Deep dive: Carbon border adjustment mechanism (CBAM) implementation — what's working, what's not, and what's next

The European Union's Carbon Border Adjustment Mechanism entered its transitional reporting phase on October 1, 2023, and within the first 18 months, more than 500,000 CBAM declarations were filed by importers across the 27 member states, covering an estimated 170 million tonnes of embedded CO2 equivalent (European Commission, 2025). By 2026, the mechanism covers imports of cement, iron and steel, aluminium, fertilizers, electricity, and hydrogen, with the definitive phase scheduled to begin January 1, 2026, when importers must purchase and surrender CBAM certificates corresponding to the carbon price that would have been paid under the EU Emissions Trading System (ETS). For sustainability leads at companies that import CBAM-covered goods into the EU, understanding what is working, what is failing, and what comes next is no longer a compliance exercise: it is a strategic imperative that will reshape procurement decisions, supplier relationships, and competitive positioning for years to come.

Why It Matters

CBAM represents the most significant trade-and-climate policy instrument ever implemented. Its core purpose is to prevent carbon leakage: the phenomenon in which carbon-intensive production migrates from jurisdictions with strict emissions pricing (such as the EU ETS, where carbon prices averaged EUR 65 to 85 per tonne in 2025) to jurisdictions without equivalent carbon costs. Before CBAM, the EU addressed carbon leakage by granting free ETS allowances to exposed industries, but free allocation is being phased out between 2026 and 2034, with CBAM certificates filling the gap.

The financial stakes are substantial. The European Commission estimates that CBAM will generate EUR 9 to 14 billion in annual revenue by 2030, depending on the carbon price trajectory and the pace of decarbonization among trading partners (European Commission, 2025). For importers, the cost impact is material: a steel importer bringing 100,000 tonnes of hot-rolled coil from a blast furnace facility with embedded emissions of 2.0 tonnes CO2 per tonne of steel faces a CBAM liability of EUR 13 to 17 million annually at current ETS price levels, minus any carbon price already paid in the country of origin.

Beyond the EU, CBAM has triggered a cascade of carbon border pricing proposals. The United Kingdom launched its own Carbon Border Adjustment Mechanism effective January 2027. Australia, Canada, Japan, and South Korea have all initiated formal consultations on border carbon adjustments. Turkey, which exports EUR 7.4 billion in CBAM-covered goods to the EU annually, introduced its own emissions trading system in 2025 partly to qualify for CBAM deductions. The mechanism is reshaping global trade architecture around carbon intensity as a competitive variable.

Key Concepts

CBAM operates through a certificate-based system. Authorized CBAM declarants (importers) must register with national competent authorities and report the embedded emissions in each shipment of covered goods. Starting in the definitive phase, declarants purchase CBAM certificates at a price linked to the weekly average EU ETS auction price. At the end of each year, declarants surrender certificates matching the embedded emissions in their imports, minus any deduction for carbon prices paid in the country of origin. Unused certificates can be sold back to the competent authority.

Embedded emissions encompass both direct emissions (Scope 1 emissions from the production process) and, for certain goods, indirect emissions (Scope 2 emissions from electricity consumed during production). The inclusion of indirect emissions has been a contentious point, as it significantly increases the CBAM liability for goods produced in countries with carbon-intensive electricity grids. For aluminium smelting in India, for example, indirect emissions from coal-dominated power supply can exceed direct process emissions by a factor of three.

Default values play a critical role during the transition. Where importers cannot obtain actual emissions data from producers, the European Commission provides default emission values based on average emission intensities in the country of origin or, failing that, the average intensity of the 10% worst-performing EU installations. The gap between actual and default values creates a powerful incentive for importers to establish data-sharing arrangements with their suppliers, but also raises concerns about data accuracy and verification.

What's Working

Transitional Phase Reporting Has Built Institutional Capacity

The 27-month transitional period (October 2023 through December 2025) succeeded in its primary objective: establishing reporting infrastructure and building compliance competency across the EU's import base. By mid-2025, the European Commission reported that 89% of CBAM-obligated importers had submitted at least one quarterly report, and the average data completeness rate (percentage of reported emissions based on actual production data rather than default values) reached 62%, up from 31% in the first reporting quarter (European Commission, 2025).

