CBAM Explained: The EU Carbon Border Adjustment Mechanism and What It Means for Your Business

On January 1, 2026, the EU's Carbon Border Adjustment Mechanism (CBAM) became fully operational. This is the world's first large-scale carbon border pricing system, and it fundamentally changes the economics of importing carbon-intensive goods into Europe. If you import cement, iron, steel, aluminium, fertilisers, electricity, or hydrogen into the EU, or if you produce these goods for export to EU customers, CBAM now applies to you.

After a two-year transitional phase (October 2023 to December 2025) focused on emissions reporting, the definitive phase now requires importers to purchase and surrender CBAM certificates that reflect the carbon cost embedded in their imported goods. The price of these certificates is tied directly to the EU Emissions Trading System (EU ETS) allowance price, which traded at approximately 65 to 85 euros per tonne in early 2026. This guide explains what CBAM is, who it affects, how it works, what the compliance requirements are, and how to prepare.

What Is CBAM and Why Does It Exist?

CBAM is an EU policy that puts a carbon price on imported goods so they face the same carbon cost as goods produced inside the EU under the EU ETS. Its purpose is to prevent carbon leakage: the risk that EU manufacturers, faced with the cost of carbon allowances under the ETS, relocate production to countries with weaker or no carbon pricing, thereby simply shifting emissions rather than reducing them.

Until CBAM, EU producers paid for their carbon emissions through the ETS while their non-EU competitors faced no equivalent cost. This created an unfair competitive disadvantage for EU industry and undermined the EU's climate ambition. CBAM closes this gap by ensuring that the carbon content of imported goods is priced equivalently to domestic production. As the EU phases out free emission allowances for covered sectors (a gradual phase-out running from 2026 to 2034), CBAM phases in to replace them.

CBAM is part of the European Green Deal, the EU's roadmap to becoming the first climate-neutral continent by 2050. It complements the CSRD, the EU Taxonomy, and the CSDDD in driving systemic decarbonisation across the European economy and its trading partners.

Which Goods Are Covered?

CBAM currently applies to imports in six sectors, selected because they are the most carbon-intensive and at the highest risk of carbon leakage:

In December 2025, the EU strengthened CBAM by adding a range of downstream industrial goods for further processing in the value chain. The Commission plans a broader review potentially expanding scope to additional sectors and downstream goods covered under the EU ETS. With the current scope, CBAM captures more than 50% of the emissions in ETS-covered sectors.

The 50-tonne de minimis threshold: The 2025 Omnibus simplification introduced a mass-based exemption: importers bringing in 50 tonnes or less of CBAM goods per year are exempt from the mechanism. This excludes approximately 90% of importers (mainly SMEs and individuals) while still capturing the vast majority of emissions. Hydrogen and electricity imports are excluded from this exemption. 

Timeline: From Reporting to Paying

How CBAM Works: The Mechanics

Step 1: Determine if you are in scope. Check whether your imported goods fall under CBAM by their Combined Nomenclature (CN) codes. The CBAM Regulation lists all covered CN codes. If your annual imports exceed 50 tonnes (cumulative net mass across all CBAM goods), you must comply.

Step 2: Register as an authorised CBAM declarant. Register via the EU's Authorisation Management Module (AMM) in the CBAM Registry. You need a Uniform User Management and Digital Signatures (UUM&DS) profile from your National Competent Authority (NCA). Applications must be submitted by 31 March 2026. If your application is registered before this date, you may continue importing provisionally until the decision takes effect.

Step 3: Collect emissions data from suppliers. You must determine the embedded emissions of your imported goods. There are two approaches: actual verified emissions (supplier-specific data from the production installation, verified by an accredited verifier) or EU default values (conservative benchmarks set by the Commission, applied when actual data is unavailable). Default values are deliberately higher than average, creating a financial incentive for importers to obtain actual data from their suppliers.

Step 4: Calculate your CBAM obligation. The formula is: CBAM cost = embedded emissions above the product benchmark multiplied by the phase-in rate multiplied by the CBAM certificate price minus any eligible carbon price already paid in the country of origin. In 2026, the certificate price is the quarterly average of EU ETS auction clearing prices. From 2027, it shifts to a weekly average.

Step 5: Purchase and surrender certificates. Buy CBAM certificates from the national authority in your country of establishment. From 2027 onwards, you must hold certificates covering at least 50% of year-to-date embedded emissions at the end of each quarter. Submit your annual CBAM declaration by 30 September each year and surrender certificates equal to your verified embedded emissions.

