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What is the EU's Carbon Border Adjustment…

The EU’s Carbon Border Adjustment Mechanism (CBAM) is a new policy that will put a price on carbon emissions embedded in imported goods.

It is designed to address the risk of carbon leakage, which occurs when companies move their production to countries with less stringent climate policies in order to avoid paying carbon costs.

The CBAM will initially apply to six carbon-intensive sectors:

cement
iron and steel
aluminium
fertilisers
electricity
hydrogen

Importers of these goods will need to purchase CBAM certificates, which will be equivalent to the price of carbon under the EU Emissions Trading System (ETS).

The CBAM will be phased in over time.

It will enter into a transitional phase on October 1, 2023, during which importers will be required to report on the embedded carbon emissions of their imports.

The CBAM will become fully operational on January 1, 2026.

EU's Carbon Border Adjustment Mechanism - CBAM

How will the CBAM work?

Importers of CBAM-covered goods will need to purchase CBAM certificates, which will be equivalent to the price of carbon under the EU Emissions Trading System (ETS).

The number of certificates required will be calculated based on the embedded carbon emissions of the imported goods.

Importers can purchase CBAM certificates from the EU Commission or from other market participants. The certificates will be valid for one year.

Importers will need to surrender their CBAM certificates when they release their goods for free circulation in the EU.

If an importer does not have enough certificates, they will be liable to pay a penalty.

The CBAM and the EU ETS

The CBAM complements the EU ETS, which is a cap-and-trade system that puts a price on carbon emissions from industrial installations in the EU.

The EU ETS has already proven to be an effective tool in helping drive emissions reductions cost-effectively. Installations covered by the ETS reduced emissions by about 35% between 2005 and 2021.

The CBAM is designed to ensure that imported goods are subject to a carbon price equivalent to that paid by EU producers under the ETS. This will help to prevent carbon leakage and protect the competitiveness of EU industries.

The CBAM and global trade

The CBAM will likely to have a significant impact on global trade. It is important to note that the CBAM is not a protectionist measure. It is designed to level the playing field between EU producers and their competitors in countries with less stringent climate policies.

The CBAM is also designed to be WTO-compatible. The EU has consulted closely with its trading partners in developing the CBAM, and it has committed to working with them to ensure a smooth transition to the new system.

Conclusion

The EU’s Carbon Border Adjustment Mechanism (CBAM) is a landmark policy that will help the EU to achieve its climate goals and protect the competitiveness of its industries. It is also a signal to the rest of the world that the EU is serious about tackling climate change.

The CBAM is a complex policy, and there are still some unanswered questions about its implementation. However, the EU is committed to working with its trading partners to ensure a smooth transition to the new system.

For impact investors and fund managers with exposure to global supply chains, the Carbon Border Adjustment Mechanism represents a material shift in how carbon risk is priced into cross-border trade. As climate policy tightens, portfolios that include manufacturers or commodity producers exporting into the EU face new compliance costs that can affect valuation, margins, and long-term competitiveness. Understanding CBAM is increasingly essential for conducting credible ESG due diligence on internationally operating companies.

Consider a steel producer based outside the EU that exports to European buyers. Under CBAM, those buyers must purchase certificates reflecting the carbon intensity of that imported steel. If the producer operates with high emissions and no domestic carbon pricing, the importer bears additional costs — creating a direct financial incentive for the producer to decarbonize. This mechanism effectively exports the EU's carbon price signal beyond its own borders, reshaping procurement decisions across global value chains.

For founders building climate or trade-adjacent ventures, and for funders allocating capital toward emerging market manufacturers, CBAM introduces both risk and opportunity. Companies that proactively measure and reduce embedded carbon in their products may gain a genuine competitive advantage in EU markets. Social enterprises working on industrial decarbonization in developing economies, where carbon pricing has historically been limited, may find CBAM creates new demand for their solutions and unlocks fresh investment interest from European partners.

Carbon Border Adjustment Mechanism

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