National competent authorities in Germany, France, the Netherlands, and Italy invested heavily in digital reporting platforms, training programs, and help desks. Germany's Deutsche Emissionshandelsstelle (DEHSt) processed over 85,000 transitional CBAM reports by Q3 2025 and published sector-specific guidance documents covering 14 product categories. France's Direction Generale des Douanes integrated CBAM reporting into its existing customs management system, reducing the administrative burden for importers already filing customs declarations electronically.

Carbon Price Signals Are Reaching Non-EU Producers

CBAM is beginning to achieve its intended effect of transmitting carbon price signals to producers outside the EU. In Turkey, the steel industry association TCSB reported that 73% of its member companies exporting to the EU had initiated or completed emissions measurement and reporting programs by mid-2025, up from 12% before CBAM announcement (TCSB, 2025). Several Turkish steel mills have invested in scrap-based electric arc furnace capacity to reduce their embedded emissions and CBAM exposure.

In India, Tata Steel and JSW Steel both announced accelerated decarbonization programs for their EU-export-facing production lines. Tata Steel's Kalinganagar plant installed a 15 MW solar array and began blending green hydrogen into its blast furnace operations, targeting a 20% reduction in specific emissions by 2028. These investments were explicitly linked to CBAM competitiveness in corporate disclosures (Tata Steel, 2025).

Verification Infrastructure Is Maturing

The EU Accreditation system for CBAM verifiers has been operational since late 2025, with over 40 accredited verification bodies across member states. Major assurance firms including Bureau Veritas, SGS, TUV SUD, and DNV have established dedicated CBAM verification practices. The European Commission's implementing regulation specifies verification standards aligned with ISO 14064-3 and the EU ETS Monitoring and Reporting Regulation, providing a robust methodological foundation.

What's Not Working

Data Collection from Non-EU Producers Remains Fragmented

Despite progress, obtaining actual embedded emissions data from non-EU producers remains the single largest operational challenge for CBAM compliance. A 2025 survey by the Federation of European Importers found that 44% of importers still relied on default values for more than half their CBAM-covered imports (FEI, 2025). The problem is particularly acute for complex supply chains where intermediate products pass through multiple production stages in different countries.

Cement importers face especially difficult data collection challenges because clinker production, grinding, and blending may occur at different facilities in different jurisdictions. An importer of blended cement from Egypt, for example, may need emissions data from a clinker kiln in Upper Egypt, a grinding plant in Alexandria, and a blending facility at the port, each operated by different entities with different monitoring capabilities.

Default Values Create Market Distortions

The Commission's default value methodology produces uneven results. For some product categories, default values are set at levels that penalize importers using them far more heavily than the actual emissions warrant, creating an effective tariff rather than a carbon price signal. For aluminium imports from Norway, which are produced using near-zero-emission hydroelectric power, importers who fail to submit actual data face default values based on global averages that overstate actual emissions by 300 to 500%. Conversely, for some product categories from high-emission jurisdictions, default values based on country averages may understate actual emissions from the worst-performing facilities.

This asymmetry undermines the mechanism's environmental integrity and creates perverse incentives. Well-resourced importers with established supplier relationships can obtain actual data and gain a competitive advantage, while small and medium enterprises (SMEs) that lack the capacity to engage directly with foreign producers are penalized by inflated default values.

Scope Limitations Leave Significant Carbon Leakage Pathways Open

CBAM currently covers only six product categories. This creates a significant circumvention risk through trade diversion in downstream products. A manufacturer in a non-EU country can import CBAM-covered steel, fabricate it into machinery or automotive components, and export the finished product to the EU without any CBAM liability. The European Commission acknowledged this risk in its 2025 review report and signaled that extending CBAM to downstream products is under active consideration, but the technical complexity of measuring embedded emissions in complex manufactured goods remains formidable.

