Carbon Border Adjustment Mechanism

This article explores the implications of the EU's Carbon Border Adjustment Mechanism and the affects it will have on companies that import certain materials in the EU.

Apr 25. 2024
May 29, 2024


In 2005, the European Union created its Emissions Trading System (EU ETS) to help it meet its climate goals. The EU ETS operates as a cap-and-trade system, imposing a limit on the amount of emissions companies within the EU can release annually. Companies are allocated a specific number of emission allowances based on this cap. They are then permitted to emit one metric ton of carbon for each allowance they surrender to the government. However, if companies lack sufficient allowances to cover their emissions, they must procure more from the EU Carbon market or engage in trades with other companies that haven't utilized theirs. This setup incentivizes companies to reduce their emissions to increase profitability. Finally, the cap is reduced each year, so the allowances become more expensive.

In recent years, the EU has observed significant carbon leakage due to its stringent carbon reduction policies. Carbon leakage, in this context, refers to a trend where EU companies relocate production to countries outside the EU to avoid having to reduce or pay for their emissions. It also refers to the practice of EU companies importing goods into the EU at a lower price than what EU companies would pay to produce domestically. This occurs because these goods are manufactured more affordably through processes that generate higher emissions, and the foreign producers are not obligated to pay any carbon tax as EU companies are required to do.

To address this issue, the EU has established the Carbon Border Adjustment Mechanism (CBAM). CBAM requires that all companies importing specific goods into the EU declare any emissions embedded in their goods and any carbon price already paid on those emissions. If a company has not paid a carbon price equivalent to what is required in the EU, it will eventually need to pay a tax for the difference. This is designed to level the playing field between companies manufacturing goods or materials in the EU and those importing them from foreign countries so that none have an unfair advantage due to ETS. CBAM will be implemented gradually, initially with fewer requirements during a "transition period," before the "definitive regime" is fully enforced.

Materials in the Scope of CBAM

At present, the goods within the scope of CBAM are cement, iron, steel, aluminum, fertilizers, electricity, and hydrogen. The EU has indicated on its customs and taxation website that these goods were selected because they often require high carbon emissions during production and are at a heightened risk of carbon leakage.

The EU Commission has announced that it will determine whether a particular import fits into one of the categories mentioned above by referencing the import’s Combined Nomenclature code (a code used for commodity exports). Furthermore, it has clarified that CBAM will primarily apply to basic materials rather than finished products incorporating those materials. PWC’s Accounting Podcast provided an illustration of this in one of its episodes, explaining that steel rolls would be subject to CBAM because they constitute a basic material, whereas cars manufactured with steel would not, as they represent a finished product.

The scope of CBAM may change in the future though. Following the transitional period, which ends in 2025, the European Union Commission has said it will review the program and determine whether to extend CBAM to include other goods covered by the EU ETS or finished products containing in-scope goods. Should the commission opt to expand CBAM, it would need to propose an amendment to the CBAM regulation, which would need to be adopted by the European Parliament and Council.

Transition Period

CBAM became effective on May 17, 2023. However, it didn’t start affecting companies until October 1, 2023, when it entered its transitional period. This phase will last until 2026 when it transitions into its definitive regime. During the transitional period, companies will not be obligated to pay a carbon tax on emissions, but they will still need to disclose information regarding the emissions embedded in materials that are in scope.

The declarant is the responsible party for filing the CBAM report each quarter. There are specific rules about who qualifies as the declarant in a transaction, but it is either the importing company or an indirect customs representative. Throughout the transitional period, the declarant must file a quarterly report through the CBAM Registry. This registry is an electronic database utilized by the European Commission for gathering data on CBAM imports and facilitating communication with declarants, competent authorities, and customs officials.

The quarterly report must include the necessary disclosures to comply with the CBAM regulation. These disclosures include reporting the quantity of CBAM goods imported during that quarter, direct and indirect emissions embedded in those goods, and any carbon price paid on those emissions not associated with the EU ETS.

In a FAQ document, the EU Commission defines direct emissions as “the emissions generated during the production processes of CBAM goods, including from the production of heating and cooling, irrespective of the location of the production of the heating and cooling.” It also defines indirect emissions as originating from “the production of electricity that is consumed during the production of CBAM goods.” Based on these definitions, direct emissions closely resemble the Scope 1 emissions of the GHG protocol, and indirect emissions seem closely related to Scope 2 emissions.

