Your Guide to the EU’s Carbon Border Adjustment Mechanism (CBAM)

As the world’s supply chains become more complex regulators across the globe are introducing new requirements for suppliers and buyers. The European Union (EU) unsurprisingly is the first mover with its introduction of a significant new global carbon tariff, the EU’s Carbon Border Adjustment Mechanism (CBAM).

CBAM is designed to address climate change by managing carbon leakage by requiring companies that import high-emissions products into the EU to report on the total emissions related to production starting in 2024, and in 2026, paying for those emissions.

In the near term, CBAM will majorly impact global trade flows of covered products and over the long term, will compel countries, exporters, and manufacturers to decarbonize in order to remain competitive.

Embracing CBAM and understanding its requirements need not be seen a compliance exercise, rather when approached correctly can create value and ensure long-term sustainability and competition.

This article will give you a rundown of everything you need to know about CBAM, its far-reaching implications, what products are covered, the implementation timeline, related costs, and how to comply.

What is the Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) was created as part of the EU’s “Fit for 55” green transition plan, which aims to reduce EU emissions by 55% by 2030.

CBAM is designed to address the following:

• To level the playing field for emissions-intensive EU companies that have been subject to paying an internal carbon tax through the EU’s Emissions Trading Scheme (ETS) by increasing the price of imported goods from countries with lower environmental standards.
• To address climate change by controlling for “carbon leakage,” the emissions from imported goods from countries with lower environmental standards that are likely to have higher “embedded emissions” due to less stringent production practices.

Starting in 2024, CBAM will require any business importing high-emissions products into the EU to report on the embedded emissions, and in 2026, any business importing high-emissions products into the EU will have to pay for those emissions.

CBAM Covered Companies and Products

For the initial phase of CBAM (from 2024 onwards), certain products that are carbon intensive and have a high likelihood of carbon leakage will be included. Companies that export or import any of these covered products into the EU are subject to comply with CBAM.

CBAM covered products include the following:

Products covered in the first phase of CBAM are expected to expand over time to include additional high-emissions goods that are currently covered under the EU’s ETS. These will include air travel, maritime transport, paper, glass, and chemicals.

CBAM Phase-in Timeline

The phase-in period for CBAM will be lengthy and complex. The following timeline shows when companies are subject to certain compliance actions leading up to 2034, when the full phase-in of CBAM will be complete:

CBAM Reporting Requirements

From October 1, 2023, through December 31, 2025, EU importers of covered goods must begin making a quarterly CBAM report no later than one month after the quarter’s end.

CBAM reporting must include the following:

• Total quantity of covered goods
• Total embedded emissions of covered goods
• Total indirect emissions of covered goods
• Any carbon price covered goods are subject to

During the definitive period (from 2026 onwards), importers are required to submit annual CBAM reports by May 31st on information from the previous year. The reports must contain information on annual embedded emissions and any CBAM certificates purchased.

For each product covered under CBAM, only certain GHG (Greenhouse Gas) emissions data has to be shared, and for some products, only direct emissions need to be shared.

The following table shows what data needs to be shared for each type of CBAM-covered good:

Companies that fail to report or misreport embedded emissions may face penalties ranging between EUR 10 and EUR 50 per ton of unreported emissions.

CBAM Certificate Pricing

From 2026, only companies registered as declarants will be able to import covered goods into the EU. Registered declarants must purchase CBAM certificates based on the embedded emissions in their imported covered products above the emissions allowance allocation. The allocation will decrease between 2026-2034, meaning the cost of importing covered products will increase over time.

The following illustrates the calculation method for determining the number of required CBAM certificates and the cost:

How CBAM will impact businesses

• Exporters to the EU: If your company currently exports products to the EU and wants to continue doing so, you will have to start measuring and managing the embedded emissions in your products. This is because the EU company importing your goods will have to report and pay for CBAM certificates covering the embedded emissions in your products.
• EU Importers: EU companies that import covered goods will have to start reporting the emissions of those products from 2024 and pay for CBAM certificates for those products from 2026 onward. The cost of these certificates is based on the embedded emissions of the product.

Therefore, if it costs an EU company more to import your product than it would to purchase the same product from an EU-based or otherwise low-carbon company, you should expect that they will select the more expensive yet less energy-intensive product as it will be cheaper overall.

To remain competitive and ensure your products are still sold in EU markets, now is the time to start measuring your product’s carbon footprint and implement plans to reduce the embedded emissions.