Additionally, resource shuffling presents a challenge. A steel producer with both high-emission blast furnace capacity and lower-emission electric arc furnace capacity could direct its cleaner output to EU markets while selling dirtier steel to non-CBAM markets, without reducing total emissions. The Commission's product-level (rather than installation-level) verification requirements are intended to address this, but enforcement depends on the accuracy of producer-level data.

Administrative Burden Falls Disproportionately on SMEs

The compliance costs of CBAM are substantial and fall disproportionately on smaller importers. A mid-2025 assessment by the European Court of Auditors found that average CBAM compliance costs (including data collection, verification, consulting, and reporting system implementation) ranged from EUR 45,000 to EUR 120,000 per year for SME importers, compared to EUR 200,000 to EUR 500,000 for large importers, but represented 0.3 to 0.8% of turnover for SMEs versus 0.01 to 0.05% for large enterprises (ECA, 2025). Several industry associations have called for simplified compliance pathways for importers below defined volume thresholds.

Key Players

Established Organizations

European Commission DG TAXUD: the directorate-general responsible for CBAM policy design, implementing regulations, and oversight of national competent authorities across all 27 member states.

World Trade Organization: monitoring CBAM's compatibility with international trade law, including challenges under GATT Article III (national treatment) and Article XX (general exceptions for environmental measures).

Bureau Veritas: one of the largest accredited CBAM verification bodies, offering embedded emissions verification services across all six covered product categories in 40 countries.

DEHSt (German Emissions Trading Authority): the national competent authority processing the largest volume of CBAM declarations in the EU, with dedicated digital platforms and sector guidance.

Startups and Technology Providers

Watershed: carbon accounting platform that has integrated CBAM-specific reporting modules enabling importers to calculate embedded emissions using supplier data and generate compliant quarterly reports.

Ecoinvent: provider of life cycle inventory databases widely used as secondary data sources for CBAM calculations where primary production data is unavailable.

Persefoni: climate management platform offering automated CBAM reporting workflows that integrate with enterprise resource planning systems and customs declarations.

CarbonChain: supply chain carbon intelligence platform specializing in commodity-level emissions tracking for metals, chemicals, and fuels covered under CBAM.

Investors and Funders

European Investment Bank: financing decarbonization projects in EU trading partner countries, including green hydrogen production and electric arc furnace conversions, partly to reduce CBAM exposure for exporters.

EBRD (European Bank for Reconstruction and Development): providing technical assistance and financing to producers in Turkey, Ukraine, and North Africa to improve emissions monitoring and reduce carbon intensity of exports to the EU.

What's Next

The definitive phase beginning in January 2026 introduces financial obligations for the first time. Importers must purchase CBAM certificates at prices tracking the EU ETS, which traded between EUR 55 and EUR 90 per tonne through 2025. The Commission will conduct its first comprehensive review of CBAM by January 2028, covering potential extension to additional product categories (organic chemicals, polymers, and potentially downstream products), the effectiveness of the carbon leakage prevention mechanism, and alignment with emerging border carbon adjustment measures in other jurisdictions.

Mutual recognition agreements are a critical next frontier. As the UK, Canada, and potentially Japan implement their own border carbon pricing mechanisms, the prospect of bilateral recognition, where a carbon price paid in one jurisdiction is credited against the border adjustment in another, could reduce administrative complexity and prevent double taxation. The EU-UK Trade and Cooperation Agreement provides a potential framework for the first such mutual recognition arrangement.

Technology-enabled compliance is also maturing. Blockchain-based product carbon footprint tracking, automated verification using digital measurement tools at production facilities, and AI-driven anomaly detection in emissions declarations are all in pilot stages. The Commission's digital CBAM registry, scheduled for full deployment in 2026, will provide a centralized platform for certificate trading, surrender, and compliance tracking.

