The Carbon Border Adjustment Mechanism — CBAM — is the EU’s answer to one of the most persistent problems in climate policy: what happens when you put a price on carbon at home, but your trading partners don’t? The answer, for decades, was carbon leakage: emissions-intensive industries relocate to countries with weaker regulation, reducing domestic emissions while increasing global ones, and undermining the competitiveness of producers who stay. CBAM is designed to close this gap by applying a carbon price to selected imports based on their embedded emissions. Fully operational since 2026, it is already reshaping trade relationships and generating international friction. Here is how it works, what it covers, and where it goes from here.
- CBAM currently covers imports of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen — sectors accounting for approximately 5% of EU imports by value.
- Importers must purchase CBAM certificates priced at the average EU ETS carbon price for each tonne of CO₂ embedded in covered goods.
- The EU ETS carbon price has averaged approximately €65 per tonne in 2026, making CBAM a significant cost for high-emission imports in covered sectors.
- Countries with their own carbon pricing systems equivalent to the EU ETS can offset their CBAM obligations — currently benefiting Switzerland, the UK and parts of Canada.
- The European Commission is assessing expansion of CBAM to additional sectors including chemicals, plastics and certain processed foods by 2030.
The concept: from idea to legislation
The idea of a carbon border adjustment was discussed in European climate policy circles for years before it gained political traction. Economists had long argued that unilateral carbon pricing without border adjustment was economically inefficient and environmentally counterproductive. The political objection — that it would be challenged at the WTO as a disguised trade barrier — was real but overstated, since GATT Article XX explicitly permits measures “necessary for the protection of human, animal or plant life or health” and measures “relating to the conservation of exhaustible natural resources.” The EU’s careful design of CBAM as a carbon price equalisation mechanism, rather than a tariff, was specifically crafted to be WTO-compatible.
2021–2023: Legislation and transition period
The CBAM regulation was adopted in 2023, following trilogue negotiations that adjusted the scope and phase-in schedule. A transitional period from October 2023 to December 2025 required importers to report embedded emissions without yet purchasing certificates — essentially a data collection exercise designed to build the administrative infrastructure for full implementation.
2026: Full implementation and first reactions
The full purchase obligation began in January 2026. As the Green Deal analysis and our COP 2026 assessment both noted, CBAM represents the EU’s most significant use of trade policy as a climate instrument. The reactions from trading partners have been predictably sharp: India, Russia, China, Turkey and Brazil have all objected formally through the WTO, with some characterising CBAM as a protectionist measure dressed in climate language. These objections are legally weak but politically significant, complicating EU climate diplomacy at precisely the moment when developing country cooperation is most needed.
For European steel and aluminium producers, CBAM provides a more level competitive playing field against imports from countries with no carbon pricing. For EU importers of covered goods, it represents a new compliance burden and cost. For the global trading system, it is an early indicator of how climate policy and trade policy will increasingly intersect — and how contentious those intersections will be.
