EU CBAM Explained: Carbon Border Adjustment Mechanism Compliance Guide

The EU Carbon Border Adjustment Mechanism (CBAM) is the first regulation of its kind — a carbon tariff applied at the border to prevent carbon leakage. It ensures that imported goods bear a carbon cost equivalent to what EU producers pay under the Emissions Trading System (ETS). For importers of carbon-intensive goods into the EU, CBAM creates a new category of compliance obligations that sit at the intersection of trade, environmental reporting, and financial liability.

The transitional phase is already underway. The definitive phase begins in 2026. This guide covers what compliance teams need to know.

What CBAM does

The logic is straightforward. EU manufacturers pay for their carbon emissions through the ETS. Non-EU manufacturers exporting to the EU do not. This creates an incentive for EU companies to move production to countries with lower carbon costs — carbon leakage — and gives non-EU producers a competitive advantage based purely on weaker environmental regulation.

CBAM eliminates that asymmetry. Importers of covered goods must purchase CBAM certificates corresponding to the carbon price that would have been paid if the goods had been produced under the EU ETS. If the exporter’s country of origin has its own carbon pricing mechanism, that cost can be deducted to avoid double-counting.

The financial impact is significant. At current ETS prices hovering around EUR 60-70 per tonne of CO2 equivalent, CBAM certificates will add material costs to imports of carbon-intensive goods. For sectors like steel and aluminium, where embedded emissions are high, the cost implications run into millions of euros annually for large importers.

Sectors and goods in scope

CBAM covers six categories of goods, chosen for their high carbon intensity and exposure to carbon leakage risk:

• Iron and steel: Including crude steel, steel products, ferroalloys, and downstream products like screws, bolts, and tubes
• Aluminium: Including unwrought aluminium, aluminium products, and downstream goods
• Cement: Including clinker and various cement types
• Fertilisers: Including urea, ammonium nitrate, and mixed fertilisers
• Electricity: Imported electricity from non-EU countries
• Hydrogen: Including pure hydrogen and certain hydrogen-derived products

The scope extends beyond the primary products. CBAM covers specific downstream goods — steel pipes, aluminium structures, and certain processed products — as defined by their Combined Nomenclature (CN) codes. Importers need to verify their goods against the specific CN codes listed in Annex I of the CBAM Regulation, not just the broad category descriptions.

The European Commission has signalled its intention to expand CBAM’s scope to additional sectors and products before the definitive phase is fully operational. Organic chemicals and polymers are frequently mentioned as likely additions.

The transitional phase (2023-2025)

The transitional phase, which ran from October 2023 through December 2025, was a reporting-only period. Importers of CBAM goods were required to submit quarterly CBAM reports containing:

• Quantity of imported CBAM goods (in tonnes)
• Direct and indirect embedded emissions per tonne of goods
• Carbon price paid in the country of origin (if applicable)
• The production installation and its location

No financial payments were required during the transitional phase. The purpose was data collection — building the reporting infrastructure and establishing baseline emissions data for covered goods.

However, the transitional phase carried enforcement consequences. The European Commission could impose penalties for failure to report, and corrections were required for inaccurate data. Several importers learned that “reporting only” didn’t mean “optional.”

The definitive phase (2026 onwards)

Starting 1 January 2026, CBAM transitions from reporting to financial liability. The key obligations in the definitive phase include:

Authorised CBAM declarant status: Importers must apply for and receive authorisation from their national competent authority before importing CBAM goods. Unauthorised importers cannot clear CBAM goods through customs.

Annual CBAM declaration: By 31 May each year, authorised declarants must submit a declaration covering the previous calendar year’s imports, including:

• Total quantity of each good type imported
• Total embedded emissions (direct and indirect)
• Number of CBAM certificates to be surrendered
• Carbon price paid in the country of origin for deduction

CBAM certificate purchase and surrender: Declarants must purchase CBAM certificates from their national authority at a price linked to the weekly average EU ETS auction price. Certificates must be surrendered to cover the declared embedded emissions, net of any foreign carbon price deductions and free ETS allocation adjustments.

Quarterly certificate holdings: Declarants must hold a minimum number of CBAM certificates at the end of each quarter — at least 80% of the embedded emissions of their imports during the calendar year up to that point. This prevents year-end scrambles.

