The Carbon Border Adjustment Mechanism (CBAM) is a regulatory framework aimed at putting a price on carbon emissions embedded in goods imported into the European Union. Introduced as a part of the ambitious 'Fit for 55' package, it is designed to prevent carbon leakage, a phenomenon where companies move their production to countries with less stringent climate policies.

The CBAM is a complex and ambitious policy, but it has the potential to play a significant role in reducing global greenhouse gas emissions, aiming to reduce greenhouse gas emissions by at least 55% by 2030.

The CBAM will initially apply to imports of certain goods from sectors at high risk of carbon leakage. Over time, it is expected to be expanded to cover more sectors and goods.

Importers of covered goods will be required to purchase CBAM certificates equivalent to the carbon emissions embedded in those goods. The certificates will be auctioned off by the European Commission, and the proceeds will be used to support the transition to a low-carbon economy in the EU and globally.

During the transitional phase importers are obliged to report emissions associated with their imports on a quarterly basis without financial penalties. However, from 2026, the mechanism will necessitate annual reporting and require the purchase of CBAM certificates. This phase aligns with the gradual phase-out of free allowances under the EU Emissions Trading System (ETS)