Navigating the European Union’s Carbon Border Adjustment Mechanism

The EU's Carbon Border Adjustment Mechanism (CBAM) transitioned from a reporting-only phase to a definitive period on January 1, 2026, introducing financial liabilities for importers of iron, steel, aluminum, cement, fertilizers, electricity, and hydrogen. Exporters must now provide verified actual emissions data to avoid high default values, which include annual markups of +10% in 2026, +20% in 2027, and +30% from 2028 onward. Financial liability is calculated based on embedded emissions, adjusted by a Free Allocation Adjustment (FAA) that phases out by 2034, and monetized through CBAM certificates linked to EU ETS prices. The guide emphasizes that verified actual emissions and documentation of carbon prices paid in the country of origin are critical for maintaining competitiveness and reducing costs.

• Starting January 1, 2026, the EU CBAM entered its definitive period, shifting from a reporting-only system to one that imposes binding compliance obligations and financial costs for importers of iron and steel, aluminum, cement, fertilizers, electricity, and hydrogen.
• Only 'Authorised CBAM Declarants' are permitted to import covered goods into the EU, and they must submit annual declarations and surrender CBAM certificates to cover embedded emissions.
• The use of default emissions-intensity values instead of verified actual data significantly increases costs due to conservative estimates and scheduled annual markups: +10% in 2026, +20% in 2027, and +30% from 2028 onward (except for fertilizers, which have a 1% markup).
• Financial liabilities are expected to rise sharply through 2034, driven by the complete phase-out of free allocations under the EU ETS and projected increases in EU carbon prices, which some forecasters estimate will reach EUR 150–200 per tonne by 2034.
• The Free Allocation Adjustment (FAA) reduces the share of embedded emissions subject to charges to align with EU ETS free allowances; this is managed by the CBAM factor, which starts at 97.5% in 2026 and decreases to 0% by 2034.
• Actual embedded emissions must be verified by an EU-accredited third-party verifier; failure to provide verified data forces the use of default values, which can be substantially higher, especially if the country of origin cannot be determined.
• Carbon prices effectively paid in the country of origin can be deducted from the CBAM liability to avoid double pricing, though a draft Implementing Regulation from May 2026 indicates that only prices net of rebates, free allowances, and other compensations qualify.
• For complex goods, embedded emissions include both the emissions from the final production process and the emissions embedded in precursors; this requires exporters to obtain verified data from upstream suppliers to avoid default value penalties.
• In 2026, direct emissions are subject to liability for all covered sectors, but indirect emissions (from electricity) are only included for cement and fertilizers, although this may expand to steel and aluminum in future revisions.

APA

Riddell, G., & Bonnet, A. (2026). Navigating the European Union’s Carbon Border Adjustment Mechanism. International Institute for Sustainable Development. https://www.iisd.org/system/files/2026-06/navigating-eu-carbon-border-adjustment-mechanism.pdf

Chicago

Riddell, George, and Antoine Bonnet. Navigating the European Union’s Carbon Border Adjustment Mechanism. International Institute for Sustainable Development, 2026. https://www.iisd.org/system/files/2026-06/navigating-eu-carbon-border-adjustment-mechanism.pdf.

Wikipedia

{{cite report |last1=Riddell |first1=George |last2=Bonnet |first2=Antoine |title=Navigating the European Union’s Carbon Border Adjustment Mechanism |publisher=International Institute for Sustainable Development |date=June 2026 |url=https://www.iisd.org/system/files/2026-06/navigating-eu-carbon-border-adjustment-mechanism.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{riddell2026navigating, author = {Riddell, George and Bonnet, Antoine}, title = {{Navigating the European Union’s Carbon Border Adjustment Mechanism}}, institution = {International Institute for Sustainable Development}, year = {2026}, month = jun, url = {https://www.iisd.org/system/files/2026-06/navigating-eu-carbon-border-adjustment-mechanism.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }