The Carbon Border Adjustment Mechanism (CBAM) is a regulatory framework and concept established by the European Union (EU) under Regulation (EU) 2023/956. It is a key provision of the European Green Deal and the EU's "Fit for 55 in 2030 package". The mechanism was created to address the problem of "carbon leakage," which occurs when EU companies move carbon-intensive production to countries with less stringent climate policies to avoid the EU's domestic carbon costs. The regulation entered into force on May 17, 2023.
CBAM works by imposing a carbon price on certain imported goods to equalize the cost with EU-produced goods, which are subject to the EU Emissions Trading System (ETS). The mechanism entered a transitional phase on October 1, 2023, requiring importers to report the embedded emissions of goods without financial penalty. The definitive regime begins on January 1, 2026, at which point EU importers must purchase CBAM certificates corresponding to the embedded greenhouse gas emissions. The price of these certificates is linked to the weekly average auction price of allowances under the EU ETS. Initially, CBAM applies to imports of carbon-intensive goods like iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen.
The CBAM is connected to the broader international concept of carbon pricing and is a subject of discussion at the World Trade Organization (WTO). Recently, the regulation has been amended to include a 50-tonne exemption threshold for small importers, and the European Commission has proposed extending the scope to selected steel- and aluminium-intensive downstream products.