CBAM: Another Step Toward Achieving Fit for 55
The Carbon Border Adjustment Mechanism (CBAM) is the European Union’s latest regulatory tool to curb carbon emissions and prevent carbon leakage. As part of the Fit for 55 package, CBAM aligns with the EU’s commitment to reducing greenhouse gas emissions by 55% by 2030 (compared to 1990 levels) and achieving carbon neutrality by 2050.
How Does CBAM Relate to the EU ETS?
The EU Emissions Trading System (EU ETS) is the EU’s cap-and-trade system that limits the amount of greenhouse gases emitted by major industries. Each year, EU member states receive emission allowances, which are then distributed among industrial sectors, such as power plants, steel mills, and cement factories. If emissions exceed these allowances, companies must pay for additional permits, creating a financial incentive to decarbonize.
As part of this process, the number of free allowances is gradually decreasing to accelerate Europe’s transition to cleaner energy and production methods. For industries that fail to cut emissions, compliance costs will continue to rise.
Where Does EU ETS Revenue Go?
Revenue from the EU ETS is largely directed to the Modernization Fund, which supports energy transition efforts in countries with carbon-intensive energy systems. Currently, eight EU countries benefit from this fund, with Poland being one of the largest recipients due to its coal-dependent power sector.
Critics argue that the EU ETS places a financial burden on coal-reliant nations, but in reality, these countries receive substantial subsidies to modernize their grids and develop low-carbon infrastructure. The Modernization Fund has already financed multiple energy transition projects in Poland, ranging from renewable energy expansion to grid upgrades.
👉 More on EU-funded modernization projects: Modernization Fund Investments
CBAM: A New Mechanism for Import Emissions
CBAM is designed to mirror the EU ETS but applies specifically to imported goods. This means that companies importing cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen into the EU will need to report and pay for the emissions embedded in these products—just like EU-based manufacturers under the ETS.
The carbon price for these imported goods will be determined based on weekly EU ETS allowances, ensuring that both EU-based and non-EU manufacturers operate under similar climate-related costs.
When Will CBAM Be Implemented?
CBAM is being phased in gradually:
📅 October 1, 2023 – The transitional phase began, requiring companies to report emissions associated with imported goods. No financial payments are required at this stage.
📅 2026 – CBAM will fully come into force, and importers will have to purchase CBAM certificates to cover the embedded carbon emissions of their goods.
To reduce administrative burdens, the EU has introduced a minimum threshold of €150 per shipment, which is expected to exclude approximately 30% of small-value imports from CBAM requirements.
Importantly, if a non-EU producer has already neutralized its emissions through carbon offsets or other verified measures, CBAM charges will not apply. This incentivizes foreign manufacturers to align with EU climate standards and invest in greener production.
Will CBAM Reduce Carbon Leakage?
One of CBAM’s primary goals is to prevent carbon leakage—a phenomenon where companies relocate production to countries with weaker environmental regulations to avoid carbon costs.
Without CBAM, there’s a risk that high-emission products manufactured outside the EU could replace lower-carbon EU products, undermining the EU’s decarbonization efforts. By applying a carbon cost to imports, CBAM levels the playing field and encourages global industries to follow Europe’s climate policies.
Why Does This Matter?
The EU accounts for just 7% of global CO2 emissions today (down from 18% in 2015), yet it has set some of the most ambitious climate targets worldwide. However, climate change is a global issue, and even the most rigorous EU regulations won’t be enough if other countries do not follow suit.
CBAM is part of a broader strategy to drive global emissions reductions by making carbon-intensive goods less competitive in the EU market. By encouraging international manufacturers to cut emissions, the EU is using its economic influence to promote climate action on a global scale.
Final Thoughts
CBAM is not just another EU regulation—it’s a transformative step toward making emissions costs a standard part of global trade. By aligning carbon costs for both EU-based and non-EU manufacturers, CBAM supports Europe’s energy transition, discourages offshoring of emissions, and incentivizes cleaner production worldwide.
As CBAM moves toward full implementation in 2026, businesses must prepare for its impact on supply chains, trade policies, and carbon pricing strategies. The road to Fit for 55 is in motion, and CBAM is a key milestone on Europe’s journey toward a climate-neutral future.