Benefits of complying with CBAM

The global supply chain will be impacted significantly by CBAM. While companies that lag on compliance will lose out, companies that embrace emissions reporting and make the necessary investments to reduce embedded product emissions will reap significant benefits:

• Competitive Advantage: Exporters that start measuring their emissions and reducing them early will make it easier for EU importers to buy their products.
• Access to EU Markets: Measuring emissions of covered products and making lower carbon versions of covered goods will increase the likelihood of exporters gaining access to the world’s largest trading bloc.
• Preparation for Future Compliance: With other countries (USA and UK) set to release their own versions of a carbon border tariff, preparing for the EU’s version will help you gain access and be more competitive in those countries and prepare for future emissions disclosure mandates.
• Reduced Risks and Operating Costs: Measuring and reducing product emissions can help companies better understand their exposure to climate risks, make plans to mitigate these risks and manage the related costs.

Simplify CBAM Compliance Measure CBAM-covered product level emissions →

CBAM compliance with Good.Lab

To measure emissions related to your company’s covered products, they must be measured product-to-product, granularly.

Good.Lab’s Product Footprint Calculator provides companies with detailed visibility into the emissions data needed to comply with CBAM’s initial transitional phase. CBAM’s “default values” (specific emissions factors) are integrated into the software for all covered goods, enabling streamlined, CBAM-aligned emissions calculations and reporting.

Good.Lab’s Product Footprint Calculator

Good.Lab’s in-house team of climate experts use your emissions reports to develop a data-driven strategy to reduce product level emissions related and ensure CBAM compliance for your product portfolio.

CBAM Transition Phase Compliance (October 2023-2026)

The following outlines four simple steps to comply with CBAM during the initial, transition period:

• Step 1: Understand CBAM compliance and its potential impact: Understand what goods are covered, the phase-in time line, and the potential increased in costs for any goods that you export to the EU. (Note that this will vary depending on the carbon-intensity of your covered goods and if there is a carbon tax in your country. For example, Wood Mackenzie estimates that CBAM certificates could increase the cost of exported steel to the EU by about 56% for India and about 49% for China in 2034.)
• Step 2: Identify CBAM-covered goods flowing into the EU: Identify and map out the global supply chain of covered goods and track the amount flowing into the EU.
• Step 3: Use Good.Lab’s product footprint calculator to measure emissions and report: Once you know the quantity of goods you have traveling into the EU, you can simplify the emissions calculations for those products with Good.Lab’s Product Footprint Calculator. Software can ensures your emissions calculations are done quickly and accurately, and help you understand how much more your product will cost importers once we enter the definitive regime in 2026. It also provides you with an audit trail for your emissions calculations for verification purposes.
• Step 4: Plan to Decarbonize: Use the data collected to start building a decarbonization plan for your covered products to ensure your products are competitive in the EU and other jurisdictions preparing to issue a carbon border tariff.

CBAM Definitive Phase Compliance (From 2026)

The following outlines three simple steps to comply with CBAM once the definitive phase begins:

• Step 1: Ongoing emissions calculations and decarbonization strategy: Once you have an initial emissions baseline for your covered products, start implementing emissions reduction strategies. You should continue to measure product emissions at regular intervals and after operational changes to track the performance of your reduction strategies and iterate as needed.
• Step 2: Have your emissions data verified: After 2026, verification of emissions by a third-party is essential and there are any number suitable emissions assurance providers, however, you will need to provide them with an audit trail for your calculations and visibility into methodology.
• Step 3: Purchase CBAM certificates and make an annual declaration: If you are an importer to the EU, you will have to make your first CBAM report and purchase all certificates prior to May 31, 2027.

Other Global Carbon Trade Taxes

Although initially, foreign exporters will look for other markets to trade their covered products, there are also other countries planning to reduce their carbon leakage and create their own carbon border taxes. This will reduce the number of trading partners willing to import higher emissions products.

• UK Carbon Border Adjustment Mechanism: The UK’s CBAM will be phased-in beginning in 2027. It covers comparable products and is based on a commensurate price to the EU.
• US Prove It Act: Although not yet a law, all indications point to this bill being passed in late 2024 and becoming the US version of a carbon border adjustment tariff. This means that non-US companies that import certain high-emissions products must pay a premium.

CBAM is expected to generate more than $9B annually in revenues from all covered goods by 2030. Most of this will go to EU member states, however, some will go to developing nations to help them with decarbonization efforts. With such high stakes, many countries are planning to issue their own carbon taxes or tariffs.

If CBAM reaches its goal of leveling playing field globally for manufacturers of certain goods and stopping carbon leakage, it will act as a global incentive for companies worldwide to both measure and reduce the emissions in their products.

Companies that do start implementing this early benefit from easier access to the EU market, a competitive advantage against competitors, and other ancillary benefits.

If you’re ready to comply with CBAM and make your products more competitive in the EU marketplace, get started today with a demo of Good.Lab’s Product Footprint Calculator.