How does the CBAM work?
The CBAM has been designed to comply with the EU’s international commitments and obligations including World Trade Organisation (WTO) rules. The CBAM system mirrors the EU ETS and works as follows:
- CBAM is applied on the actual embedded emissions in the goods imported in the EU, determined according to a methodology that is in line with the reporting of emissions under the EU ETS for the production of the same goods in the EU.
- As from the entry into force of the definitive period of CBAM in 2026, EU importers will buy CBAM certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU's carbon pricing rules.
- Conversely, if a non-EU producer has already paid a carbon price in a third country on the embedded emissions for the production of the imported goods, the corresponding cost can be fully deducted from the CBAM obligation.
The CBAM will therefore help reduce the risk of carbon leakage while encouraging both, producers in non-EU countries to green their production processes as well as countries to introduce carbon pricing measures.
To provide businesses and other countries with legal certainty and stability, the CBAM is being phased in gradually and initially applies only to a selected number of goods in sectors at high risk of carbon leakage: iron/steel, cement, fertilisers, aluminium, hydrogen and electricity. In the transitional period, which started on 1 October 2023, a reporting system applies for those goods with the objective of facilitating a smooth roll-out and to facilitate dialogue with third countries. Importers will start paying the CBAM financial adjustment in 2026.
Source: EC’s Questions and Answers on CBAM