Verification of embedded emissions: Emissions data must be verified by an accredited verifier. The verification requirements mirror the rigor of EU ETS verification — including site-level data from the production installation, methodology review, and uncertainty assessment.

Calculating embedded emissions

The embedded emissions calculation is where CBAM’s complexity concentrates. Embedded emissions include:

Direct emissions: Emissions from the production process of the goods, including emissions from heating, chemical reactions, and process-specific sources. For steel, this includes blast furnace emissions, electric arc furnace emissions, and downstream processing emissions.

Indirect emissions: Emissions from the generation of electricity consumed in the production process. The inclusion of indirect emissions is significant — for aluminium production, electricity-related emissions often exceed direct process emissions.

The calculation methodology requires:

• Installation-level production data from the non-EU manufacturer
• Fuel and raw material input data
• Electricity consumption and emission factor data
• Allocation of emissions to specific goods when an installation produces multiple products
• Application of the prescribed calculation methodology from the CBAM Implementing Regulation

When actual installation-level data is unavailable, importers can use default values published by the European Commission. However, default values are set conservatively — typically at the average emission intensity of the worst-performing installations. Using defaults is compliant but expensive, creating a strong incentive to obtain actual production data.

This creates a supply chain challenge. EU importers need their non-EU suppliers to provide detailed, verified emissions data at the installation level. Suppliers in countries without mandatory emissions reporting may lack the monitoring infrastructure to provide this data. The compliance burden flows upstream, and the commercial leverage to obtain cooperation varies.

Interaction with the EU ETS

CBAM and the EU ETS are designed as complementary mechanisms. As CBAM phases in, free ETS allowances for covered sectors phase out. The timeline:

• 2026: CBAM certificates cover 2.5% of embedded emissions (free allocation covers the rest)
• 2027-2033: CBAM coverage increases incrementally as free allocation decreases
• 2034: Full CBAM coverage, zero free allocation for covered sectors

This gradual transition means the financial impact of CBAM certificates escalates over time. An importer’s CBAM cost in 2026 is a fraction of what it will be in 2030, and a fraction again of the full cost in 2034. Compliance programmes need to model the trajectory, not just the current year’s exposure.

The phase-out of free allocation also affects EU producers. Companies that currently receive free ETS allowances for their production will see those allowances decrease in step with CBAM’s phase-in. The competitive playing field levels, but EU producers lose a benefit they’ve relied on for years.

Common compliance challenges

Supplier engagement: Obtaining installation-level emissions data from non-EU suppliers is the single largest operational challenge. Many suppliers are unresponsive, unable to calculate emissions, or unwilling to share proprietary production data. Importers need a strategy that combines direct engagement, third-party data providers, and strategic use of default values.

CN code classification: CBAM’s scope is defined by specific CN codes, not general product descriptions. Misclassification leads to either under-reporting (enforcement risk) or over-reporting (unnecessary certificate costs). Customs classification expertise is essential.

Verification procurement: The pool of accredited verifiers with CBAM experience is limited, particularly for installations in countries without established emissions verification markets. Early engagement with verifiers is important — the annual declaration deadline creates a seasonal bottleneck.

Multi-jurisdiction complexity: Companies importing through multiple EU member states must understand how national competent authorities implement CBAM. While the regulation is EU-level, authorisation and enforcement are national. Procedures, timelines, and communication channels vary.

Preparing for full implementation

For importers affected by CBAM, the priority actions in 2026 are:

1. Secure authorised declarant status if not already obtained
2. Map all imported goods against CBAM CN codes to confirm scope
3. Establish supplier data collection processes for embedded emissions — prioritise high-volume suppliers
4. Engage accredited verifiers for the 2026 reporting year
5. Model financial exposure across the CBAM phase-in trajectory (2026-2034)
6. Integrate CBAM reporting with CSRD disclosures — CBAM data feeds into ESRS E1 climate reporting

The regulatory obligations span trade compliance, environmental reporting, financial accounting, and supply chain management. They don’t sit neatly within a single function, and compliance requires coordination across teams that historically haven’t worked together on the same regulation.

---

AuditDSS includes CBAM within its environmental-energy regulation coverage, decomposing the regulation into individual obligations with dependency mapping to related frameworks including the EU ETS, CSRD, and EU Taxonomy. Explore AuditDSS.