Carbon price deduction: If your supplier has already paid a carbon price in the country of production (e.g., through a national carbon tax or ETS), the corresponding amount can be deducted from your CBAM certificate obligation. The European Commission will publish default carbon prices for third countries. This prevents double taxation and encourages global carbon pricing adoption. 

Who Is Affected?

EU importers are the primary compliance entities. If you import CBAM-covered goods above the 50-tonne threshold, you must register, collect emissions data, purchase certificates, and submit annual declarations. Failure to comply results in penalties of 100 euros per undeclared tonne of CO2, plus potential import delays and restrictions.

Non-EU producers and exporters are indirectly but significantly affected. EU importers will demand supplier-specific emissions data to avoid using costly default values. From 2026, third-country manufacturers can register their production sites in the CBAM Registry to securely share verified emissions data with importers. Producers with lower carbon intensity have a competitive advantage: their EU customers face lower CBAM costs.

Customs agents and indirect representatives may handle CBAM declarations on behalf of importers. They must be established in an EU member state and hold an EORI number.

Supply chain and procurement teams across industries need to understand CBAM because it directly affects the landed cost of imported raw materials. A steel importer, for example, must now factor CBAM certificate costs into procurement decisions, which may shift sourcing toward lower-carbon suppliers or domestic EU production.

Compliance Checklist for 2026

Check your CN codes

Review all imported goods against the CBAM Regulation's Annex I to determine which products are in scope. Use your customs declarations and TARIC codes.

Assess the 50-tonne threshold

Calculate your total annual import volume of CBAM goods (cumulative net mass). If under 50 tonnes, you are exempt (except for hydrogen and electricity). If over, proceed to registration.

Register as authorised declarant

Contact your National Competent Authority. Obtain UUM&DS access. Submit your application in the CBAM Registry AMM by 31 March 2026. Obtain your CBAM account number.

Engage suppliers for emissions data

Request installation-specific emissions data from your non-EU suppliers. Provide them with the CBAM data requirements. Encourage them to register in the CBAM Operators Portal. Use actual verified data wherever possible to avoid expensive default values.

Calculate embedded emissions

Apply the EU methodology to calculate direct (and for some sectors, indirect) embedded emissions per tonne of imported product. Factor in product benchmarks and the phase-in rate.

Budget for CBAM certificates

Estimate your annual CBAM cost: embedded emissions (above benchmark) multiplied by EU ETS price (approximately 65 to 85 euros per tonne in 2026). Factor in any carbon price deductions from origin countries. Include CBAM costs in your procurement budgets and pricing models.

Ensure correct customs declarations

From 1 January 2026, specific TARIC document codes must be declared on customs declarations for CBAM goods. Key codes include Y128 (CBAM account number), Y137 (de minimis threshold), and Y238 (application submitted before 31 March 2026). Inform your customs broker or agent.

Submit annual declaration and surrender certificates

Submit your first annual CBAM declaration by 30 September 2027 (covering 2026 imports). Purchase and surrender certificates equal to your verified embedded emissions. Maintain records for audit. Repeat annually.

The Bigger Picture: CBAM and Global Carbon Pricing

CBAM is not happening in isolation. The UK is developing its own CBAM, scheduled for 2027. Japan's GX-ETS became mandatory in 2026. Australia's Safeguard Mechanism is tightening. India joined the Joint Crediting Mechanism as the 31st partner country in September 2025. China added cement, steel, and aluminium to its national ETS in March 2025. The direction is clear: carbon pricing is becoming global, and border adjustments are the mechanism for ensuring that domestic carbon costs do not disadvantage local producers.

For businesses, the strategic implication is straightforward: decarbonise your operations and supply chain now, or pay increasingly higher carbon costs on imports and production. Companies that invest in lower-carbon production processes, renewable energy sourcing, and supplier engagement will face lower CBAM costs, lower ETS costs, and a competitive advantage in a carbon-constrained global economy.

Conclusion

CBAM transforms the economics of importing carbon-intensive goods into the EU. It is no longer possible to avoid carbon costs by sourcing from countries without carbon pricing. The mechanism is operational, the penalties are real (100 euros per undeclared tonne), and the scope will expand. If you import cement, steel, aluminium, fertilisers, electricity, or hydrogen into the EU above the 50-tonne threshold, you must register as an authorised declarant by 31 March 2026, engage your suppliers for actual emissions data, calculate your embedded emissions, budget for CBAM certificate costs, and submit your first annual declaration by 30 September 2027. The companies that act now will have accurate data, efficient processes, and competitive supply chains. The companies that delay will face inflated costs from default values, last-minute compliance scrambles, and potential import disruptions.