All you need to know about the EU’s CBAM regulation

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”.

What is the EU’s Carbon Border Adjustment Mechanism(CBAM)?

The EU’s Carbon Border Adjustment Mechanism(CBAM) is the EU’s response to the long-standing climate policy challenge of minimizing carbon leakage.

What is “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”.

What is the goal of the EU’s CBAM regulation?

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.

How does CBAM interact with the EU Emissions Trading System (ETS)?

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.

Which products are currently included under the CBAM regulation?

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.

Will CBAM’s scope be expanded?

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.

How does CBAM reporting work for importers?

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.

What are importers required to do during the transitional phase of CBAM?

During the transitional phase of CBAM, which runs from October 1^st, 2023 to December 31^st, 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.

What changes for importers in the definitive phase of CBAM starting in 2026?

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 31^st, 2027, for imports made in 2026.

What’s next for EU’s CBAM?

What’s expected before 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.

What impact does CBAM have on electricity imports?

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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