Carbon Border Adjustment Mechanism

Carbon Border Adjustment Mechanism: The EU's Climate Trade Gambit

Analysis of Implementation Challenges, Compliance Requirements, and Global Trade Implications

Author: Victor Solé Ferioli, Founder & Director, Beresol

Date: July 2025 (updated in January 2026)

This is a report made for a client of Beresol that has allowed us to publish it as an open report from December 2025.

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Executive Summary

The EU Carbon Border Adjustment Mechanism (CBAM) represents the world's first carbon border tax, designed to prevent carbon leakage by requiring importers to purchase certificates reflecting the carbon price that would have applied under the EU Emissions Trading System. It’s one of the several “unilateral measures” the Union established to strengthen its legal framework in trade and customs matters. Reminder: CBAM is also meant to be a new “own resource” for the club, raising up to nearly €80 bn.

With the transition phase having ended in December 2025 and full implementation beginning in January 2026, CBAM aims at reshaping global trade patterns and triggering significant compliance challenges for importers and third-country producers alike.

Personal disclaimer: When working at the European Parliament during the CBAM’s ordinary legislative process, third country representatives tended to bitterly complain in the EP’s committee on international trade (INTA) about the EU’s bullying power on trade issues, both imposing its trade quotas to protect EU interests (e.g., farmers, agriculture, and the like), and trying to stop third countries from exporting to the Union. Their voices were much more heard in the EP’s international development committee (DEVE), to no avail.

Key Findings:

• Financial scope: CBAM wants to cover €45-50 billion annually in EU imports across six sectors by 2034
• Compliance burden: over 100.000 EU importers submitted quarterly reports during the transition phase, but error rates exceeded 40%
• Third-country response: trading partners including the US, China, and India have launched WTO challenges and threatened retaliatory measures. And we talk about the US under the Biden Administration, prior to Trump 2.0’s Liberation Day ultra-tariffs
• Carbon price impact: at current ETS prices (~€70/tonne), CBAM certificates would add 15-25% to the cost of imported steel and 8-12% to aluminium
• Administrative capacity: national authorities report insufficient resources to verify embedded emissions declarations.

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Table of Contents

1. Introduction
2. CBAM Regulatory Framework
3. Transition Phase: Lessons Learned
4. Definitive Period: Full Implementation from 2026
5. Sector-Specific Impact Analysis
6. Third-Country Reactions and Trade Tensions
7. Compliance Challenges and Administrative Burden
8. Carbon Leakage and Environmental Effectiveness
9. Conclusions and Recommendations
10. References

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1. Introduction

The Carbon Border Adjustment Mechanism (Regulation 2023/956) entered its transitional phase on 1 October 2023, marking a watershed moment in international climate and trade policy since it’s perhaps the very first of its kind.

CBAM is designed to address carbon leakage (i.e., the risk that production shifts to jurisdictions with less stringent climate policies) by ensuring imported goods face carbon costs equivalent to those borne by EU producers under the Emissions Trading System (ETS).

Now it would seem odd, since the backlash has made us forget that back in 2020, right during the COVID-19 pandemic, when everyone was locked in, the EU wanted to accelerate its climate ambitions under its Green Deal, with the ETS price rising from €25/tonne in 2020 up to €70-90/tonne in 2025. Without border adjustment, this price differential could disadvantage EU industry while failing to reduce global emissions, the Commission stated.

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2. CBAM Regulatory Framework

CBAM serves three interconnected objectives:

1. Carbon leakage prevention: ensure EU climate policy does not merely relocate emissions abroad
2. Level playing field: subject imports to equivalent carbon costs as EU production
3. Global climate ambition: incentivise trading partners to adopt carbon pricing.

The regulation sits within the broader "Fit for 55" package, the legislative package of the Green Deal macropolicy. Coordinated with the ETS reform, that phases out free allowances for CBAM-covered sectors by 2034 (some critics say this time frame is not realistic), CBAM was controversial from its inception and, nevertheless, is a new “own resource” for the Union.

