The global trade landscape is undergoing a big transformation with the rollout of the Carbon Border Adjustment Mechanism (CBAM). This policy, introduced by the European Union (EU), is designed to level the playing field for businesses operating under strict emissions regulations while encouraging international partners to adopt cleaner production practices. But what does CBAM mean for global trade, industries and businesses worldwide? At its core, CBAM aims to prevent carbon leakage, which occurs when companies relocate production to countries with weaker climate policies to avoid carbon pricing. By imposing a carbon cost on imports, CBAM ensures that all businesses, whether based inside or outside the EU, are held to the same environmental standards.
How Does CBAM Work?
CBAM operates as a carbon tariff, requiring importers to purchase CBAM certificates equivalent to the embedded carbon emissions in their goods. Starting January 2026, importers must get enough emission allowances to match their imported emissions. They can subtract any carbon price already paid during production in the origin country. It follows the following steps:
Carbon Cost Calculation: Importers must calculate the total carbon footprint of their imported goods, based on emissions during production. This requires detailed tracking, reporting and verification.
Purchasing CBAM Certificates: Importers must buy certificates to cover the emissions associated with their goods. The price of these certificates fluctuates based on the EU Emissions Trading System (ETS) carbon price, ensuring alignment with domestic costs.
Adjustments for Non-EU Carbon Pricing: If a country already imposes a carbon price, its exporters can receive credits to offset their CBAM obligations. However, this depends on whether the EU recognises the foreign carbon pricing system as equivalent to its own.
Understanding the CBAM timeline is crucial for businesses to ensure smooth adaptation and avoid financial penalties. Starting in 2026, importers must begin purchasing CBAM certificates to cover the embedded carbon in their goods. The system will gradually expand to include more sectors and more stringent requirements. Companies will also need to integrate CBAM compliance into their supply chain management to avoid financial risks. By 2034, full implementation across all sectors is expected to have been completed. Companies that fail to comply will face penalties and potential trade restrictions.
Key Industries Under CBAM
The rules target industries with high carbon leakage risk. Right now, CBAM covers:
- Cement and fertilisers: The chemical reaction in clinker production is a major source of CO₂. CBAM will promote the use of alternative materials and carbon capture technologies. Likewise, the fertiliser industry emits both CO₂ and nitrous oxide, a greenhouse gas that’s more potent than CO₂.
- Iron and steel production: The steel industry is responsible for 8% of global carbon emissions. CBAM aims to push steel manufacturers toward low-carbon technologies such as hydrogen-based steelmaking.
- Aluminium manufacturing: Aluminium production is highly energy-intensive, with emissions varying depending on the energy mix. CBAM will penalise imports from coal-reliant countries while benefiting producers using hydropower or renewable energy.
- Electricity generation: CBAM applies to electricity produced with fossil fuels, discouraging imports from high-carbon grids and encouraging clean energy investments.
- Hydrogen production: CBAM will apply to high-emission hydrogen production, particularly grey hydrogen, which relies on fossil fuels.
The rules go beyond basic products and include specific precursors and downstream items, especially in iron, steel and aluminium sectors. CBAM will affect more than 50% of emissions in ETS covered sectors when fully implemented. The European Commission aims to expand CBAM to all EU ETS sectors by 2030. This growth matches the gradual removal of free emissions allowances under EU ETS from 2026 to 2034. Free allowances will drop by 2.5% in 2026 and reach 100% by 2034. The UK plans to launch its own CBAM by 2027. Their system mirrors the EU approach for aluminium, cement, fertiliser, hydrogen, and iron and steel sectors. All the same, the UK version excludes electricity.
Read More: What Sectors are Impacted by CBAM | Tunley Environmental
Impact on Global Trade
Global trade patterns are changing by a lot as the CBAM continues to reshape international commerce. This mechanism's effect on global trade flows creates both challenges and opportunities for nations worldwide. Already, we’ve seen how it as impacted imports to the EU and non-EU member countries propose similar resolutions.
New Regional Trade Partnerships
The mechanism has led to new trade alliances, especially when countries have strong climate policies. To name just one example, Turkey has sped up its efforts to reduce carbon emissions and created new climate laws because of CBAM. Brazil has started to think about domestic carbon pricing systems to keep its competitive access to EU markets.
Alternative Market Development
Various regions feel the economic effects of CBAM in different ways. For instance, Chile benefits because its manufacturing industry generates low emissions. Countries like South Africa, India and Tunisia see their value-added drop by about 0.25%. Countries are adapting to these changes in different ways. The United Kingdom uses carbon pricing systems, and the United States has the Inflation Reduction Act. These show how countries create different ways to stay competitive. But developing nations face bigger challenges because they don't have enough money to help their industries quickly reduce carbon emissions. In response, The EU has launched several programmes to help, including:
- The Africa-EU Green Energy Initiative
- Just Energy Transition Partnerships with South Africa, India, Indonesia, Vietnam, and Senegal
- Technical Assistance and Information Exchange initiative
Creating a Level Playing Field for EU Businesses
CBAM prevents EU manufacturers from being undercut by cheaper, high-emission imports. European industries investing in low-carbon production will no longer face unfair competition from carbon-intensive imports. The mechanism also supports the EU Green Deal’s net-zero ambitions, ensuring that emissions reductions do not simply shift overseas.
The Bottom Line
CBAM is a major milestone in global climate policy, ensuring that carbon costs are integrated into international trade. The rollout of this mechanism brings both challenges and opportunities. Companies can now choose suppliers with lower carbon footprints. However, less developed nations still face hurdles with unreliable infrastructure and complex technical demands for emissions reporting. The road to 2026 and beyond shows CBAM's influence reaching way beyond its current reach and influence. Environmental regulations will tighten as free emissions allowances phase out between 2026 and 2034. This development, combined with initiatives like the UK's planned carbon border tax, suggests carbon pricing will become the norm in international trade.