CBAM

The global regulatory landscape for environmental accountability is undergoing a profound transformation. At the forefront of this shift is CBAM — the Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU by requiring importers to declare and pay for the greenhouse gas emissions embedded in covered products. This landmark instrument is designed to equalise the carbon price between domestic European products and imports, ensuring that the EU’s climate objectives are not undermined by production shifting to countries with less ambitious environmental policies.

For sustainability directors, procurement officers, and organisations importing goods into the EU, this is more than a simple tax. It is a fundamental change in how international supply chain data must be captured, verified, and reported, with direct consequences for procurement costs, supplier selection, compliance risk, and continued access to the EU market. We recognise that the transition from voluntary ESG reporting to mandatory carbon accounting requires a high degree of technical precision and radical transparency across the entire value chain.

The purpose of this mechanism is to prevent carbon leakage. This phenomenon occurs when businesses transfer the production of carbon-intensive goods to jurisdictions with lax emission constraints. By imposing a financial levy on the embodied carbon of certain imports, the European Union is effectively extending its carbon pricing logic beyond its borders, compelling global manufacturers to align with systemic decarbonisation goals. In practical terms, that means understanding embedded emissions, sector-specific reporting challenges, verification requirements, implementation timelines, common misconceptions, and the compliance steps needed to respond early rather than absorb avoidable penalties later.

Key Takeaways

• Regulatory Equalisation: CBAM ensures that imported goods carry the same carbon financial burden as items produced within the EU Emissions Trading System (ETS).
• Phased Implementation: The transitional phase began in October 2023, requiring quarterly reporting, with full financial obligations commencing in 2026.
• Scope of Application: Initial sectors include cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen, with planned expansions to downstream products.
• Primary-Source Data: Relying on secondary emission factors will become increasingly risky; verified primary data from global suppliers is now a strategic necessity.
• Procurement Impact: The mechanism will directly influence the Total Cost of Ownership (TCO) for imported materials, necessitating a re-evaluation of supplier selections.
• Financial Compliance: Importers must purchase CBAM certificates to cover the embedded emissions of their goods, mirroring the weekly average auction price of EU ETS allowances.

What is CBAM?

In technical terms, CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU is a policy tool intended to mitigate the risk of carbon leakage while supporting the EU’s “Fit for 55” package. It functions as a climate measure that targets the carbon-intensive imports entering the European single market. We define it as the world’s first carbon border tax system that requires importers to submit a CBAM declaration and report embedded carbon emissions for covered products.

Quantifying these emissions involves a rigorous calculation of both direct emissions (released during the production process) and indirect emissions (under specific conditions, such as electricity consumption). As the EU gradually phase out free allowances for domestic industries under the ETS, this mechanism scales up to fill the gap, ensuring a level playing field for all market participants regardless of their geographical location.

Table 1: Key Differences Between EU ETS and CBAM

Feature	EU ETS	CBAM
Target Audience	EU-based industrial installations	EU importers of specific commodities
Mechanism	Cap-and-trade system	Carbon certificates based on embedded emissions
Carbon Pricing	Market-driven auction price	Reflects the weekly average ETS auction price
Verification	Accredited EU verifiers	Accredited verification of installation data

The Strategic Significance of Embedded Emissions and Carbon Leakage

The core of the CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU lies in the concept of “embedded emissions.” This refers to the total volume of greenhouse gases released during the manufacturing of a product. We view the accurate measurement of these emissions not just as a compliance hurdle, but as a critical component of radical transparency within global supply chains.

For many organisations, identifying emissions at the installation level in non-EU countries is a massive undertaking. Traditionally, procurement departments have relied on generic industry averages. However, under this new regime, using default values (which are often set at punitive levels) will result in higher certificate costs. Therefore, obtaining verified primary-source data is a strategic necessity for cost mitigation.

Direct vs. Indirect Emissions

Understanding the distinction between direct and indirect emissions is vital for accurate reporting. Importers must calculate and declare the greenhouse gases emitted during the production processes of covered goods, not just report shipment volumes. Direct emissions include all GHG released during the physical production process, such as the heating of furnaces in steel production or chemical reactions in fertiliser manufacturing. 

