CBAM: the EU's Border Steps onto the Climate Frontline

CBAM: A Structural Shift in Global Carbon Pricing

The year 2025 marked a symbolic milestone: the twentieth anniversary of the EU Emissions Trading System (EU ETS), the world’s first international carbon market, coincided with the end of the preparation phase for the Carbon Border Adjustment Mechanism (CBAM). 

The two instruments are closely intertwined. CBAM did not emerge overnight; its rationale can be traced back to economic and climate dynamics that have shaped the last two decades. While the ETS was set up in 2005 to regulate emissions from the largest and most carbon-intensive sectors within the EU, the CBAM goal is to prevent “carbon leakage” – the risk that carbon-intensive industries relocate to regions with weaker climate policies – by applying a carbon price to selected imported goods from outside the EU. At the outset of the EU ETS, the EU distributed a large number of free pollution allowances to soften the impact, keeping carbon prices very low. This “free lunch” was the downsize of the EU ETS. In essence, the 'polluter pays principle' has largely remained theoretical, with Europe's most polluting industries receiving billions of euros in subsidies through the EU ETS. CBAM came as response to this loophole: within the EU ETS reform, free allowances for companies will be phased out from 2026 until the end of 2033, in parallel with the phasing-in of the CBAM. 

After a two-year transition period, the CBAM officially entered into force on January 1, 2026. Since then, imports of products such as steel and fertilizers have been subject to fees proportional to their CO₂ footprint, ensuring that foreign producers do not gain an unfair competitive advantage over European companies already paying for their emissions.

At its core, the CBAM seeks to level the playing field by aligning the carbon price paid by EU and non-EU producers. For the first time, carbon pricing extends directly into international trade. This structural shift sends a powerful economic signal – especially to low-carbon projects outside the EU – and encourages industries worldwide to adopt cleaner production methods, as lower-carbon imports face reduced CBAM charges. Schneider Electric, for instance, is engaging with 1,500 suppliers on a Zero Carbon Pathway to decarbonize its supply chain. CBAM further incentivizes non-EU suppliers that supply EU entities for the supplier decarbonization project.

The mechanism is also accelerating the global uptake of carbon pricing. Since the CBAM was announced in 2021, the number of carbon-pricing systems worldwide have more than doubled. With the EU carbon price steadily rising, it increasingly makes economic sense for countries exporting to Europe to price carbon domestically rather than pay the difference at the EU border. According to the latest data from I4CE, as of May 1, 2025, there were 78 carbon-pricing instruments. Yet, like any other EU Green Deal regulations, CBAM has been under attack. While CBAM exemption are being discussed regarding fertilizers, Norwegian fertilizer giant Yara International recently warned that it may have to reconsider a multi-billion-euro low-carbon project if the mechanism were suspended. In early-2026, EUROMETAL repeatedly signaled that policy uncertainty around CBAM – especially the possibility of suspension or retroactive exemptions – poses a direct risk to investment planning in the European iron and steel value chain. While the European Commission introduced Article-27a (the so-called CBAM “emergency brake”), allowing temporary suspension in case of market disruption, even discussing suspension is already damaging market confidence. Yet, despite rising concerns about CBAM dilution, the Regulation core design and objectives were not weakened by the 2025 deregulation wave.

The last wall of the EU Green Deal

As recently highlighted in a webinar, the CBAM has withstood the push for deregulation of the EU Green Deal. Several dynamics can be observed to explain such resistance. First there was first a strong political alignment to protect European industry, seconded by an East-West compromise that held firm, the launch of an Innovation Fund to support industrial players, and finally strong leadership from France to safeguard the mechanism substance and its implementation timeline. At the same time, the EU introduced targeted concessions, considering the competitive risks faced by small European manufacturers. The “Omnibus” process enabled a significant reduction in administrative burden for SMEs and small importers, with 90% of importers now exempt, while still maintaining 99% of the emissions originally covered within the mechanism’s scope.

France played a decisive role in ensuring that CBAM remained a robust tool. With rising geopolitical turbulence and repeated disruptions to global supply chains, the mechanism is considered, with good reason, as an instrument of industrial sovereignty in the transition toward a low-carbon economy. Together, these dynamics explain why Europe has stayed the course and why CBAM ultimately survived the simplification waves inherent to the Omnibus process.

How to navigate the CBAM complexity and get ready for 2027

Like any new regulation While EU importers have no formal obligations in terms of reporting and certificates in 2026, anticipating 2027 is paramount in order to source provisions to purchase the certificates as of February 2027. This brings three major consequences for EU importers.

BE REGISTERED AS AUTHORISED CBAM DECLARANT – First, they need to ensure they have requested and obtained Authorized Declarant status. The deadline to receive this accreditation was March 31, 2026. Since this date, shipments can be blocked at the EU border by customs authorities. Any company that has not yet submitted its application should begin the process without delay. The procedure requires estimated quantities and values of goods planned for importation for both the current and following year. Applicants must also submit a certificate of activity issued by the tax authorities, as well as financial statements for the past three fiscal years.

ANTICIPATE RISK EXPOSURE - Second, CBAM represents a significant transition risk, as companies will need to estimate their financial exposure to CBAM certificates. Every import from January 1, 2026 onward will require the purchase of certificates, with payments starting in February 2027. Importers therefore must determine the perimeter of impacted products using the correct custom codes, identify supplier countries of origin, apply the appropriate CBAM benchmarks and default values, and rely on accurate carbon-price forecasts. CBAM exposure will increase mechanically when EU ETS caps tighten, free allocation is reduced, and benchmarks become stricter. CBAM risk should be assessed using EU ETS forward dynamics, not trade volume alone. Practical implication means an importer should project embedded emissions x future ETS price paths, not just current CBAM costs. Many in the industry see significant upside risk for carbon prices in the coming years, including SE Advisory Services Global Research & Analytics Department, who can provide EU allowances carbon forecasts to guide companies in their procurement decisions.

CBAM INFLUENCING PROCUREMENT STRATEGY - Third, CBAM is both a customs and supply-chain regulation, requiring coordination across departments and ultimately leading to strategic sourcing decisions. With rising CBAM costs – driven by penalizing default values for third-country installations, the phase-in factor, and increasing carbon prices – importers will eventually reach a tipping point where the financial burden becomes too heavy to absorb. This will inevitably push companies to consider alternative sourcing options for their iron, steel, aluminum, cement and fertilizers purchases: switching to low-carbon and data-ready suppliers, exploring near-shoring or reshoring for CBAM-exposed materials, engaging their supply chains with decarbonation programs to reduce its scope 1 emissions, or implement internal carbon pricing tools. Procurement departments will have multiple options, which have to be tailored and adapted to the complexity of the supply chains and the willingness of suppliers to cooperate. To support this, SE Advisory Services has partnered with a software platform that calculates product emissions through pre-filled, customizable models across multiple tiers, and provides dashboards to facilitate supplier engagement campaigns.

While CBAM has not yet triggered large-scale supplier relocation, it is already reshaping procurement strategies, with companies prioritising low-carbon suppliers, and reassessing sourcing geographies ahead of the start of the certificate purchases.

Contributor:

Jules Cordillot, Senior Sustainability Consultant