The Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) is one of the EU’s most consequential climate policy instruments. At its core, CBAM is about levelling the playing field, ensuring that imported products bear the same carbon cost as goods produced within the EU’s regulatory framework. But beyond its technical design, CBAM signals a shift in climate policy from internal ambition to external leverage, pressuring global producers to decarbonise or risk losing access to one of the world’s largest markets.

As reporting requirements take effect and financial obligations began on 1^st January 2026, companies across the value chain are required to rapidly adapt to a new era of carbon accountability at the border.

Introduction

The EU’s Carbon Border Adjustment Mechanism (CBAM) is a flagship instrument designed to put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU to encourage cleaner industrial production in non-EU countries and to reduce carbon leakage from EU Industries.

By confirming that a price has been paid for the embedded carbon emissions generated during the production of goods imported into the EU, CBAM ensures that the carbon price of imports matches that of domestic production and that the EU’s climate objectives are upheld.

The EU CBAM applies to imports of carbon-intensive goods, for now within the categories of iron and steel, aluminium, cement, fertilisers, hydrogen and electricity. During the CBAM transitional phase from 2023-2025, importers already reported embedded emissions in these products quarterly. With the CBAM entering its definitive regime from 2026, importers are required to purchase CBAM certificates to cover the emissions in imported products.

How the EU’s CBAM may impact your business

While the EU CBAM is altering cost structures and supplier relationships, for many firms the true challenges lie elsewhere. Although it is designed to level the carbon‑cost playing field between EU and non‑EU producers, its implementation brings a suite of regulatory, financial, and operational exposures that businesses must proactively manage.

From 1 January 2026, importers of selected carbon‑intensive goods will be subject to embedded‑emissions reporting, with associated financial liabilities materialising in 2027 through CBAM certificate surrender. In addition to these direct compliance requirements, CBAM is set to alter procurement cost structures, supply‑chain resilience considerations, and the ability to compete in increasingly carbon‑sensitive markets.

Understanding these challenges and embedding a forward-looking response into business strategy is important for companies aiming to remain competitive and compliant. Five key reasons as to why companies should take note are summarised below.

1. Increased input costs

One of the most immediate and quantifiable impacts of CBAM is the increase in cost of CBAM goods. Companies importing products in the CBAM scope into the EU will be required to purchase CBAM certificates (from 2027) that reflect an increasing share of the carbon emissions embedded in those products. Certificates will be priced in alignment with the EU ETS, which has seen significant price volatility and is expected to trend upward as the EU tightens its decarbonisation targets. This creates a new cost layer for importers of carbon-intensive materials such as aluminium, steel, cement, fertilizers and hydrogen.

EU producers of CBAM goods will also gradually lose free allocation of ETS allowances, meaning that they will face additional carbon costs.

For manufacturers relying heavily on CBAM goods, whether imported or purchased within the EU, this means narrower profit margins unless costs can be passed on, in which case customers will face higher prices.

2. Supply chain disruption

CBAM is fundamentally altering global sourcing strategies by embedding carbon as a cost driver in procurement decisions. Companies will increasingly favour low-carbon suppliers to minimise the number of CBAM certificates they must purchase. This shift creates commercial pressure on third-country producers to disclose and reduce emissions, which many may be unwilling or unable to do. As a result, businesses may be forced to phase out long-standing suppliers in favour of those with credible emissions transparency and performance.

These shifts may disrupt continuity in raw material and component sourcing. The need to evaluate and potentially replace suppliers on carbon criteria could lead to delays, quality variability and increased input costs. In regions without robust carbon accounting infrastructure, companies may default to conservative emissions assumptions, increasing costs and further incentivising supplier diversification.

3. Regulatory and administrative complexity

CBAM adds a significant layer of regulatory and administrative complexity for businesses operating in or trading with the EU. The mechanism creates new compliance roles, most notably the “authorised CBAM declarant”, which is essentially the importing entity and is responsible for emissions reporting and CBAM declarations. These reports must detail both direct and indirect emissions associated with imported goods and be substantiated with documentation from upstream production processes. Further, reporting on actual emissions requires the physical verification of CBAM installation in third countries.

