EU CBAM Definitive Phase Entry Into Force

Mechanism

CBAM establishes a carbon tariff on imports of carbon-intensive goods to prevent "carbon leakage" — the relocation of production to jurisdictions with weaker climate policies. The mechanism mirrors the EU Emissions Trading System (ETS) by requiring importers to surrender certificates corresponding to the embedded emissions in their goods.

The definitive phase replaces the transitional reporting-only period (October 2023 – December 2025). Key operational elements:

• Certificate pricing: Calculated quarterly (2026) then weekly (2027+)

based on EU ETS allowance auction prices. Q1 2026 price: EUR 75.36/tCO2.

• Phase-in factor: 2.5% in 2026, increasing linearly to 100% by 2034.

This mirrors the phase-out of free ETS allowances to EU producers.

• Declaration timeline: First annual CBAM declaration covering 2026

imports due 30 September 2027. Certificate purchases begin February 2027.

• Third-country carbon price credit: Importers may deduct carbon

prices already paid in the country of origin (e.g., UK ETS, Korean ETS).

The regulation exempts imports from EEA states (Iceland, Liechtenstein, Norway) and Switzerland, which have linked or equivalent carbon pricing.

Downstream implications

• Trade diversion: Countries with high-carbon production (Russia,

Turkey, India, China, Ukraine) face cost disadvantages in EU-bound steel, aluminium, and fertilizer exports. Turkey and Ukraine have announced domestic carbon pricing initiatives partly in response.

• Competitive pressure on US: The US lacks federal carbon pricing;

US steel and aluminium exporters to EU will bear full CBAM cost without domestic carbon price credit.

• Supply chain restructuring: Importers are incentivising suppliers

to provide verified emissions data and to decarbonise. The administrative burden falls heavily on SME importers.

• Revenue stream: CBAM certificate revenue accrues to EU budget,

estimated at EUR 1.5-2.5 billion annually at full phase-in.

Severity rationale

Severity 4 (significant): The mechanism covers sectors representing ~EUR 100 billion in annual EU imports. However, the 2.5% phase-in factor in 2026 limits immediate financial impact to ~EUR 2-4/tonne for typical steel products. Full severity materialises by 2034. Quant basis: explicit pricing (EUR 75.36/tCO2 × 2.5% = ~EUR 1.88 effective rate per tonne CO2 in 2026).

Open questions

• Will the EU expand CBAM to additional sectors (plastics, organic

chemicals, glass) as proposed in the March 2024 Commission review?

• How will third-country carbon pricing schemes (UK ETS, Korean ETS)

be credited — will mutual recognition agreements emerge?

• What is the compliance rate for SME importers in the first

declaration cycle (September 2027)?