CBAM: Carbon Border Adjustment Mechanism

Consistent carbon pricing for EU imports: encouraging non-EU countries to step up their climate action

The European Union (EU) introduced the Carbon Border Adjustment Mechanism (CBAM) on 1 October 2023 and is now implementing it step by step. The CBAM focuses on carbon-intensive goods produced outside the EU and aims to align carbon prices for these products with those for products manufactured in the EU.

The EU Emissions Trading System (EU ETS), launched in 2005, is the EU’s key tool in the fight against climate change. It is a cap-and-trade system, with the cap referring to the limit set on the total amount of greenhouse gas emissions that installations covered by the scope of the system are allowed to emit. For each tonne of carbon dioxide equivalent emitted, companies are required to submit one EU emission allowance to their national authorities by a specific date. As EU emission allowances can be freely traded on the market, carbon emissions pricing is determined by the relationship between supply and demand. It is worth noting that for some sectors emission allowances are (at least for now) allocated partially for free.

EU ETS: Closing the gaps

EU ETS related costs have so far only affected companies located in Europe. This has led to a competitive disadvantage compared with countries lacking comparable carbon pricing models. However, transferring production, and thus moving emissions, to these countries for reasons of costs – known as carbon leakage – would not be in the interests of climate action or the economy as a whole. While the free allocation of EU emission allowances to obliged sectors has cushioned this effect so far, such allocation is being scaled down and will be completely phased out by 2034 – to be replaced by the CBAM as part of the EU’s Fit for 55 policy package. The resulting consistent carbon pricing aims to create a level playing field for affected products across the EU.

Consistent carbon prices beyond EU borders?

The CBAM applies to emissions incurred during the production of certain imported goods such as cement, electricity, fertilizer, hydrogen, iron, steel and aluminium. The aim of the mechanism is to levy the carbon price that would have been paid if the product had been produced under the scope of the EU ETS when the goods enter the EU’s customs territory. The introduction of the CBAM Regulation is a means to encourage the EU’s international partners to reduce emissions and contribute to more ambitious climate policy via carbon pricing.

**Manuel Hoechemer, Financial Markets Corporate Sales Commodities**

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CBAM reporting obligations for EU importers

EU importers have been required to publish quarterly CBAM reports since 2023. Reports must include information on the quantity of goods imported from non-EU countries, on direct and indirect embedded emissions and on the effective carbon price payable in the country of origin for the emissions of the imported goods.

CBAM regulation: Already under review

As things stand currently, EU importers will have to purchase CBAM certificates for verified emissions of imported goods from 2026 onwards. Pricing of the certificates will be based on the weekly average auction price of EU ETS allowances and, for each quarter, importers will be required to hold certificates for at least 80 per cent of imported goods covered by the CBAM regulation.

However, the EU Commission has proposed a legislative change to the regulation, which is being discussed by representatives of the European Parliament, the Council of the European Union and the European Commission in what is referred to as a trilogue, to postpone the sale of CBAM certificates until February 2027. The price of the certificates would initially be based on the quarterly average [of the closing prices of EU ETS allowances] for imports made in 2026 and then be changed to a weekly average further on. The Commission’s proposal is to reduce the minimum purchase threshold for CBAM certificates from 80 per cent, as mentioned above, to 50 per cent.

CBAM exemptions

Where an agreement has been entered into with a third country that includes a carbon price in line with the EU ETS Directive, payments made abroad can be credited towards the CBAM obligations.

Exemptions from the obligations also apply to:

imports from Norway, Iceland, Liechtenstein and Switzerland;
military goods; and
electricity imports where the non-EU country is closely integrated with the EU’s internal energy market.

Commerzbank: 20+ years of experience in emissions trading

Since the EU ETS was launched in 2005, Commerzbank has been an active player in the market and also participates in the UK Emissions Trading Scheme. The Bank not only assists its clients with mandatory emissions trading but also offers the option to offset unavoidable carbon emissions via certified, high-quality compensation projects on the Voluntary Carbon Market. Leveraging our extensive experience and profound expertise in carbon markets, we are ideally positioned to deliver expert support and assist companies in effectively hedging CBAM-related pricing risks according to their specific needs.