This story was originally published by Canary Media. It has been edited to conform with Corporate Knights style.
At the start of next year, companies that make and buy energy-intensive commodities like steel and aluminum will enter the era of CBAM — the Carbon Border Adjustment Mechanism.
CBAM is a first-in-the-world policy by the European Union that charges fees on imports based on how much planet-warming pollution was produced in their manufacturing. On Jan. 1, 2026, the carbon tariff will officially take effect, raising costs for European businesses that source products from dirty facilities abroad.
The policy is part of the EU’s broader effort to drive the decarbonization of heavy industries in the 27-member bloc as well as globally. It’s already having a ripple effect, with other countries considering adopting their own carbon-pricing schemes and international firms investing in cleaner technologies to make their exports more enticing to Europe.
Here’s what to know as the landmark policy goes into effect.
How it started
In 2005, the EU launched the Emissions Trading System, the first scheme in the world to limit greenhouse gas emissions from power plants and industrial facilities. The ETS caps the total amount of carbon pollution that each operator is allowed to spew. The companies can then buy allowances that give them the right to generate 1 metric ton of CO2-equivalent. The idea is that making it costlier to pollute will incentivize businesses to clean up their operations.
Until now, however, the ETS has given what experts call a “free pass” to producers of certain trade-exposed commodities. Manufacturers argued that raising the costs of producing goods in Europe would make their industries less competitive on the global market. It could also push key customers, including European automakers, to import cheaper materials from countries without stringent climate policies — a phenomenon known as “carbon leakage.”
As the EU phases out these free passes, CBAM is designed to plug such a leak.
“It doesn’t make sense that you basically ask your own producers to produce in a certain way, to be as clean as possible, or else ask them to pay a price, and then let others — competitors from outside Europe — bring in their products and then compete unfairly,” Mohammed Chahim, the European Parliament’s lead negotiator on the carbon border fee, said on the Energy Policy Now podcast earlier this year.
How it works
The EU officially finalized CBAM’s rules in May 2023. Later that year, a “transitional phase” began for importers of goods from six carbon-intensive sectors: aluminum, cement, electricity, fertilizers, hydrogen, and iron and steel. Companies had to begin filing quarterly reports listing the direct and indirect carbon emissions of those products.
On Dec. 31, that phase will end, kicking off the “definitive period.”
Starting next month, in addition to tracking emissions, importers will pay a fee on covered products like steel rods, metal wiring, and ammonia. Initially, the fee will be a small percentage of the average quarterly price of CO2 allowances under the ETS — though participants could pay less, or nothing at all, if the exporting country has a similar carbon-pricing scheme in place. Over eight years, the CBAM tariff will gradually increase to represent 100% of the weekly average allowance price.
At the same time, the EU will wind down the special treatment it’s given to trade-exposed industries under the regional cap-and-trade scheme, requiring European manufacturers to gradually pay more for their facilities’ emissions.
The free allowances were “always viewed as a bit of a black mark on Europe’s decarbonization ambitions,” said Trevor Sutton, who leads the program on trade and the clean energy transition at Columbia University’s Center on Global Energy Policy. European regulators have billed CBAM as a “necessary component” to meeting the region’s climate goals — a way to curb industrial emissions without endangering its economy, he added.
To start, the rules will only apply to importers that bring in more than 50 metric tons of goods every year. According to the EU, this threshold excludes roughly 90% of importers, who are mainly small and medium-sized businesses, but still captures around 99% of emissions from CBAM-covered goods, since large manufacturers represent the bulk of industrial imports.
How it’s going
CBAM has dominated global discussions on climate policy and trade in recent years. But the regulation itself is surprisingly narrow in scope. Targeted products only make up 3% of EU imports from countries outside the bloc. And the carbon footprint of those goods collectively represents about 0.31% of global greenhouse gas emissions in 2022, according to the Organisation for Economic Co-operation and Development.
Still, “it’s a topic that inspires intense emotions,” Sutton said.
Critics, including Europe’s trade partners in the Global South, have argued that the carbon tariff amounts to protectionism — an excuse to shut out foreign competition — and “green imperialism,” since Europe is unilaterally making decisions that affect producers abroad. Mozambique, for instance, sends 97% of its aluminum exports to the EU, leaving it especially exposed.
Manufacturers within the EU have also pushed back against CBAM and the related decline in free CO2 allowances, claiming that the measures put companies at a competitive disadvantage in global markets and will inflate costs for producers. Last week, the head of French aluminum producer Constellium urged Europe’s regulators to “eradicate” CBAM altogether. Importers and their suppliers have also expressed frustration at the onerous and confusing requirements involved with tracing and reporting emissions, Sutton said.
Even so, some of the EU’s key trading partners are responding to CBAM’s signals. Since the measure passed, countries like Brazil and Turkey have introduced domestic carbon-pricing policies. The United Kingdom is set to implement its own Carbon Border Adjustment Mechanism starting in 2027. China, for its part, has started shipping steel made using hydrogen to Italy — a move experts say could set the stage for increasing Chinese green-steel exports.
Sutton said that CBAM “has helped drive a conversation and elevated the salience of carbon pricing” in other countries, while also setting “a foundation for decarbonization of European industry.”
Maria Gallucci is a senior reporter at Canary Media. She covers emerging clean energy technologies and efforts to electrify transportation and decarbonize heavy industry.
The Weekly Roundup
Get all our stories in one place, every Wednesday at noon EST.