Indirect emissions pertain to the electricity consumed during these processes. During the transitional phase, reporting both is mandatory for all covered sectors. However, the definitive regime may apply different treatments to indirect emissions depending on the specific product category and the prevalence of carbon pricing in the country of origin.

Calculating the Carbon Debt and CBAM Certificates

The calculation methodology required for compliance is stringent. Companies must calculate embedded emissions at installation level using actual data where available rather than relying on defaults. It necessitates a “cradle-to-gate” approach, where the boundaries of the assessment begin at the extraction of raw materials and end at the factory gate of the reporting installation. This mirrors the principles found in the GHG Protocol and ISO 14067, but with specific EU-mandated adjustments for specific industrial processes that determine the carbon embedded in goods using actual emissions data and other emissions data from the facility.

Implementation Timeline and CBAM Compliance Obligations

Compliance with CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU is structured as a multi-year rollout. This allows organisations to build the necessary data infrastructure and engage with their global supply base before the financial impact is fully realised, even as importers take on administrative burdens tied to tracking, collecting, and verifying emissions across suppliers under evolving cbam rules. Companies exporting to the EU also face rising emissions reporting and verification requirements if they want to preserve market access and maintain cbam compliance. We expect the scrutiny on data quality to intensify significantly as we approach the 2026 deadline, with the transitional phase running from October 2023 to December 2025 and the definitive phase starting on January 1, 2026.

The Transitional Phase (2023–2025)

Since October 2023, importers have had to begin cbam reporting as part of the transitional phase. During this period, importers must report emissions and embedded emissions in quarterly filings without having to purchase certificates yet, but the reporting obligation is absolute. Importers must submit quarterly reports detailing the quantity of goods imported, the specific embedded emissions (direct and indirect), and any carbon price already paid in the country of origin. 

This phase is intended to serve as a learning period for both the European Commission and the private sector. It provides an opportunity to refine calculation methodologies and ensure that deep-tier visibility into supplier operations is established before financial penalties for non-compliance are introduced.

The Definitive Regime (2026 onwards)

Starting in January 2026, the mechanism enters its full operational state, and the cbam regulation applies carbon costs to cbam goods cleared from January 1, 2026. Importers exceeding 50 tonnes must apply for authorised CBAM declarant status to continue their operations, and indirect customs representatives acting on their behalf must also be authorised where relevant. The financial obligations involve:

• Purchasing CBAM certificates from January 1, 2026, corresponding to the total embedded emissions of the imported goods.
• Submitting an annual declaration by 31 May each year for the preceding calendar year; from 2027, importers must surrender cbam certificates for 2026 imports by September 30, 2027, and by September 30 each year thereafter.
• Ensuring all reported emission data is verified by an independent, accredited body, as verified emissions data is mandatory for CBAM compliance.
• Adjusting for any carbon pricing already effectively paid in the country of production to avoid double taxation; importers may deduct any carbon price paid abroad from CBAM fees when properly evidenced.

Sector-Specific Challenges and Opportunities

While the regulation currently targets high-impact heavy industries, its influence radiates through the entire economy. We believe that companies operating in the food and beverage, retail, and horticulture sectors must also remain vigilant, as the scope will almost certainly expand to include downstream products containing these base materials. More specifically, cbam applies to cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen, and the eu cbam is expected to eventually cover over 50% of emissions in ETS sectors.

Iron, Steel, and Aluminium

For the metals sector, the CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU represents a major shift in procurement strategy. Steel and aluminium are ubiquitous in global manufacturing. Importers must now scrutinise the energy mix of their suppliers. In practice, such a policy is meant to encourage cleaner industrial production globally by making carbon-intensive metals less competitive when they involve higher carbon emissions, with a focus on carbon intensive industries and goods with high greenhouse gas emissions and carbon leakage risk. A supplier utilising coal-fired power for aluminium smelting will become significantly more expensive than one using renewable energy, regardless of the base price per tonne.

Fertilisers and Hydrogen

The inclusion of fertilisers has massive implications for the food and beverage industry. Although chemical fertilisers are “upstream” from a retail perspective, the increased costs will inevitably flow through the supply chain, and the mechanism is intended to reduce emissions by shifting demand toward lower-carbon fertiliser and hydrogen production. Organisations must decide whether to absorb these costs or work with producers to transition toward “green” ammonia and low-carbon agricultural inputs to maintain price competitiveness, since cleaner production processes with fewer emissions can lower future CBAM exposure.

