Article by
Eszter Pontenagel
As the EU approaches the full implementation of the Carbon Border Adjustment Mechanism (CBAM) in 2026, energy market participants across Europe are preparing for a significant shift in how carbon costs are applied to imports of non-EU electricity.
In this article, our power market experts at Time2Market unpack what CBAM means, how it’s being phased in, and where the key challenges lie. For an even more detailed overview of how CBAM affects electricity imports, take a look at our whitepaper on “CBAM for Power Traders”.
The EU’s Carbon Border Adjustment Mechanism(CBAM) is the EU’s response to the long-standing climate policy challenge of minimizing carbon leakage.
Carbon leakage occurs when efforts to reduce greenhouse gas emissions within one region, such as the EU, lead to increased emissions elsewhere.
As climate regulations in the EU become stricter, the risk of producers to simply relocating their production to countries with looser restrictions increases. The concepts of producers relocating their carbon-heavy production abroad, or foreign carbon-heavy production outcompetes local green production, are jointly known as “carbon leakage”.
The goal of the EU’s CBAM regulation is to effectively disincentivize carbon leakage. CBAM addresses this by placing a carbon cost on certain imports, effectively extending the EU’s environmental standards to its trading partners.
By mirroring the costs EU producers already face under emissions regulations, CBAM aims to maintain fairness while promoting global decarbonization. It’s a key piece of the EU’s broader effort to reach net-zero emissions by 2050.
CBAM and the EU ETS work in tandem. The ETS places a price on carbon emissions within the EU through a cap-and-trade model. CBAM applies a comparable cost to imported goods by requiring importers to surrender CBAM certificates, equivalent to the embedded carbon in the production of the imported product. These certificates are priced in line with the EU ETS but are non-tradeable and specific to the importer’s declared emissions.
CBAM initially targets production sectors with high carbon intensity and a significant risk of trade distortion. These include electricity, aluminium, cement, iron and steel, fertilizers, and hydrogen. The regulation also covers certain precursor materials used in the production of these goods, as well as the carbon emissions of the electricity used to produce the goods.
During the transitional period (2023-2025),importers of these goods must report embedded emissions. From 2026 onward, financial obligations begin.
The scope is likely to broaden over time to include other energy-intensive goods, depending on future assessments by the European Commission.
The Carbon Border Adjustment Mechanism(CBAM) is being follows a phased rollout designed to ease importers and regulators into the requirements. CBAM’s transitional phase began in October 2023, during which importers only face reporting obligations. In 2026, CBAM will enter its definitive phase, when financial obligations will take effect.
During the transitional phase of CBAM, which runs from October 1st, 2023 to December 31st, 2025,importers are required to submit quarterly reports, detailing the embedded greenhouse gas emissions in covered goods. These reports include information on the production process, emission factors, and any carbon price paid in the country of origin.
The transitional phase allows the EU and importers to test and refine the reporting system before monetary obligations begin.
Beginning January 2026, CBAM enters its definitive phase, and financial obligations come into effect. Importers will be required to purchase and surrender CBAM certificates equivalent to the total embedded emissions in their imported goods.
The price of these certificates is aligned with the average weekly price of EU ETS allowances. The first certificate surrender deadline will be May 31st, 2027, for imports made in 2026.
Before CBAM enters its definitive phase, several developments are expected from the European Commission and various Member States:
· Additional guidance will clarify calculation methods, especially for indirect emissions and carbon price deductions for third-country producers.
· A dedicated CBAM registry is being developed to streamline emissions data submission and certificate management.
· Importers are now able to apply for “Authorized CBAM Declarant” status, which will become mandatory during the definitive phase of CBAM.
Electricity is one of the most complex goods covered by CBAM due to its cross-border nature, anonymized trading, and data verification hurdles.
To help market participants understand incoming regulations and potential hurdles, our power market experts have created an overview of how electricity imports are treated under the CBAM regulation. In Time2Market’s whitepaper on CBAM, you can find:
· Unresolved technical issues,
· The role of Power Purchase Agreements (PPAs),
· Emission factor calculations, including the difference between default and actual values, and
· The implications for countries like the UK, Türkiye, and the Western Balkans.
Find your guide on CBAM for Power Traders here.
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Disclaimer: Time2Market ApS is not responsible for the completeness, accuracy, and actuality of the information provided. This article is intended for informational purposes only and should not be considered business or legal advice. The energy industry is extremely dynamic and counterparties change their requirements frequently. As a result, information discussed on this page is subject to change without notice.
This page has last been updated on
July 7, 2025