What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is a pioneering climate policy introduced by the European Union to put a price on carbon-intensive imports, aligning their carbon cost with that faced by domestic EU producers under the EU Emissions Trading System (EU ETS).
Why was CBAM introduced?
The goal is to prevent carbon leakage—when carbon-intensive industries shift production to regions with lax climate policies, resulting in no net reduction in emissions. CBAM ensures that imported goods bear the same carbon price burden as EU-made goods, preserving fair competitiveness and supporting climate objectives.
Timeline & Phases:
- Transitional Phase (1 October 2023 – 31 December 2025): Importers must report quarterly on embedded emissions; no fees are charged yet.
- Definitive Phase (From 1 January 2026): Reporting becomes annual; importers must purchase CBAM certificatesto cover carbon emissions embedded in goods. By 2034, the mechanism is fully phased in, with 100% coverage and the elimination of free ETS allowances for high-risk sectors.
Sectors Initially Affected:
CBAM initially applies to six carbon-intensive categories: iron & steel, cement, fertilisers, aluminium, hydrogen, and electricity. Over time, coverage may expand to include chemicals, polymers, petroleum products, and other industrial goods by 2030.
Implications of CBAM
1. Enhanced Competitiveness for Clean Producers
CBAM favors low-carbon producers—particularly those using cleaner technologies such as electric arc furnaces for steel—by making high-emission imports more costly. Notably, firms like Meranti Green Steel in Thailand are positioning themselves strategically to benefit from increased demand for greener exports to the EU.
2. Supply Chain Transformation & Reporting Burden
Importers and exporters must now invest in systems to accurately measure, report, and verify the carbon intensity of their products. The obligation to supply reliable “real data” stresses data collection across supply chains, posing practical challenges.
3. Trade Tensions & Global Dynamics
CBAM has elicited concern from trade partners, especially developing countries, who argue it may act as a de facto carbon tax or protectionist measure. India’s Commerce Minister warned recently that CBAM could end up hurting European industries through rising input costs.
4. Stimulus for Global Carbon Pricing
CBAM might catalyze broader adoption of carbon pricing. Countries such as the UK (from 2027), Canada, Australia, and the US are exploring similar border adjustments, potentially leading to more globally harmonized climate policies.
5. Revenue and Climate Financing Opportunities
CBAM certificates will generate revenue for the EU. Proposals—including “CBAM-plus”—suggest redirecting funds to support decarbonization and capacity-building in developing countries, aligning climate action with global equity goals.
6. Potential Loopholes & “Two-Tier Markets”
Critics highlight the risk of “two-tier markets,” where firms produce low-carbon exports for the EU while maintaining high-emission production for other markets, undermining CBAM’s global impact.
Looking Ahead: What Should Businesses Know?
For EU Importers:
- Assess whether your goods fall within CBAM’s scope.
- Begin tracking and reporting emissions data now—even during the transitional phase.
- Prepare to purchase CBAM certificates starting in 2026.
For Non-EU Exporters:
- Engage with customers early: provide emissions data proactively.
- Invest in greener technologies to remain competitive.
For Policy Stakeholders:
- Monitor global policy developments—CBAM-like measures are proliferating.
- Advocate for coherent trade rules and fair treatment of developing nations.
CBAM represents a landmark shift in climate policy—integrating carbon pricing with trade regulations. It not only ensures a level playing field within the EU but also acts as a lever for global decarbonization. For businesses and policymakers alike, proactive adaptation and strategic engagement with CBAM will be critical to navigating this evolving landscape.
If you need assistance with navigating CBAM, don’t hesitate to reach out to us on +971547801615.