The EU’s Carbon Border Adjustment Mechanism (CBAM) entered its definitive compliance phase on 1 January 2026, requiring importers to cover embedded carbon emissions through purchasable certificates to address carbon leakage.
Operational Framework
- Certificates from 2026: Authorised importers must purchase electronic CBAM certificates matching embedded emissions of covered imports.
- Price determination: 2026 prices use the quarterly average EU ETS auction price (EUAs); from 2027 prices use a weekly average.
- Link to free allocations: Free EU ETS allocations fall by 2.5% in 2026 and 2027, increasing border tariff exposure.
- Verification: Annual declarations plus accredited third‑party verification are required for actual direct and indirect emissions.
- Default values: If exporters fail verification, punitive default emission values rise by 10% in 2026, 2027 and 2028.
- De minimis: Consignments under 50 kg of covered goods are exempt from reporting and certificate purchase.
Sectoral Coverage
- Covered industries: Iron & steel, aluminium, cement, fertilisers, hydrogen and electricity imports (based on exporter’s grid intensity).
Global and Trade Effects
- Brussels effect: EU regulation incentivises trading partners to develop domestic carbon pricing instruments.
- Modelled impact: Potsdam Institute study: CBAM could increase global GHG reductions by ~73% compared with EU-only measures.
- Legal friction: Multiple WTO concerns cite potential conflict with the CBDR principle.
Indian Context
- Export exposure: India’s iron, steel, aluminium and engineering exports to the EU are most vulnerable to CBAM costs.
- Domestic response: India is fast‑tracking a national carbon trading framework; CBAM allows deduction of carbon prices paid in country of origin.
IASPOINT Booster Facts
- EU ETS: Launched 2005; operates a cap‑and‑trade system with EUA auctions.
- NCAs: National Competent Authorities in EU member states manage declarations and certificate surrender.
- Embedded emissions: Emissions across extraction, transport and manufacturing attributed to a good.