The EU's Carbon Border Adjustment Mechanism (CBAM)

The EU's Carbon Border Adjustment Mechanism (CBAM)

What will the EU CBAM entail, how will it operate, and how can firms get ready for it? Here’s what you need to know.

What is the CBAM ?

The Carbon Border Adjustment Mechanism (CBAM) is an environmental policy instrument designed to apply the same carbon costs to imported products as would be incurred by installations operating in the European Union (EU). In doing so, the CBAM reduces the risk of the EU's climate objectives being undermined by production relocating to countries with less ambitious decarbonisation policies (so-called ‘carbon leakage’).

What is the CBAM regulation?

While EU nations are covered by the current EU Emissions Trading System (ETS), goods generated outside of the EU (except from Iceland, Norway, Liechtenstein, and Switzerland) will be subject to the CBAM.

This deals with the issue of carbon leakage, which is the circumstance in which businesses relocate their manufacturing to nations with less strict regulations regarding emissions regulations, mainly in order to reduce expenses related to carbon price. 

What are embedded emissions?

EU CBAM Timeline: What is the transitional period vs permanent system?

The Carbon Border Adjustment Mechanism (CBAM) entered its transitional phase on October 1, 2023, initiating the initial reporting period for importers, which concludes on January 31, 2024.

In the transitional period, emissions reporting is mandatory, and no "financial adjustment" is involved.

January 1, 2026, marks the commencement of the permanent CBAM system, requiring a financial adjustment through the acquisition of certificates.