Why CBAM Is the Most Important Regulation You Don’t Know About

Article Highlights:

• The Carbon Border Adjustment Mechanism (CBAM) is a carbon pricing tool for imports that imposes a financial charge on the carbon emissions embedded in certain goods when they enter the EU market.
• CBAM requires EU importers to report the greenhouse gas emissions embedded in the goods they bring into the region. Embedded emissions refer to the emissions produced during the manufacturing of a product, including the extraction and processing of raw materials, production processes, and, in some cases, transportation.
• During its initial phase, CBAM will cover a range of highly carbon-intensive sectors— including cement, iron and steel, aluminum, fertilizers, hydrogen, and electricity—that were selected because they’re particularly vulnerable to carbon leakage, with a high risk of companies relocating production to countries with weaker emissions controls.
• On January 1, 2026, the CBAM will enter its definitive phase. At this point, importers will still be required to report embedded emissions, but they will also need to purchase and surrender CBAM certificates to cover those emissions. 

In today’s increasingly climate-focused economy, environmental regulations are evolving quickly. Businesses that import goods into the European Union (EU) are about to feel the impact of this evolution in the form of one of the most significant climate policies of the past few years. The Carbon Border Adjustment Mechanism (CBAM) is a regulation designed to curb carbon emissions globally by preventing something called “carbon leakage.” Carbon leakage occurs when companies move production to countries with less stringent climate policies or when cheaper, high-carbon products from overseas undercut cleaner, domestically produced alternatives. As industries and governments continue working to cut emissions, the EU wants to ensure that local climate efforts aren’t undermined by an influx of cheaper, more carbon-intensive imports.

Despite the scale of this policy shift and the substantial implications of the CBAM regulation, many businesses either haven’t heard of CBAM or don’t understand how it works. If your company produces, sources, or imports goods that end up in the EU market, this regulation will likely affect you. Familiarizing yourself with the details of the regulation now is essential to managing risks, controlling costs, and, perhaps most importantly, maintaining access to European markets.

What Is the Carbon Border Adjustment Mechanism (CBAM)?

The Carbon Border Adjustment Mechanism (CBAM) is a carbon pricing tool for imports. It places a financial charge on the carbon emissions embedded in certain goods when they enter the EU market, ensuring that imported products bear the same carbon costs as goods produced by EU manufacturers, who already pay for their emissions through the EU Emissions Trading System (ETS). CBAM levels the playing field for European companies while encouraging international suppliers to reduce their carbon footprints.

CBAM levels the playing field for European companies while encouraging international suppliers to reduce their carbon footprints.

CBAM reflects the EU’s broader climate strategy and overarching objective to achieve climate neutrality by 2050. The policy was first proposed in 2021 as part of the European Commission’s Fit for 55 package, a set of initiatives aimed at reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. The CBAM is one of the central tools the EU will use to extend the reach of its climate policies beyond its own borders. The regulation’s unique structure and ability to target foreign manufacturing position it to drive global climate ambition by ensuring imported goods are subject to the same environmental standards and costs as those products made within the EU.

How Does CBAM Work?

At its core, CBAM functions by requiring EU importers to report the greenhouse gas emissions embedded in the goods they bring into the region. Embedded emissions refer to the emissions produced during the manufacturing of a product, including the extraction and processing of raw materials, production processes, and, in some cases, transportation.

These emissions must be verified by an accredited third-party organization to ensure accuracy and comparability. Based on these verified emissions, importers will need to purchase CBAM certificates equivalent to the amount of carbon emissions associated with their imports. The price of these certificates is linked to the prevailing market price of EU Emissions Trading System (ETS) allowances, which can fluctuate based on supply and demand within the EU carbon market.

The Initial Phase of CBAM: What to Expect

During its initial phase, CBAM will cover a range of highly carbon-intensive sectors, including cement, iron and steel, aluminum, fertilizers, hydrogen, and electricity. These sectors were selected because they’re particularly vulnerable to carbon leakage, with a high risk of companies relocating production to countries with weaker emissions controls. However, the European Commission has made it clear that these carbon-intensive industries only represent the first phase of the regulation. The scope of CBAM is expected to broaden in future phases, potentially encompassing sectors such as plastics, chemicals, glass, paper, ceramics, and downstream manufactured products that contain carbon-intensive components.

The CBAM Timeline: Two Critical Phases

In order to allow businesses time to adapt, CBAM follows a phased implementation schedule. The regulation officially entered its transitional phase on October 1, 2023. This reporting-only phase serves as a trial run for businesses, giving them an opportunity to build familiarity with the reporting requirements, test data collection systems, and begin collaborating with their supply chain partners on emissions data. The transitional period runs until December 31, 2025. During this period, importers are required to submit quarterly reports to EU authorities detailing the embedded carbon emissions in their imports and any carbon pricing paid in the country of origin (COO). Importantly, no CBAM certificates need to be purchased during this transitional phase.

During this period, importers are required to submit quarterly reports to EU authorities detailing the embedded carbon emissions in their imports and any carbon pricing paid in the country of origin (COO).

