Global trade is entering a new era in which a product's carbon footprint can influence its competitiveness just as much as its price or quality.
To address this, the European Union introduced the Carbon Border Adjustment Mechanism (CBAM). It places a carbon cost on selected imported goods based on the emissions generated during their production, ensuring they are treated similarly to EU-made products under the EU Emissions Trading System (EU ETS).
Since October 2023, CBAM has been in its transitional reporting phase. From 2026, it will fully apply, bringing financial obligations and stricter compliance requirements for importers.
Whether you're an exporter, manufacturer, importer, or sustainability professional, CBAM is now a key part of global trade and carbon compliance.
In this blog, we’ll explain how CBAM works, which products and sectors are covered, how reporting and calculation work, the latest 2026 updates, and what businesses should do to prepare.
What is CBAM?
The Carbon Border Adjustment Mechanism (CBAM) is the European Union's carbon pricing mechanism for certain imported goods. It ensures that products entering the EU face a carbon cost similar to those manufactured within Europe under the EU Emissions Trading System (EU ETS).
In simple terms, if an imported product generates significant greenhouse gas emissions during production, the importer may need to purchase CBAM certificates that reflect those embedded emissions. If a recognised carbon price has already been paid in the country of production, that amount may be deducted to avoid double carbon pricing.
CBAM currently applies to selected high-emission sectors, including cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. While it began as a reporting-only mechanism in 2023, it entered its definitive phase in 2026, making carbon reporting and compliance an important part of exporting these products to the European Union.
More than a regulatory requirement, CBAM reflects a growing global shift towards transparent carbon accounting and cleaner industrial supply chains.
Why was CBAM introduced?
The European Union introduced CBAM to address a challenge known as carbon leakage.
For years, manufacturers operating within the EU have paid for their greenhouse gas emissions under the EU Emissions Trading System (EU ETS). However, imported goods produced in countries without similar carbon pricing could enter the European market at a lower cost, even if they had a higher carbon footprint.
Imagine two companies producing the same steel. One manufactures it in Germany and pays for its emissions through the EU ETS. The other produces it in a country with no carbon price and exports it to Europe. Without CBAM, the imported steel could be cheaper simply because it avoids carbon costs.
This creates an uneven playing field and may encourage companies to relocate production to countries with weaker climate policies instead of reducing emissions, a phenomenon known as carbon leakage.
CBAM helps close this gap by assigning a comparable carbon price to certain imported goods. The objective isn't to restrict trade but to encourage fair competition while supporting global decarbonisation and preventing emissions from simply shifting across borders.
How does CBAM work?
At its core, CBAM links the carbon emissions embedded in imported goods with the carbon price paid by manufacturers within the European Union.
Instead of imposing a flat tariff on imports, the mechanism considers the actual emissions generated during the production of specific goods. This encourages exporters to improve their manufacturing processes, adopt cleaner technologies, and maintain accurate emissions data rather than simply absorbing an additional cost.
Here's how the process works:
Step | What Happens? |
1. Goods are exported to the EU | A CBAM-covered product such as steel, aluminium, or cement is imported into an EU member state. |
2. Embedded emissions are calculated | The emissions generated during the production of the imported product are measured using the EU's approved methodology. |
3. Emissions are reported | The authorised EU importer submits the required emissions information through the CBAM reporting system. |
4. Carbon price is determined | The cost is linked to the weekly average auction price of EU ETS allowances, adjusted for any eligible carbon price already paid in the country of origin. |
5. CBAM declaration is submitted | Under the definitive phase, importers submit an annual CBAM declaration and surrender the required number of CBAM certificates. |
For Example:
An Indian steel manufacturer exports steel coils to Germany. The manufacturer provides verified emissions data to its European customer. The EU importer uses this information to determine the embedded emissions and purchases the required CBAM certificates before submitting the annual declaration. If India has already imposed a recognised carbon price on those emissions, the importer may be able to claim a corresponding deduction under CBAM rules.
This approach shifts the focus from where a product is manufactured to how carbon-intensive its production is, making emissions transparency an important factor in global trade.
CBAM Timeline: From Proposal to Implementation
CBAM has been introduced gradually, giving businesses time to understand the regulation, improve emissions reporting, and prepare for financial compliance.
