The EU Carbon Border Adjustment Mechanism (CBAM): What It Means for Europe and Abroad

In October 2023, the European Union (EU) introduced the first fair carbon pricing tool. In their efforts to be the first carbon neutral region by 2050 (coined the European Green Deal), the Carbon Border Adjustment Mechanism (CBAM) was born into the EU’s Fit for 55 Package, the European Commission’s (EC) strategy to reduce greenhouse gas emissions by 55% by 2030. 

We’ll cover what the EU CBAM is, how it works in alignment with the EU Emissions Trading System (EU ETS), why it mitigates carbon leakage and promotes fair pricing, and how Net0 collects and tracks data granularly and measures it precisely, so reporting is accurate, fair and government-compliant. 

What is a CBAM?

The Carbon Border Adjustment Mechanism was introduced to address carbon leakage from offshore emissions. Carbon leakage occurs when companies transfer the production of goods to countries with lower emissions standards, often leading to an overall increase in their scope 3 emissions. This can happen if another country has less effective carbon mitigation policies or little climate consideration. This may lead to importing goods with higher production emissions that replace the cleaner domestic products; not only polluting more but making prices unfair. 

Who will the EU CBAM affect?

• EU and Non-EU organizations that import carbon intensive goods, (cement, iron, steel, aluminium, fertilisers, electricity and hydrogen), into the EU.
• Depending on a country’s electricity schemes and if they’re integrated into the EU, the CBAM will apply to their electricity until it's integrated, after 2030.
• Exempt from the EU CBAM are the Members of the European Free Trade Association (EFTA): Iceland, Liechtenstein, Norway, and Switzerland because they participate in the EU ETS although they are not part of the EU. 

EU CBAM objectives

• Prevent carbon leakage.
• Incentivize value chains to emit less carbon throughout.
• Encourage foreign partners to cut their emissions as well. 
• Standardize the carbon price by those operating under the ETS, that is based on the cap-and trade-system. 
• Make carbon pricing fair on production of goods that are coming into the EU.
• Offer a (EU CBAM-mandatory) methodology of accounting for the emissions in imported goods.

EU CBAM definitive regime from 2026

According to the European Commission, EU importers of goods covered by the CBAM will be obligated to register with national authorities where they can buy EU CBAM certificates. “The price of the certificates will be calculated depending on the weekly average auction price of the ETS allowances expressed in €/tonne of CO₂ emitted.” EU importers will have to declare the emissions from goods imported then surrender the certificates every year. If a carbon price was paid during production in another country, (say if that country has carbon cutting compliance), then the amount can be deducted when declared.

EU CBAM transitional phase (2023 – 2026)

The EU CBAM will allow a transitional phase from 2023-2026 which will give EU and non-EU entities a chance to plan, collect information, and learn methodologies that are useful for preparing to capture the emissions in the ETS by more than 50%. The CBAM will first encompass those imports whose production is “carbon intensive and at most significant risk of carbon leakage: cement, iron and steel, aluminum, fertilisers, electricity and hydrogen” as stated by the EC.

In this period, organizations will need to report their scopes 1, 2, and 3 emissions to the EU CBAM Transitional Registry but won’t need to purchase certificates until 2026. 

Related content

For more information about setting targets and reduction planning, check out our following resources:

• How Are Carbon Emissions Measured?
• Corporate Sustainability Reporting Directive (CSRD) 2024: Who and What Is Impacted
• How to Reduce Upstream Emissions With the Gold Standard Framework for Supplier Engagement

EU CBAM vs. EU ETS

It could be thought of as both systems working together in order to offer fair carbon pricing for domestic (ETS) and foreign (CBAM) goods. Therefore, both markets can stay competitive. The CBAM will also ensure that carbon leakage shouldn’t happen through entities in the EU ETS doing business abroad.

The difference between EU CBAM and EU ETS is:

• The ETS works on a cap-and-trade system which sets tariffs within the EU on emissions allowances, lowering them every year to mitigate carbon emissions. 
• The EU CBAM applies to certain imported goods into the EU which makes carbon pricing fair to domestic firms so they aren’t taking care of all of the carbon costs; which leads to carbon leakage.

How Net0 can help with EU CBAM reporting

To recap, the EU CBAM has been established to foster emissions abatement throughout the supply chain abroad, to make carbon prices fair for EU and non-EU entities, and to encourage foreign nations to adopt climate policies. 

Net0 helps with carbon data management with over 10,000 integrations and AI-driven features. The automated platform cuts time and costs by collecting over 50,000 types of emissions data from multiple sources and locations and calculating it so your company can count its comprehensive embedded emissions, making your carbon pricing fair while avoiding greenwashing. 

Schedule a call with one of our carbon management experts and explore the capabilities of how Net0 manages direct and indirect emissions data.