Building Scenarios for Risk Mitigation

We recommend that sustainability directors conduct exposure mapping across their entire procurement portfolio. This involves:

1. Identifying all HS (Harmonised System) codes in your inventory that fall under the regulation.
2. Quantifying the volume of imports from non-EU countries.
3. Modelling cbam certificate prices based on EU ETS auction averages, which will be set quarterly in 2026, to understand the potential financial liability. The first published price for Q2 2026 is €75.28, which can serve as a benchmark for scenario modelling.
4. Engaging in primary-source verification with top-tier suppliers to obtain actual emission data.

The Imperative for Verified Primary-Source Data

The reliance on secondary data or “averages” is no longer a viable long-term strategy for ESG compliance. CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU explicitly prioritises actual emissions data from the installation where the goods were produced, and the cbam regulation favors actual data over default values wherever possible. If an importer cannot provide this, the authorities will apply default values based on the worst-performing 10% of EU installations for that product category.

This “worst-case” default approach is designed to be punitive. It creates a clear economic incentive for radical transparency. By investing in digital platforms and auditing services that verify supplier claims on the ground, companies can use verified emissions data on embedded greenhouse gas emissions to prove their imports are cleaner than the industry average, thereby reducing their carbon certificate costs. We provide the tools to bridge this data gap, moving businesses from estimation to verified impact.

The Role of Auditing and Verification

Verification of emissions data is not merely a “box-ticking” exercise; it is a legal requirement under CBAM compliance in the definitive regime. Accredited verifiers will check the boundaries of the production process, the accuracy of the monitoring systems, and the validity of the emission factors used, including reviewing actual data used to measure emissions embedded in the product and the carbon emitted during production. This level of scrutiny mirrors the financial auditing process, placing carbon data on equal footing with fiscal reporting. 

We assert that companies should start trial audits now. Waiting until 2026 to verify a complex global supply chain for the first time is a high-risk strategy that invites both financial penalties and reputational damage.

Integration into Corporate Strategy

CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU should not be viewed in isolation. It is part of a broader systemic shift including the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). Together, these regulations demand a holistic approach to supply chain ethics and environmental performance. The border adjustment mechanism CBAM is also expected to generate about €7.2 billion annually for the EU, reinforcing its strategic role in fair carbon emissions pricing.

Procurement directors must now integrate carbon costs into their Total Cost of Ownership models. A supplier in a country with a high-carbon electricity grid may initially offer a lower unit price, but once the carbon certificates are added, the effective cost might exceed that of a premium, lower-carbon supplier within the EU or a country with equivalent carbon pricing, as this mechanism sits alongside other carbon pricing mechanisms and can be compared conceptually with a carbon tax when assessing sourcing strategy. This creates a powerful commercial driver for global decarbonisation.

Case Study: Navigating Steel Imports

Consider a retail chain importing steel shelving from a non-EU manufacturer. Under the old regime, the only variables were production cost, quality, and logistics. Under the new mechanism, the importer must account for the carbon intensity of the blast furnace used. Using actual, verified emissions data from third countries can materially reduce certificate exposure compared with default values.

By switching to a manufacturer using Electric Arc Furnace (EAF) technology powered by renewable energy, the importer could potentially reduce their carbon certificate liability by upwards of 70%. Under the mechanism, products made with cleaner production processes and lower embedded carbon emissions become more competitive. This decision requires deep-tier visibility into the manufacturing process—information that was previously considered non-essential for procurement.

Addressing Common Misconceptions

There are several misconceptions regarding CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU that can lead to strategic errors. We believe it is vital to clarify these points to ensure robust compliance planning.

Misconception 1: “It’s only a tax on the importer.”
While the importer pays the certificate, the financial pressure is designed to push back up the supply chain. It is actually a tool for value chain transformation. Suppliers who cannot provide verified data or demonstrate decarbonisation will lose their market access to the EU.

