Carbon Border Adjustment Mechanism

The regulation establishes a Carbon Border Adjustment Mechanism (CBAM) to prevent the risk of carbon leakage for specific goods containing embedded greenhouse gas emissions that are imported into the European Union (EU). It complements the EU Emissions Trading System (EU ETS) by applying similar rules to the imports covered under the regulation and replaces certain elements of the existing system to account for the extent to which EU ETS allowances are allocated for free. CBAM aims to mitigate this by leveling the playing field between EU producers, who are subject to strict environmental regulations, and foreign manufacturers.

Key Objectives of CBAM

Equalizing Carbon Costs
CBAM ensures that the carbon emissions associated with the production of certain goods imported into the EU are priced equivalently to those produced within the EU. This discourages companies from relocating production to countries with more lenient environmental standards.

Encouraging Global Emission Reductions
By imposing a carbon cost on imports, CBAM incentivizes non-EU countries to adopt cleaner industrial processes, aligning with global climate goals.

Product Coverage

Initially, CBAM targets carbon-intensive sectors such as cement, electricity, fertilizers, iron, steel, aluminum, and hydrogen. The list may expand over time to include additional products.

Mechanism Details

CBAM Certificates
Importers must buy certificates equivalent to the amount of carbon emissions embedded in their products. This mechanism mirrors the EU ETS, where domestic producers purchase allowances for their emissions. -

Exemptions 
Countries with carbon pricing mechanisms equivalent to the EU's may be exempt from CBAM, provided their climate policies align closely with EU standards.

CBAM is anticipated to

Prevent Carbon Leakage
By equalizing carbon costs, CBAM reduces the incentive for companies to relocate production to countries with lax environmental regulations.

Promote Global Climate Action
Encouraging non-EU countries to implement robust carbon pricing and cleaner production methods contributes to global emission reduction efforts.

Support EU Climate Goals: CBAM complements the EU's broader climate strategy, including the European Green Deal and the "Fit for 55" package, aiming to reduce net greenhouse gas emissions by at least 55% by 2030.

In summary, the Carbon Border Adjustment Mechanism represents a strategic approach by the EU to combat carbon leakage, promote fair competition, and drive global efforts toward a sustainable and low-carbon economy.

*UPDATE: The European Commission's "Simplification Omnibus" package, introduced in February 2025, proposes significant changes to the Corporate Sustainability Reporting Directive (CSRD) to reduce administrative burdens and enhance competitiveness.

Key proposed changes:

1/ Introduction of a Mass-Based De Minimis Threshold

• Importers of certain CBAM goods—specifically iron and steel, aluminium, fertilizers, and cement—are exempted from CBAM obligations if their annual imports are below 50 tonnes. 
• This change shifts the threshold from a previous value-based limit (€150 per shipment) to a mass-based criterion, aiming to simplify compliance for small importers. 
• The exemption is designed to exclude approximately 90% of importers while still covering around 99% of embedded emissions. 

2/ Simplification of Compliance Procedures

• The process for obtaining CBAM declarant authorization is streamlined.
• Calculations for embedded emissions are simplified, reducing the reporting burden on importers.
• Management of CBAM financial liabilities is made more straightforward, facilitating easier compliance. 

3/ Adjustment of Compliance Deadlines

• While the CBAM's full entry into force remains scheduled for January 1, 2026, the sale of CBAM certificates is postponed to February 1, 2027. 
• This delay provides importers with additional time to adapt to the new requirements. 

4/ Enhanced Measures Against Circumvention

• The Commission proposes strengthening anti-abuse provisions and developing a joint anti-circumvention strategy in collaboration with national authorities. 
• These measures aim to ensure the effectiveness and integrity of the CBAM framework. 

5/ Future Review and Potential Expansion

• A comprehensive review of the CBAM is planned for later in 2025 to assess the possibility of extending its scope to additional goods, including downstream products and indirect emissions. 
• The Commission will also explore support mechanisms for EU exporters facing competitive risks due to carbon pricing.

🔗 EP, EC