The regulation also splits CBAM products into “simple” and “complex” goods. Simple CBAM products do not contain any input materials with embedded emissions that are CBAM goods in their own right, while complex ones do. Companies should note that when calculating embedded emissions, they must also account for emissions associated with input materials if included in the CBAM scope. The EU Commission provided an example in their FAQ document, citing cement. They explained that if an EU company were to import cement, it would need to consider not only the embedded emissions involved in cement production but also those of cement clinker, which is utilized in cement production and falls within CBAM coverage.

When calculating emissions, the European Commission has offered some leeway for companies during the first year of the transition period. Normally companies are required to calculate their emissions using the methodology outlined in the regulation, known as the EU method. However, the EU Commission has offered two additional alternatives. Until June 30, 2024 (report due by July 31, 2024), companies that have not yet calculated their embedded emissions can use default values calculated by the EU Commission instead. The other alternative is that companies may report under an equivalent method, but this option is only available through the end of 2024.

Definitive Regime

In 2026, the program will officially transition into its definitive phase. At that time, CBAM declarants will shift from submitting quarterly reports to an annual report due on the 31st of May of the following year. The annual report will closely resemble the former quarterly reports. However, in the annual report, companies will only need to disclose the direct emissions associated with their products and not indirect emissions, except for cement and fertilizers, which must continue to report indirect emissions as well.

In addition to submitting an annual report, companies will also need to purchase CBAM certificates from the EU, equivalent to the cost of the carbon price they would have paid under the EU ETS system if they had manufactured the goods within the EU. In this way, participants in the CBAM program will progressively incur higher costs for emissions each year, as the EU ETS gradually reduces its allocation of free emissions to companies to zero by 2034.

However, companies that have already paid a carbon tax in any other jurisdiction will be able to report that amount and reduce the value of CBAM certificates they need to purchase by the amount of carbon tax already paid. The EU Commission has permitted this to show that it is not focused on taxing imports but on lowering emissions.

By 2034, the cost of CBAM goods will have risen significantly as the EU ETS completes its gradual phase-out of all free allowances and CBAM continually increases to match its price. In a brochure on CBAM, Deloitte calculated that by 2034, 41% of the cost of aluminum and 18% of the cost of steel imported by EU companies would be caused by the CBAM tax. This showcases the extreme impact CBAM will have on the prices of goods imported into the EU.


Timeline of Significant CBAM Dates
October 2023 January 2025 Fiscal Year 2026 2026-2034
Event CBAM enters its transitional phase with the first CBAM report, covering the final quarter of 2023, due by January 31, 2024 The EU method will now be the only acceptable method for calculating embedded emissions used for reporting CBAM enters its definitive or permanent phase and companies will need to start surrendering CBAM certificates for emissions of in-scope products The EU ETS system will completely phase out free allowances over this time while CBAM correspondingly becomes more expensive

Important Considerations

Companies importing goods into the EU should be aware that there are penalties for non-compliance. Failure to accurately file CBAM reports during the transitional period will result in fines ranging from 10 to 50 Euros per ton of unreported emissions. Beyond the transitional period, companies that are not authorized CBAM declarants will be prohibited from importing any goods into the country. Consequently, companies should ensure they are ready to report under the CBAM regulation as soon as possible.

The following is a list of other parts of the regulation that may be significant to companies.

  • The EU Commission will undertake a precursory review of CBAM reports to identify those that appear to be incomplete or arouse suspicion. The commission will then send a list of these reports to the appropriate government agency in each member state country which will then have the option of reviewing the report further and assigning fines if needed.
  • Imports from countries in the EU Economic Area and Switzerland are exempt from CBAM because they already participate in the EU ETS.
  • Imports in a shipment where the total value of CBAM goods is less than 150 Euros will be exempt from needing to file a CBAM report.
  • The EU Commission has clarified that companies can offset their emissions through carbon capture to reduce the amount of emissions they need to pay a carbon tax on.
  • Most of the CBAM report will be kept confidential by the EU Commission. The Commission will only disclose to the public names, addresses, contact information, and locations of installations in third countries.
  • The policy is designed to be compliant with World Trade Organization (WTO) policies.


With the transitional period already underway, CBAM stands as one of the earliest mandatory reporting deadlines for companies in terms of greenhouse gas (GHG) emissions. Companies intending to import goods into the EU should ensure they understand the requirements of the new regulation and are ready to comply with it. Additionally, exporters in other countries, like the United States, who engage with EU importers should begin evaluating their emissions now so that they will be able to provide this information to EU clients, who will inevitably seek it for their reporting. Moreover, companies should assess the current cost of their operations and determine whether, by 2034, the price of CBAM will become significant enough to necessitate a shift to lower-emitting suppliers to save money on materials.

Resources Consulted