Misconception 2: “Small volumes are exempt.”
There is an extremely limited “de minimis” exemption for consignments with a value of less than €150. For the vast majority of industrial and retail imports, there is no escape from the reporting or financial requirements.

Misconception 3: “We can use our current ESG reports for compliance.”
Current ESG reporting is often high-level and organisational. This mechanism requires product-specific carbon footprints (kg CO2e per kg of product), calculated according to very specific methodology rules that do not always align with general Scope 1, 2, and 3 reporting.

Practical Compliance Steps for Procurement Officers

To navigate the complexities of CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU, we recommend the following actionable roadmap:

1. Internal Audit: Map your imports against the Annex I list of HS codes currently covered by the regulation.
2. Supplier Engagement: Contact your suppliers in these categories immediately. Assess their ability to provide installation-level emission data, including verified emissions data and the information needed for secure data exchange with importers and verifiers.
3. Data Infrastructure: Implement a digital system capable of supporting emissions reporting, cbam registry workflows, and structured data exchange, not just storing and aggregating quarterly carbon data. Spreadsheets are insufficient for the rigor required by the EU Commission.
4. Financial Planning: Model the impact of current EU ETS prices on your import costs for 2026. This should be a line item in your long-term procurement budget.
5. Verification Strategy: Identify accredited verification partners who can audit your production facilities outside the EU and validate actual emissions data used in CBAM reporting.

Frequently Asked Questions

Which countries are exempt from the mechanism?

Countries that participate in the EU ETS or have a carbon pricing system linked to it are generally exempt. The EU also plans to exempt goods from 46 least developed countries from CBAM, while standard rules continue to apply to most other third countries. This currently includes members of the European Economic Area (Norway, Iceland, Liechtenstein) and Switzerland. It is essential to monitor updates, as other nations may negotiate exemptions if they implement equivalent domestic carbon taxes.

What happens if a supplier refuses to provide emission data?

In the absence of primary-source data from the supplier, you are required to use default values provided by the European Commission. These values are designed to be significantly higher than the average, which will substantially increase your costs for carbon certificates. Over time, this makes non-transparent suppliers commercially unviable.

Is this regulation consistent with WTO rules?

The European Commission has meticulously designed the mechanism to be compliant with World Trade Organization rules. Even so, some critics argue that, within international trade, the mechanism could create significant barriers for developing countries despite that WTO-focused design. Some analyses estimate it may impose costs equivalent to 2–6% on exports from developing countries, including cases where those exporters currently benefit from tariff-free access to the EU market, and these effects could weaken the competitive advantage of exports from developed countries’ poorer trading partners. By ensuring that the cost of carbon certificates mirrors the cost paid by domestic EU producers, the policy aims to avoid being classified as a discriminatory tariff, instead positioning itself as a legitimate environmental measure.

How does this link to other ESG regulations like CSDDD?

While this mechanism focuses strictly on carbon pricing, it is a component of the broader movement toward proven impact. Climate change policy is driving this closer integration of supply-chain due diligence and carbon accounting. Effective compliance requires the same level of supplier relationship management and data verification as required for modern slavery or deforestation audits under directives like the CSDDD. The EU intends this green transition to encourage cleaner production methods globally, although developing countries could face significant barriers to EU trade and some may need differentiated treatment and support, including plans to exempt goods from 46 least developed countries. We treat these as interconnected facets of a single, transparent supply chain strategy.

Will the scope of the mechanism expand in the future?

Yes. The European Commission has clearly stated it will assess the feasibility of extending the scope to other sectors, including plastics and organic chemicals, by 2026, and it plans to expand CBAM to downstream goods by 2028. The ultimate goal is to include all sectors covered by the EU ETS by 2030, meaning virtually all carbon-intensive manufacturing will eventually be impacted, likely capturing more carbon intensive products moving through eu imports. A uk cbam is also planned from 2027, which increases the need for scalable emissions data and compliance processes for companies trading across both markets.

As we navigate this new era of CBAM — Carbon Border Adjustment Mechanism imposing carbon costs on imported goods into the EU, the companies that thrive will be those that embrace radical transparency and primary-source verification. We are here to partner with you in turning this regulatory challenge into a systemic advantage for your organisation and the planet.