Action Checklist

• Register as an authorized CBAM declarant with your national competent authority before the definitive phase deadline
• Map all CBAM-covered imports by product category, country of origin, and supplier to identify data collection priorities
• Establish direct data-sharing agreements with key suppliers for actual embedded emissions data, prioritizing high-volume and high-emission sources
• Implement or procure a CBAM compliance management system integrated with existing customs and procurement platforms
• Engage accredited CBAM verifiers early to avoid capacity constraints during the first verification cycle
• Model CBAM certificate costs under multiple carbon price scenarios (EUR 50, 75, 100, and 125 per tonne) to quantify financial exposure
• Evaluate alternative sourcing options for CBAM-covered goods from lower-carbon producers or EU-based suppliers
• Monitor the Commission's review process for potential scope extension to downstream products and additional sectors

FAQ

Q: How is the CBAM certificate price determined? A: CBAM certificate prices are set weekly based on the average closing price of EU ETS allowances at auction during the preceding calendar week. This ensures that importers face the same carbon cost as EU producers subject to the ETS. Certificate prices fluctuate with the ETS market, which has ranged between EUR 55 and EUR 90 per tonne through 2025. Importers can purchase certificates at any time but must hold sufficient certificates to cover the previous year's emissions by May 31 of the following year.

Q: Can importers claim deductions for carbon prices paid in the country of origin? A: Yes, but with conditions. Importers may deduct the effective carbon price paid in the country of origin from their CBAM certificate obligation, provided the carbon price is a mandatory charge (not a voluntary offset), applied to the specific goods being imported, and not refunded or otherwise compensated upon export. The importer must provide documentary evidence of the carbon price paid, verified by an accredited verifier. Countries with no domestic carbon pricing provide no basis for deduction.

Q: What happens if an importer cannot obtain actual emissions data from their supplier? A: During the transitional phase, importers could use default values without penalty. In the definitive phase, importers may still use default values, but these are typically set at conservative levels (average intensity of the worst-performing 10% of EU installations for the relevant product), resulting in higher CBAM certificate costs than would apply with actual data. This creates a strong financial incentive to obtain actual data. For importers consistently unable to secure supplier data, switching to suppliers willing to share verified emissions data becomes a cost-effective strategy.

Q: How does CBAM interact with the phase-out of free EU ETS allowances? A: CBAM and free allocation phase-out are designed to move in tandem. Between 2026 and 2034, free ETS allowances for CBAM-covered sectors are progressively reduced (by 2.5% in 2026, increasing to 48.5 percentage points cumulatively by 2034, reaching full phase-out by 2034). CBAM certificates are adjusted to reflect only the portion of embedded emissions not covered by free allocation. As free allocation decreases, the effective CBAM rate increases proportionally, ensuring that the carbon price signal strengthens gradually.

Q: Are there penalties for non-compliance with CBAM? A: Yes. Failure to surrender sufficient CBAM certificates by the annual deadline triggers penalties equivalent to the penalty for excess emissions under the ETS (EUR 100 per tonne of CO2 equivalent, adjusted for inflation), plus the obligation to purchase and surrender the missing certificates. Failure to register as an authorized declarant or to submit required reports may result in additional administrative penalties determined by national competent authorities, including potential suspension of import permits for CBAM-covered goods.

Sources

• European Commission. (2025). CBAM Transitional Period: Implementation Report and Preliminary Assessment. Brussels: European Commission, DG TAXUD.
• Federation of European Importers. (2025). CBAM Compliance Survey: Challenges and Costs for EU Importers. Brussels: FEI.
• European Court of Auditors. (2025). Special Report: The Carbon Border Adjustment Mechanism, Early Implementation Assessment. Luxembourg: ECA.
• Tata Steel. (2025). Annual Sustainability Report 2024-25: Decarbonization Roadmap and CBAM Preparedness. Mumbai: Tata Steel Limited.
• Turkish Steel Producers Association (TCSB). (2025). CBAM Impact Assessment: Turkish Steel Sector Readiness Report. Ankara: TCSB.
• International Emissions Trading Association. (2025). Border Carbon Adjustments: Global Landscape and Mutual Recognition Prospects. Geneva: IETA.
• World Bank. (2025). State and Trends of Carbon Pricing 2025. Washington, DC: World Bank Group.