CBAM applies to imports in six carbon-intensive sectors:

From January 2026, downstream products containing significant quantities of CBAM goods (screws, bolts, certain steel articles) are also covered.

CBAM liability is calculated as:

CBAM Certificates Required = Embedded Emissions × (ETS Price - Foreign Carbon Price Paid)

Embedded emissions can be determined through:

• Actual emissions: verified installation-level data from third-country producers
• Default values: commission-published values based on average emissions of exporting country + markup
• EU default values: highest-emitting EU installations (used if data unavailable).

CBAM's financial impact phases in as ETS free allowances phase out:

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3. Transition Phase: Lessons Learned

During the transition phase, importers faced quarterly reporting obligations without financial liability:

• Q4 2023: first reports due January 31, 2024
• Q1-Q3 2024: subsequent quarterly submissions
• Q4 2024 - Q4 2025: final transition reports.

Reports required administrative information regarding:

• Goods quantity and type
• Country of origin
• Installation of production (where known)
• Embedded direct and indirect emissions
• Carbon price paid in the country of origin.

Commission data from the first year of transition revealed significant implementation challenges for all companies, especially small- and medium-sized:

Only 18% of imports were accompanied by actual emissions data from producers; the remainder relied on default values. 15% of reports contained product classification errors affecting emissions calculations. Moreover, the calculation of electricity-related emissions proved particularly challenging, with wide variance in methodologies. Finally, small importers reported disproportionate compliance costs relative to import values; 67% of declarants imported less than €100.000 in CBAM goods. The interest (or necessity) to comply by such a large number of European companies led to the CBAM Transitional Registry experiencing multiple outages, leading to the average report submission time exceeding 4 hours.

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4. Definitive Period: Full Implementation from 2026

From 1 January 2026, importers must:

1. Obtain authorisation: register as authorised CBAM declarant with national competent authority
2. Purchase certificates: buy CBAM certificates reflecting embedded emissions at weekly ETS price (and a new market has flourished about this! With new companies, or existing ones, specialising in helping those who do not understand this law and its administrative requirements how to comply correctly)
3. Annual declaration: submit by each 31 May, each year, covering previous calendar year
4. Surrender certificates: surrender certificates matching declared emissions by 31 May.

CBAM certificates are priced at the weekly average ETS auction price:

Based on average embedded emissions: steel 1.8-2.0 t CO2/t; aluminium 9-11 t CO2/t

From 2026, embedded emissions declarations must be verified by accredited verifiers for imports exceeding specified thresholds:

• Mandatory verification: annual imports >€150,000 or >500 tonnes
• Verifier accreditation: EU-accredited under Regulation (EC) No 765/2008
• Third-country verification: possible under mutual recognition agreements (none concluded to date).

Penalties for non-compliance

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5. Sector-Specific Impact Analysis

Let’s have a look at the some sectors specifically impacted by this new own resource of the EU. These were also the ones whose lobbyists were the most active during the CBAM’s legislative procedure, on all fronts.

5.1 Iron and steel

Steel represents CBAM's largest affected sector by both import value and emissions:

Import profile:

• Total EU steel imports: ~30 million tonnes annually
• Top suppliers: Turkey (18%), Russia (pre-sanctions 15%), Ukraine (12%), China (10%), India (8%)
• Average embedded emissions: 1.8-2.4 t CO2/t steel (vs EU average 1.4 t CO2/t).

Price impact at €80/tonne ETS:

• Basic steel products: +€144-192/tonne (15-20% price increase)
• Hot-rolled coil: +18-22% vs EU production
• Stainless steel: +12-15%

Market response:

• Turkish producers investing €2.5 billion in decarbonisation
• Russian steel effectively excluded (sanctions post Ukraine invasion in February 2022 + CBAM)
• Chinese exports redirecting to non-EU markets
• EU domestic production gaining market share.

