The Carbon Border Adjustment Mechanism:Rewiring trade for a low-carbon economy

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.

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

By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU's climate objectives are not undermined.

The EU CBAM applies to imports of carbon-intensive goods within the categories of iron and steel, aluminium, cement, fertilisers, hydrogen and electricity. During the CBAM transitional phase from 2023-2025, importers must report embedded emissions in these products quarterly, and when the transitional phase ends in 2026, they will be 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 not designed to level the carbon cost playing field between EU and non-EU producers, its implementation brings with it a suite of regulatory, financial and operational exposures that businesses must proactively manage.

The transition period (2023–2025), offers a window for preparation, but it will very soon be over. From 2026, financial liabilities in the form of CBAM certificates will apply to imports of selected carbon-intensive goods. For many firms, the true challenges lie not just in direct obligations, but in how CBAM fundamentally reshapes procurement economics, supply chain resilience and access to 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. Below, we summarise five key reasons as to why companies should stay ahead of the CBAM.

1. Increased input costs

One of the most immediate and quantifiable impacts of CBAM is the increase in cost of CBAM goods. When the definitive period begins on 1 January 2026, companies importing products in the CBAM scope into the EU will be required to purchase CBAM certificates 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, fertilisers 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 to customers, 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 introduces new roles, such as “CBAM declarants,” who are responsible for submitting quarterly emissions reports and annual CBAM declarations. These reports must detail both direct and indirect emissions associated with imported goods and be substantiated with documentation from upstream production processes.

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. Moreover, companies must manage their registration in the CBAM Transitional Registry, verification of emissions data and tracking of CBAM certificates.

4. The EU Omnibus proposal and regulatory uncertainty

The European Union's Omnibus Proposal, introduced in February 2025, aims to streamline sustainability regulations, including the CBAM. While the proposal seeks to reduce administrative burdens and enhance competitiveness, it has introduced regulatory uncertainty.

Key changes to CBAM under the Omnibus include a proposed exemption for importers bringing in less than 50 metric tons of CBAM-covered goods annually, potentially excluding around 90% of companies from purchasing CBAM allowances for their imports. Additionally, the proposal delays the financial obligations of 2026 imports to 2027 and simplifies reporting processes by allowing the use of default emission values and third-party declarants. These adjustments aim to alleviate compliance challenges, particularly for small and medium-sized enterprises.

The EU Parliament expressed support for the Omnibus simplification of CBAM in May 2025, but the legislative process is ongoing, and the final outcomes will remain uncertain for many months. It is critical for companies to continue to monitor the process.

5. Potential extension of sector and product scope

The EU is preparing to expand the scope of the CBAM beyond its initial coverage of cement, aluminium, fertilisers, electricity, hydrogen, and iron and steel. By 2030, the CBAM is expected to align 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.

The EU is also considering extending the CBAM scope to downstream goods, which would include manufactured products that incorporate CBAM-covered inputs. For example, a car importer would be liable to pay CBAM certificates on the car’s aluminium content. A proposal for the inclusion of downstream products for steel and aluminium is expected by the end of 2025.

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 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.