What is the Carbon Border Adjustment Mechanism (CBAM)? 

CBAM stands for Carbon Border Adjustment Mechanism and is the EU’s regulatory tool designed to prevent “carbon leakage,” the shifting of emissions-intensive production to regions with relaxed environmental rules. For example, aluminum producers in the EU have been subject to a carbon price since 2005 when the EU Emissions Trading System (EU ETS) was created. Carbon leakage would result if an aluminum producer were to leave the EU and set up its operations in a country without carbon pricing mechanisms.

Under CBAM, importers of certain high-carbon goods will be required to pay a levy based on the embedded CO₂ emissions in those goods, aligning their cost base with the carbon price of the EU ETS, which is expected to climb in the coming years.

Initially, CBAM covers a small but strategic group of products: iron, steel, aluminum, cement, fertilizers, electricity, and hydrogen. These sectors were chosen for their high emissions intensity and critical role in industrial value chains. Starting in 2026, importers in the EU will be required to purchase CBAM certificates to account for the embedded carbon emissions in these products. This is designed to level the playing field for EU producers subject to ETS, while encouraging cleaner industrial practices globally, as less carbon-intensive products will face lower CBAM costs.