5.2 Aluminium

Aluminium faces the highest per-tonne CBAM cost due to electricity-intensive production:

Import profile:

• Total EU aluminium imports: ~6 million tonnes annually
• Top suppliers: Russia (pre-sanctions 25%), Norway (18%), UAE (12%), China (10%)
• Average embedded emissions: 9-16 t CO2/t (vast range depending on electricity source).

Price impact:

• Primary aluminium: +€720-1,280/tonne at €80 ETS
• Products from hydro-powered sources (Norway, Iceland): minimal impact
• Products from coal-powered sources (China, India): +30-45%

5.3 Cement

Cement's low value-to-weight ratio limits long-distance trade, but border regions face significant impact:

Import profile:

• EU cement imports: ~8 million tonnes annually
• Primary suppliers: Turkey (45%), Tunisia, Algeria, Egypt
• Embedded emissions: 0.6-0.9 t CO2/t

Price impact:

• Clinker imports: +€48-72/tonne (significant given ~€60-80/tonne baseline price)
• Ground cement: +€40-60/tonne
• Cross-border trade with Turkey particularly affected.

5.4 Fertilisers

Fertilisers present unique challenges due to energy price sensitivity:

Import profile:

• EU fertiliser imports: ~20 million tonnes annually
• Top suppliers: Russia (pre-sanctions 30%), Egypt, Morocco, Trinidad
• Nitrogen fertiliser emissions: 2.5-6.0 t CO2/t (mainly from natural gas).

Price impact:

• Ammonia: +€200-480/tonne at €80 ETS
• Urea: +€160-280/tonne
• Significant food security implications during price spikes.

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6. Third-country reactions and trade tensions

6.1 WTO challenges

As expected, multiple trading partners have challenged CBAM's WTO compatibility:

What has the EU been saying in its defence? First, that XBAM is environmental measure, not trade barrier (although it is). Second, Article XX (i.e., 20) of the GATT is a legal shield for the Union, since the Commission says CBAM is necessary to protect human/animal/plant life. Third, CBAM is, according to the Commission, “non-discriminatory” because it applies equally to all imports (and, as we have seen, that’s not true either, because it focuses especially on steel, aluminium, cement, and fertilisers). Finally, carbon price that is paid abroad is also deducted: there is no double taxation.

6.2 Retaliatory measures

In front of such a unilateral measure, some third countries decided to toughen up.

United States:

• the Biden administration opposed CBAM, and the second Trump administration announced retaliatory tariffs on this EU mechanism and other legal measures (tech-related, especially, although this is a matter for another open report)
• it introduced a bipartisan bill on a US carbon border adjustment (competing system)
• steel and aluminium tariffs remained in place throughout the Biden administration. I remember the DG Trade chief saying once in INTA that she did not fear a Trump II, but a “Trump II with Biden’s tools”. Indeed, we have seen that Trump 2.0 has doubled down in the long-standing US growing distance in its trade policy inception and consideration.

China: This ally / rival of the EU announced a review of rare earth export restrictions once it learned that CBAM was going ahead. President Xi’s government accelerated domestic ETS development (potential CBAM credit claims) and the rollout of its fourteenth five-year plan (2020-2025), based on the so called "internal circulation and external circulation" servicing domestic and foreign trade respectively: the Communist Party aims at keeping China open to the world economy while increasing its self-reliance. A consequence is that it has already started redirecting CBAM-affected exports to non-EU markets.

India: The steel ministry announced €3 billion decarbonisation support and said it would explore domestic carbon pricing for CBAM credit eligibility. It has also pursued a WTO challenge in 2023.

6.3 Adaptation and compliance strategies

Third-country producers are pursuing multiple strategies:

1. Decarbonisation investment: €15+ billion announced across major steel/aluminium producers
2. Carbon pricing adoption: Indonesia, Vietnam exploring domestic carbon taxes
3. Market diversion: redirecting high-carbon production to non-EU markets
4. EU production investment: several producers establishing EU facilities
5. Product mix adjustment: shifting to lower-emission product categories.

