Everything you need to know about the European Union Carbon Border Adjustment Mechanism

Named the Carbon Border Adjustment Mechanism (CBAM), this new policy aims to prevent carbon leakage, which is defined by the UK government as the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through carbon pricing and climate regulation.

But what exactly is the CBAM, when is it being introduced, and what are its implications for businesses?

In this blog, we’ll outline some of the key points to help you understand this proposal.

What is the CBAM?

The CBAM is a form of carbon pricing that would apply to imports of certain goods into the EU, based on their carbon content and the price of emissions in the country of origin. The idea is to ensure that foreign producers pay a similar carbon cost as domestic producers, and to discourage them from relocating to countries with lower environmental standards.

The CBAM is part of the EU's Green Deal, which aims to make the bloc climate-neutral by 2050. The EU argues that the CBAM is necessary to protect its industries from unfair competition and to encourage other countries to adopt more ambitious climate policies. The CBAM would also generate revenues for the EU budget, which could be used to finance green investments and support vulnerable regions and sectors.

When will the CBAM take effect?

Currently in a transitional phase until the end of 2025, the CBAM will see the introduction of initial obligations on importers, such as the requirement to submit quarterly reports detailing the Combined Nomenclature (CN) codes of products, the production facilities, the countries, the calculated emissions, and any carbon price already paid in the country of production. Certificates and CBAM fees will not be part of the transitional phases, but information on the carbon price already paid will still be needed to help design appropriate compensation mechanisms for the final phase.

From January 1^st 2026, the CBAM will enter its definitive phase, at which point importers will also be obliged to purchase and surrender the relevant certificates for their imports.

What are the implications of the CBAM?

The CBAM is a complex and contentious policy that will have far-reaching implications for the global trade and climate agenda. The UK and other countries will have to carefully weigh the costs and benefits of engaging with the EU on this issue, and consider the potential impacts on their industries, consumers, and environment.

For UK businesses who import CBAM products, they must be currently submitting quarterly reports to the EU registry. If not, they could face penalties from regulators.

To ensure these reports are free from error, business data must be accurate, consistent, and valid, with reliable data flows across suppliers that feed into the CBAM process. Automated processes and a holistic view across the entire supply chain can help make this a lot easier.

What’s more, none-EU companies that sell directly to the market as well as some EU companies that use representatives to help with their imports will need a customs representative in the EU.