Year | Key Milestone |
July 2021 | The European Commission proposes the Carbon Border Adjustment Mechanism as part of the "Fit for 55" climate package. |
May 2023 | The CBAM Regulation officially enters into force. |
October 2023 | Transitional phase begins. Importers start submitting quarterly reports on embedded emissions without purchasing CBAM certificates. |
2024–2025 | Businesses continue quarterly reporting while refining emissions calculations and supplier data collection. The European Commission releases additional guidance, reporting tools, and verification requirements. |
January 2026 | The definitive phase begins. Eligible importers become authorised CBAM declarants and transition towards certificate obligations. |
2027 onwards | Annual CBAM declarations and certificate surrender become part of the regular compliance cycle for covered imports. |
Why does the phased rollout matter?
The transition period wasn't simply an administrative exercise; it was designed to help businesses identify data gaps, strengthen supplier engagement, and establish reliable emissions reporting systems before financial obligations took effect.
Companies that invested in emissions measurement during the transitional phase are now significantly better positioned to comply with the definitive framework.
Which Products and Sectors are covered under CBAM?
CBAM currently focuses on sectors that are both carbon-intensive and at a higher risk of carbon leakage. These industries account for a significant share of industrial emissions and have historically faced competitive pressure from imports produced in regions with lower environmental standards.
Sector | Examples of Covered Products |
Iron & Steel | Flat steel, steel pipes, tubes, railway materials, structural steel products |
Aluminium | Aluminium bars, sheets, rods, wires, plates and selected finished products |
Cement | Cement clinker and hydraulic cement |
Fertilisers | Ammonia and nitrogen-based fertilisers |
Electricity | Imported electricity supplied through interconnected grids |
Hydrogen | Hydrogen produced for industrial use |
While these are the initial CBAM sectors, the European Commission has indicated that the scope may expand in the future as the mechanism evolves and additional industries are assessed.
For exporters, this means that even if their products are not currently covered, strengthening emissions reporting capabilities today can help prepare for future regulatory changes.
Which Products are not covered?
Many manufactured products, consumer goods, textiles, electronics, food products, and finished machinery are currently outside CBAM's scope.
However, this does not necessarily mean these industries will remain unaffected. Many manufacturers purchase steel, aluminium, cement, or other CBAM-covered materials as inputs.
As carbon costs become embedded across supply chains, downstream businesses may also experience indirect cost increases and growing pressure from customers to provide product-level emissions data.
CBAM Reporting Requirements
One of the biggest challenges businesses face under CBAM isn't paying for carbon, it's collecting accurate emissions data.
The quality of emissions information provided by manufacturers directly affects the reporting obligations of EU importers. Incomplete or inaccurate data can lead to compliance risks, delayed reporting, and additional administrative effort.
Who Is Responsible for CBAM Reporting?
The legal responsibility for submitting CBAM reports rests with the authorised EU importer, also known as the Authorised CBAM Declarant.
However, importers depend heavily on exporters and manufacturers to provide reliable emissions data. This makes CBAM a shared responsibility across the supply chain.
What Information Needs to Be Reported?
Depending on the product and reporting period, businesses may need to provide:
Product classification and quantity imported
Country of origin
Production facility information
Direct embedded greenhouse gas emissions
Indirect emissions (where applicable)
Production methodology
Carbon price already paid in the country of origin, where eligible for deduction
This information must be calculated using methodologies aligned with EU requirements, and in many cases, verified emissions data will be expected.
Conclusion
For many businesses, CBAM represents their first experience with product-level carbon accounting.
Unlike corporate sustainability reports that focus on organization-wide emissions, CBAM requires businesses to understand the emissions associated with producing specific products.
That means manufacturers need greater visibility into:
Energy consumption across production facilities
Fuel usage and process emissions
Supplier-provided emissions data
Production volumes and allocation methods
Supporting documentation for verification
As global climate regulations continue to evolve, businesses with reliable emissions data will be better equipped not only for CBAM reporting but also for meeting broader customer expectations, sustainability disclosures, and future carbon pricing mechanisms.
Beyond CBAM Compliance
While CBAM focuses on measuring and reporting the carbon emissions embedded in imported goods, businesses that take a proactive approach can turn compliance into a competitive advantage.
With Sustainiam's Emission Calculator, ECal, organizations can calculate product-level emissions, streamline supplier data collection, and generate audit-ready carbon reports aligned with evolving global regulations.
Once emissions are accurately measured and reduction opportunities are identified, businesses can further strengthen their climate strategy by procuring high-integrity carbon credits and renewable energy certificates through EmX, Sustainiam's environmental markets platform.
