CBAM page.