CBAM

The Carbon Border Adjustment Mechanism (CBAM) is a key instrument of EU climate policy that was introduced as part of the Fit for 55 package to further reduce the EU's CO₂ emissions and mitigate the risk of carbon leakage. The CBAM regulation aims to prevent companies from relocating their production to countries with less stringent environmental regulations due to the EU's strict climate requirements. Read all about how CBAM works, its objectives and the obligations for affected companies from the Table.Briefings editorial team. What is CBAM? The Carbon Border Adjustment Mechanism ( CBAM ) is a mechanism developed by the European Union ( EU ) to ensure that the reduction of CO₂ emissions in the EU is not undermined by the relocation of emissions-intensive production processes abroad. This phenomenon is known as carbon leakage. CBAM is intended to mitigate the risk by ensuring that imports into the EU are affected by CO₂ pricing that corresponds to the EU's internal emissions allowances under the Emissions Trading Scheme (ETS). How does CBAM work? CBAM works by requiring importers of certain CO₂-intensive products from third countries to purchase CO₂ certificates that correspond to the CO₂ emissions generated during the production of these goods. This is intended to avoid distortions of competition that arise when EU companies have to pay for their emissions while foreign competitors can export their goods to the EU without incurring comparable CO₂ costs. Affected products initially come from sectors such as cement, steel, aluminium, fertilizers and electricity, which are particularly emission-intensive. The mechanism will be introduced gradually and the companies concerned will have to report on the emissions of their imports at regular intervals. CBAM Regulation and reporting obligation The CBAM Regulation specifies which products are covered by the mechanism and how the reporting and calculation of emissions should be carried out. The introductory phase of the CBAM begins in 2023 with a reporting obligation for importers. They are obliged to document the CO₂ emissions of the products they import and submit them to the relevant authorities. From 2026, the mechanism will come into full force and importers will then have to purchase additional CO₂ certificates to offset the CO₂ emissions of their imports. The CBAM reporting obligation requires detailed information on emissions along the entire supply chain. Companies must ensure that they can collect and submit accurate data in order to avoid penalties. For many companies, this will be a significant challenge as emissions data is often difficult to access and depends on the entire production chain. What is carbon leakage? Carbon leakage refers to the risk that strict climate policies in a region – such as the EU – lead to companies relocating their production to countries with less stringent climate protection regulations. This leads to an increase in global CO₂ emissions, even though emissions in the region with strict regulations are falling. The CBAM mechanism aims to mitigate this problem by imposing a carbon price on imports from third countries that is comparable to the costs incurred by EU companies through emissions trading. Carbon leakage is one of the biggest challenges in global climate policy, as it undermines the effect of regional emissions reductions and creates distortions of competition on the global market. CBAM seeks to minimize this risk and ensure that the carbon price is consistent for both domestic and foreign producers in the European market. What is the Fit for 55 package? Fit for 55 is a comprehensive package of measures developed by the EU as part of the European Green Deal to drastically reduce the EU's CO₂ emissions. The package includes various policy and legislative initiatives aimed at achieving the EU's climate targets, including a reform of the EU Emissions Trading System (ETS) and the introduction of the CBAM. The Fit for 55 package aims to strike a balance between climate protection and economic competitiveness. A central component is the strengthening of emissions trading and the shifting of CO₂ costs to emissions-intensive sectors that have not been sufficiently regulated to date. This is intended to prevent the transition to a low-carbon economy from leading to a shift of emissions to other regions. CBAM and the international dimension CBAM not only has an impact on the EU's internal market, but is also the subject of intense debate in international trade policy. Some countries see the mechanism as protectionist and fear that it could be used as a barrier to trade. In particular, countries with high CO₂ intensity in their production processes, such as China, Russia and India, have expressed concerns about the impact of CBAM on their exports to the EU. The EU, on the other hand, argues that CBAM is necessary to create a level playing field and ensure that the EU's climate targets are not undermined by imports from countries with less stringent climate targets. The mechanism could also lead to other countries tightening their climate policies in order to secure their exports to the EU. What does CBAM mean for companies? For companies that operate in the EU or export to the EU, CBAM means that they will have to check their production processes more closely for CO₂ emissions and adapt them if necessary. It could be worth investing in lower-emission technologies to reduce the cost of CO₂ certificates. Companies in industries such as steel, cement, aluminum and chemicals in particular will have to adapt to the new regulations. For importers, CBAM means an additional bureaucratic hurdle, as they are obliged to record and report the emissions data for the products they import. They will also have to be prepared to purchase CO₂ certificates for their imports from 2026, which will incur additional costs. The Carbon Border Adjustment Mechanism (CBAM) is a key component of EU climate policy, which was developed to minimize the risk of carbon leakage and ensure that the EU's climate targets are not undermined in global trade. Although the mechanism is challenging for companies, it is necessary to ensure fair competition between European and international companies while reducing CO₂ emissions worldwide. Companies must adapt to the new requirements and develop strategies to adapt their production processes to the new climate requirements. CBAM will play a central role in European climate policy in the coming years and could also encourage other countries to intensify their own climate protection measures.