On January 1, 2026, the CBAM will enter its definitive phase. At this point, importers will still be required to report embedded emissions, but they will also need to purchase and surrender CBAM certificates to cover those emissions. The price of the certificates will track the prevailing market price for EU ETS allowances, which has historically fluctuated between €50 and €100 per metric ton of CO₂ equivalent. This creates a significant financial incentive for companies to begin decarbonizing their supply chains or risk incurring higher costs.

Who Will Be Affected by CBAM?

Although CBAM directly applies to EU-based importers, its effects will ripple across entire global value chains. Non-EU manufacturers exporting goods into the EU will be expected to provide verified emissions data for their products. This will require upstream suppliers to track and disclose emissions from raw material extraction through final production.

For example, a Turkish steel producer selling into Germany will need to calculate and verify the emissions associated with its steel production processes. The same applies to a cement manufacturer in Egypt, an aluminum smelter in India, or a fertilizer producer in Morocco. Even companies that are not currently exporting to the EU could feel indirect effects if their customers further down the value chain begin demanding verified emissions data in anticipation of future CBAM-related reporting or costs.

Which Sectors Will Be Impacted by CBAM?

CBAM’s implications extend to sectors beyond the six currently covered, too. The construction, automotive, packaging, consumer electronics, and renewable energy industries all rely heavily on many of the materials included in those phase-one industries, including steel, aluminum, cement, and fertilizers. These businesses could experience increased costs, as CBAM charges are passed through the supply chain. In addition, operational disruptions are also possible if suppliers struggle to meet their new reporting or compliance obligations.

How the EU Omnibus Regulation Could Influence CBAM’s Future

As businesses focus on CBAM’s immediate requirements, it’s also important to consider how this mechanism might evolve in the broader context of the EU’s expanding regulatory framework. One development worth monitoring is the EU Omnibus Regulation, a legislative initiative aimed at streamlining and enhancing the enforcement of the EU’s environmental and sustainability rules.

Currently under review by EU institutions, the Omnibus Regulation is designed to harmonize and modernize the implementation of several existing product and sustainability regulations while introducing new compliance tools for authorities. It will improve how data is shared across EU customs, market surveillance, and environmental authorities—which could have a direct effect on how CBAM data is collected, reported, and enforced.

If passed in its current form, this EU legislation could allow for closer integration between CBAM reporting obligations and other regulatory requirements, such as those under the Corporate Sustainability Reporting Directive (CSRD) or the Ecodesign for Sustainable Products Regulation (ESPR). This would mean that emissions data submitted for CBAM could be cross-referenced with other product compliance documentation, increasing both the accuracy of carbon reporting and the scrutiny importers and manufacturers face at EU borders.

For businesses, this convergence of regulations underscores the importance of building robust, cross-functional compliance frameworks capable of handling environmental, social, and governance data requirements holistically. It also signals that CBAM is unlikely to remain a standalone policy. Instead, it’s likely poised to become one piece of a much broader, interconnected regulatory system governing product sustainability, supply chain transparency, and carbon accountability across the European market.

For businesses, this convergence of regulations underscores the importance of building robust, cross-functional compliance frameworks capable of handling environmental, social, and governance data requirements holistically.

Why CBAM Matters for Your Business

When it comes to the implementation of CBAM in the EU, the stakes for businesses are high. The financial implications of the regulation could be substantial, particularly for companies that source carbon-intensive materials from countries without robust carbon pricing mechanisms. Firms that fail to prepare risk higher operating costs, supply chain bottlenecks, and potential loss of access to EU markets.

Beyond the immediate financial risks, CBAM introduces operational and reputational challenges. Stakeholders—including regulators, investors, customers, and the public—are placing growing emphasis on transparency, ESG reporting, and climate responsibility. Companies unable to demonstrate emissions traceability and credible decarbonization strategies could face reputational damage and a competitive disadvantage within their respective industries. 

Companies unable to demonstrate emissions traceability and credible decarbonization strategies could face reputational damage and a competitive disadvantage within their respective industries. 

For businesses that act early, however, CBAM also presents an opportunity. Companies capable of documenting lower-carbon production processes or sourcing from cleaner suppliers can reduce their CBAM liability and offer more sustainable products to environmentally conscious customers. In an increasingly ESG-driven marketplace, demonstrating readiness for CBAM can strengthen market positioning, open doors to green financing opportunities, and enhance stakeholder trust.

A Turning Point in Global Trade

Ultimately, CBAM represents a pivotal moment in global trade policy—one that signals the beginning of border carbon pricing as a standard feature of international commerce. While its immediate focus is on a limited set of industries, the broader message is clear: businesses must integrate carbon considerations into their global sourcing and pricing strategies.

Other jurisdictions, including the United Kingdom, Canada, and the United States, are also beginning to explore similar carbon border adjustment mechanisms. Given this global landscape, there’s a strong likelihood that CBAM becomes the template for future trade regulations and the role carbon taxes play in them. Companies that adapt now will be better positioned to navigate this evolving regulatory environment, manage costs, and thrive in an increasingly decarbonized global economy.

Other jurisdictions, including the United Kingdom, Canada, and the United States, are also beginning to explore similar carbon border adjustment mechanisms.

If your company trades with or sources from the EU, now is the time to act. CBAM isn’t just another environmental policy—it’s a strategic business issue, and understanding it today is essential for staying competitive tomorrow.