The Carbon Border Adjustment Mechanism (CBAM) is a regulatory concept and a specific scheme implemented by the European Union (EU) to apply a carbon price to certain imported goods. It was legislated as part of the EU's European Green Deal and entered into force on 17 May 2023, with the regulation being Regulation (EU) 2023/956. The CBAM's primary purpose is to prevent "carbon leakage," which is the risk of EU companies moving carbon-intensive production abroad to countries with less stringent climate policies, or of EU products being replaced by more carbon-intensive imports. This problem arose because the EU's domestic carbon price, set by the EU Emissions Trading System (ETS), made EU-produced goods more expensive.
The CBAM works by requiring EU importers of covered goods to purchase and surrender CBAM Certificates equal to the amount of embedded greenhouse gas (GHG) emissions in the imported products. The price of these certificates is directly linked to the weekly average auction price of allowances under the EU ETS. The mechanism is being phased in, with a transitional period for reporting that began on 1 October 2023 and lasts until 31 December 2025. The definitive phase, where the financial obligation to surrender certificates begins, starts on 1 January 2026. Initially, the CBAM covers imports of cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. A key provision allows for a deduction in the number of certificates an importer must surrender if they can prove that a carbon price has already been paid in the country of origin.
The CBAM is intrinsically connected to the EU ETS, as it mirrors the carbon price imposed on EU domestic producers. It is also linked to the gradual phase-out of free allowances granted to carbon-intensive sectors under the EU ETS, which is set to be complete by 2034. Recent changes, adopted in October 2025 through Regulation (EU) 2025/2083, simplified the mechanism by introducing a 50-tonne 'de minimis' threshold for exemption and postponing the deadline for the annual CBAM declaration to 30 September. The core principle of pricing embedded carbon in imports to match the EU ETS price remains the same.