The Carbon Border Adjustment Mechanism (CBAM) is the EU's policy to apply a carbon price to certain goods imported from outside the Union. Its goal is to prevent "carbon leakage"—where EU companies move production to countries with less stringent climate policies—by ensuring imported goods face the same carbon cost as those produced domestically.
The Carbon Border Adjustment Mechanism (CBAM) is a landmark climate policy introduced under the European Green Deal. It functions as a tariff on the carbon emissions embedded in specific goods imported into the European Union. The primary purpose of CBAM is to level the playing field between EU producers, who must pay for their carbon emissions under the EU Emissions Trading System (EU ETS), and non-EU producers who may not face similar costs. By doing so, it protects the competitiveness of European industries and encourages global partners to adopt stronger decarbonization policies.
This mechanism is a critical pillar of the EU's climate ambition. Without it, there's a significant risk of carbon leakage, where companies relocate their production to regions with weaker environmental regulations to cut costs, resulting in no net global reduction in emissions. CBAM directly addresses this by ensuring that the price of carbon is paid, regardless of where a product is made.
How does CBAM work?
The implementation is being phased in, starting with a transitional period from October 1, 2023. The full financial mechanism will apply from 2026. The process for importers involves a few key steps:
- Reporting Emissions: EU importers must declare the greenhouse gas emissions embedded in the goods they bring into the EU. This is known as "embedded emissions."
- Purchasing CBAM Certificates: Importers will be required to purchase a corresponding number of "CBAM certificates." Each certificate represents one tonne of CO₂ emissions.
- Price Alignment: The price of CBAM certificates will be directly linked to the weekly average auction price of carbon allowances within the EU Emissions Trading System (EU ETS). This ensures parity between foreign and domestic producers.
- Covered Sectors: Initially, CBAM applies to imports in sectors with a high risk of carbon leakage, including:
- Iron and steel
- Cement
- Aluminium
- Fertilizers
- Electricity
- Hydrogen
Concrete Example
Imagine a French construction company that imports steel from a non-EU country that does not have a national carbon price.
Under CBAM, this French importer must calculate the total carbon emissions generated during the production of that steel. Starting in 2026, the company will have to buy an equivalent number of CBAM certificates to cover those emissions. This effectively places the imported steel on equal footing with steel produced in Germany or Spain, where manufacturers are already required to pay for their emissions via the EU ETS.
Source: European Commission, Carbon Border Adjustment Mechanism