EU Launches Transitional Phase of Carbon Border Adjustment Mechanism (CBAM)
The EU took a pioneering step on October 1st by launching the world's first Carbon Border Adjustment Mechanism (CBAM), a system designed to impose CO2 emissions tariffs on carbon-intensive goods imported into the EU. This tool serves a dual purpose: to establish a fair price for carbon emissions associated with the production of carbon-intensive goods entering the EU and to encourage cleaner industrial practices in countries outside the EU.
Source: The Conference Board
In this initial phase, the CBAM will target imported goods and raw materials with a high carbon footprint such as iron and steel, aluminum, cement, electricity, fertilizers and hydrogen. This approach mitigates the risk of carbon leakage, where EU-based companies relocate carbon-intensive production to regions with laxer climate policies. As CBAM expands, it will eventually cover over 50% of emissions from sectors regulated by the EU Emissions Trading System (ETS). The transitional phase serves as a pilot to gather information and improve the methodology for the final implementation.
As of now, importers are only tasked with reporting greenhouse gas (GHG) emissions embedded in their imports, without any immediate financial obligations. However, starting on January 1, 2026, importers will have to purchase certificates to cover these GHG emissions. These certificates' prices will be determined by the weekly average auction price of EU ETS allowances (in €/tonne of CO2 emitted), effectively ensuring that importers are on equal footing with EU industries.
Paolo Gentiloni, European Economy Commissioner, emphasized that the objective is to encourage a global shift towards greener production: “CBAM is not about trade protection. It is about protecting the EU's climate ambition – and seeking to raise the level of climate ambition worldwide.”
The significance of CBAM cannot be overstated. It reflects the EU's proactive stance in achieving its climate goals and signifies its role as a global leader in sustainable trade practices. It sends a message to the international community that the EU is not merely advocating change but is actively leading by example.