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7. Compliance challenges and administrative burden

7.1 Importer compliance costs

7.2 Data collection challenges

Supply chain opacity: 60%+ of importers report inability to obtain actual emissions data from suppliers Multi-stage production: complex supply chains make installation-level attribution difficult Indirect emissions: electricity grid emissions vary widely; national grid averages may not reflect actual sourcing.

7.3 National authority capacity

Member State competent authorities report significant resource constraints:

Industry and Member States have requested:

• SME exemption: de minimis threshold for small importers (Commission studying €50,000 threshold)
• Simplified verification: self-certification for low-volume importers
• Default value refinement: more granular country/product defaults
• Extension period: additional transition time for complex supply chains.

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8. Carbon Leakage and Environmental Effectiveness

CBAM's effectiveness depends on preventing emissions relocation. Some relevant key risk factors are:

The Commission estimates that CBAM could reduce emissions by:

• Direct imports: 25-50 Mt CO2/year by 2030 through supplier decarbonisation
• Indirect effect: incentivise 15+ countries to adopt carbon pricing
• EU industry: and maintain competitiveness while ETS price rises.

Limitations and criticisms

Coverage gaps: as we have seen, critics say that CBAM covers only six sectors; downstream products partially included Indirect emissions: it has a (very) complex methodology may undercount actual footprint Developing country impact: it imposes a disproportionate burden on countries with limited decarbonisation capacity Administrative complexity: and compliance costs may outweigh environmental benefits for small importers.

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9. Conclusions and Recommendations

All in all, and in Europe’s interests, CBAM represents an unprecedented attempt to extend climate policy beyond domestic borders while gaining some much needed money. The transition phase has revealed significant implementation challenges, including data availability, compliance costs, and administrative capacity. These challenges had to be addressed before full financial obligations begin in 2026.

The mechanism faces (and will face, as long as it remains in its current state) a fundamental tension: rigorous emissions verification would maximise environmental effectiveness but impose substantial burdens, and simplified approaches risk becoming mere trade barriers with limited climate benefit. But there are three factors which can determine its success:

1. Data infrastructure: whether third-country producers provide actual emissions data or importers rely on conservative defaults
2. International engagement: whether trading partners adopt compatible carbon pricing or pursue retaliation
3. Administrative execution: whether national authorities can process the volume of declarations and verifications required.

Recommendations

As part of our research we can provide some recommendations for importers:

• Engage suppliers now on actual emissions data provision
• Consider supply chain adjustments toward lower-emission sources
• Build internal compliance capacity before financial obligations begin
• Monitor evolving default values and calculation methodologies
• Implement AI workflow solutions to help out with the automation of this task.

CBAM will likely define the future relationship between climate and trade policy globally for decades to come (having already started in 2023). If successfully implemented, it could catalyse a cascade of carbon border adjustments (the UK, Canada, the US, Australia, potentially Japan, even China, are considering similar measures), creating de facto global carbon pricing through trade pressure. If it fails, through WTO challenge, administrative collapse, or widespread circumvention, it could set back climate-trade integration for a long time.

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10. References

European Parliament and Council (2023). Regulation (EU) 2023/956 establishing a carbon border adjustment mechanism. OJ L 130, 16.5.2023.

European Commission (2023). Implementing Regulation (EU) 2023/1773 on CBAM transitional rules. OJ L 228, 15.9.2023.

European Commission (2024). Report on CBAM transition phase implementation. COM(2024) XXX.

European Commission (2025). CBAM: Guidance for authorised declarants. December 2025.

World Trade Organization (2024). Trade and climate change: WTO perspectives.

UNCTAD (2024). Carbon border adjustment mechanisms: Trade implications for developing countries.

Eurofer (2024). European steel industry position on CBAM implementation.

International Aluminium Institute (2024). CBAM impact assessment for aluminium sector.

Fertilizers Europe (2025). CBAM transition phase: Lessons learned.