Understanding CBAM: The EU Mechanism for Carbon Leakage Prevention and Fair Carbon Pricing

Why CBAM Matters: Addressing Carbon Leakage and Global Emissions

The European Union has committed to becoming climate-neutral by 2050 and to cutting greenhouse gas emissions by at least 55% by 2030 compared with 1990 levels. Reaching these objectives requires not only reducing emissions generated within EU borders but also addressing the emissions associated with imported products. Although significant progress has been made in lowering domestic emissions, the risk of carbon leakage continues to represent a major challenge. This phenomenon occurs when production shifts to countries with less demanding climate regulations or when goods produced within the EU are replaced by imports with a higher GHG emissions intensity.

Global greenhouse gas emissions amounted to approximately 37 billion tonnes in 2022. The European Union represented around 6% of that total, while countries such as China, the United States and India accounted for significantly larger shares. At the same time, economic expansion in regions where climate-related requirements are generally less stringent has intensified concerns about competitive imbalances and the relocation of carbon-intensive manufacturing activities. In this context, measures capable of safeguarding both EU climate ambitions and industrial competitiveness have become increasingly important.

Which Products Are Covered by CBAM and Who Is Affected?

CBAM applies to specific categories of imported goods, namely cement, electricity, fertilisers, iron and steel, aluminium and hydrogen. These products are listed in Annex I of Regulation (EU) 2023/956 and identified through dedicated Combined Nomenclature codes.

Imports originating from countries participating in the EU ETS, as well as from EEA and EFTA countries such as Norway, Iceland, Switzerland and Liechtenstein, fall outside the scope of the mechanism. Exemptions also apply to certain low-value consignments and to goods intended for military purposes.

CBAM Roll-Out: From Transitional to Definitive Phase

The implementation of CBAM follows a two-phase approach. The transitional period started on 1 October 2023 and ended on 31 December 2025. During this stage, importers and customs representatives were required to gather and report information concerning imported products and the greenhouse gas emissions embedded in their production. Reporting obligations were fulfilled quarterly through the Transitional CBAM Registry, and no financial adjustment was imposed. The transitional phase was also intended to support learning and preparation activities for economic operators and authorities, while facilitating the authorization process for future CBAM declarants.

The definitive phase entered into force on 1 January 2026. Since that date, authorized CBAM declarants have been required to report imported quantities together with the related embedded emissions. They must also purchase and surrender CBAM certificates. Each certificate represents one tonne of CO2 emissions, and its value is linked to the average price of EU ETS allowances. The implementation of this system progresses in parallel with the gradual withdrawal of free EU ETS allocations.

How to Measure, Verify and Report Embedded Emissions Under CBAM?

The Regulation establishes a distinction between direct emissions generated by production activities and indirect emissions associated with electricity consumption. It further differentiates between simple goods, for which embedded emissions result solely from the manufacturing process itself, and complex goods, whose calculation also includes emissions attributable to precursor materials.
Within the definitive regime, importers must submit annual declarations covering the embedded emissions associated with imported goods and surrender the corresponding number of CBAM certificates. To ensure reliability and consistency, reported emissions are subject to verification by accredited verifiers in accordance with the provisions of the Regulation.

How CBAM Impacts Businesses: Costs, Risks and Opportunities

For some imported products, the introduction of CBAM may result in additional costs and has prompted concerns among both importers and exporting countries. Nevertheless, the mechanism plays a key role in limiting carbon leakage, supporting the effectiveness of EU climate policies and stimulating investment in sustainable technologies beyond the European Union.
By promoting a more harmonized approach to carbon pricing, CBAM supports the transition towards a low-carbon economy.