Compliance requires navigating multiple legal instruments, including the regulation establishing the CBAM (Regulation 2023/956), the CBAM Implementing Regulation (Regulation 2023/1773), and associated guidance from the European Commission with many guidance documents having only been published in December 2025.

On 17 December, 2025, the European Commission published a long-waited suite of implementing legislation and guidance for CBAM. It provides a more detailed framework for calculating CBAM‑relevant emissions, including the use of default values, rules for free allocation adjustments, and stringent requirements for verifying actual emissions from third‑country installations. A key takeaway is that the newly issued default values are significantly higher than anticipated, strengthening the incentive for importers to report actual emissions instead of relying on defaults. At the same time, the expanded verification principles add substantial complexity. Both importers and non‑EU producers face demanding data collection, documentation, and audit processes, intensifying administrative burdens across the supply chain. In summary, the published legislation is complex, lengthy and detailed, making it difficult for businesses to make informed decisions and take consequential steps, to prepare and comply.

4. Regulatory uncertainty

CBAM is progressing rapidly and entered its definitive phase at the start of this year, with legislative adjustments continuing to arrive at a pace that leaves businesses little time to respond. Notably, on 17^th December, just two weeks before the definitive regime took effect, the EU released a broad package of secondary legislation that clarified critical aspects of CBAM’s application. Although the financial obligation to surrender certificates for 2026 has been deferred to 2027, import‑level compliance remains stringent: missing CBAM documentation at the border can still lead to containers being held by EU customs.

Further changes to CBAM are expected. These include already announced measures such as anti‑circumvention measures, as well as future adjustments driven by early feedback from the mechanism’s application and potential responses to unforeseen market conditions. Based on initial reactions, the Commission has already introduced a proposed amendment that would allow CBAM to be suspended in situations of severe price impacts on specific goods, a criterion that remains broadly defined.

Together, these shifting requirements create a regulatory environment where companies must continuously monitor developments, adapt internal processes, and coordinate closely with suppliers to remain compliant.

5. Policy development and extension

The CBAM scope will further develop in the coming years, vertically as well as horizontally.

Vertically, from 2028, downstream products in the steel and aluminium sectors will be in scope of CBAM, together with pre-consumer scrap to close much debated loopholes of the current regulation.

Horizontally, additional ETS sectors are expected to be incorporated into the CBAM toward 2030, while the exact timeline remains unclear. This aims to align the CBAM more closely with the EU ETS encompassing a broader range of carbon-intensive goods and sectors vulnerable to carbon leakage. Extensions are likely to include products such as crude petroleum, inorganic chemicals, synthetic rubber and non-ferrous metals.

These proposed changes would have far-reaching implications for companies operating internationally. Importers will face expanded compliance obligations, including the need for more robust emissions reporting and verification systems for more types of products and more complex products. Companies may also need to re-evaluate supply chain partnerships to ensure they can access reliable emissions data, particularly for complex or multi-sourced goods. Financially, the cost of purchasing CBAM certificates for a wider array of products would materially impact import prices and margins.

In other words, an extension of the CBAM scope will mean that all the aforementioned challenges will apply to a wider range of companies and industries.

Turning CBAM challenges and uncertainty into strategic readiness

The CBAM is reshaping the regulatory and economic landscape for global trade in carbon-intensive goods. For companies across the value chain, the risks are real including rising input costs, supply chain fragility, administrative complexity, and mounting stakeholder scrutiny. The degree and scope of the challenges will be industry and sector-specific and vary from product to product, depending on market dynamics, trading patterns and carbon intensities.

Yet, these challenges also represent a strategic inflection point. Businesses that act now to model their CBAM exposure, secure compliant supply chains and embed carbon performance into procurement and reporting will be better positioned to absorb regulatory shocks and capture emerging market advantages. Moving forward, companies should take a proactive approach to understanding and acting on the CBAM, because the implications will likely be significant and wide-reaching.