Introducing the Carbon Border Adjustment Mechanism (CBAM)
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Introducing the Carbon Border Adjustment Mechanism
Having officially come into force in 2023, the EU’s Carbon Border Adjustment Mechanism (CBAM) is moving from its so called “transitional phase” into its definitive regime. For companies importing iron and steel, aluminium, concrete, fertilizers, electricity, and hydrogen into the EU this means they now need to fully comply with CBAM requirements. The following article intends to explain what the CBAM is, why it is now being enforced, what compliance entails, and how companies can stay ahead of its requirements.
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1 – What is the CBAM
With the introduction of its Emissions Trading Systems (ETS) in 2005, the EU effectively created the first large greenhouse gas emissions trading scheme in the world. A major pillar of its energy policy, the ETS is based on a cap-and trade system wherein each allowance sold under the ETS permits their holder to emit 1 ton of CO2. The intended effect of this scheme was to force polluters into paying for their share greenhouse gasses emitted in Europe. That said, this system was limited to those emissions originating within the EU.
To prevent "carbon leakage", where production shifts to countries with looser environmental regulations, the EU granted free CO2 emission allowances to specific sectors. These allocations, determined by efficiency benchmarks developed by the European Commission, were designed to reduce compliance costs and maintain a level playing field for European businesses in the global market. However, as the European Union’s decarbonization targets became increasingly ambitious, this system of free allocation fell quickly out of favour.
Introduced in 2023, the CBAM’s stated purpose is to address carbon leakage through a system that puts a price the embedded emissions in Union imports. By targeting certain high emission sectors, namely iron and steel, aluminium, concrete, fertilizers, electricity, and hydrogen imports, the Union effectively taxes greenhouse gasses emitted throughout the product’s lifecycle before its entry into the European market.
Despite having been introduced in 2023, the CBAM up to now been in a “transitional phase”. In the period between 2023 and 2026, CBAM compliance was not enforced. Companies were given time to adapt to new rules and set up reporting frameworks that satisfy the regulation’s requirements. From January 1, 2026, onwards, however, CBAM compliance becomes mandatory.
2 - Who is in scope, and what do they need to do
The CBAM targets companies importing iron and steel, aluminium, concrete, fertilizers, electricity, and hydrogen products from countries outside of its borders. Importantly, determining whether a company is under scope of the regulation depends on the products it imports. The full list of products under scope is available under Annex I of the CBAM, you can find the full list by clicking here.
From 2026 onwards, companies in scope of the CBAM will be required to report on their GHG emissions and purchase CBAM certificates covering the embedded emissions in their imports. By 30th September 2027, these companies will be mandated to report on the specific embedded emissions of CBAM-related goods and based on that surrender the corresponding CBAM certificates to the relevant national authorities.
Box 1. How to calculate embedded emissions – Default Values vs Actual Emissions Data
Understanding the embedded emissions in your imports can be tricky. Luckily, Annex IV of the CBAM offers two provisions for that calculation, companies can thus determine the embedded emissions in their products based on either default values provided by the Union, or on actual emissions data.
Default values:
Calculating embedded emissions based on default values is the most straightforward manner of figuring out how much CO2e is in your imports. The EU provided default emissions factors in a document released in December 2025. In this document, the Union calculated, per country and per product the average emissions of sector companies. With these averages it sets its default emissions factors.
Companies who are unable to obtain actual emissions data pertaining to their imports may, as such, employ these so-called default values to estimate the embedded emissions in their products using the following formula.
Total CBAM emissions=Quantity of goods∗Default Emission Value∗(1+Markup)
That said, relying on these values can be costly. Based on the average emissions of a given sector per country means that values are skewed by high embedded emissions totals. As such, another way to calculate embedded emissions is by relying on actual supply chain data.
Supply chain data:
Using the actual supply chain data to calculate the embedded emissions in your imports is the most reliable method to determine your CBAM obligations. To perform CBAM calculations with actual supply chain values companies need to engage in a complex data-gathering exercise, getting into contact with suppliers, and petitioning information that is not always readily available. This also entails getting your embedded emissions verified by an authorized third party at the declarant's expense.
If the actual embedded emissions information is available, the CBAM distinguishes between two distinct categories of goods, for which different formulas apply. These goods are simple, and complex goods. Simple goods are goods produced using only input materials with no embedded emissions, such as raw materials or electric energy. Conversely, complex goods, are goods with one or more precursors whose production also resulted in GHG emissions. The European Commission has made two sets of formulas for either type of goods available on Annex IV of the CBAM, you can also find it by following the link here.
Differences between Actual Emissions Data vs Default Values
The cost differences between using the default values and actual emissions data can be palpable. As the default values rely on emissions averages for a given country, the values can be comparatively high when placed next to the actual embedded emissions in your products. On the other hand, using actual emissions data also requires taking verification costs into account. To know the best option for your company can be a challenge in and of itself. To start, you can rely on tools like the CBAM calculator devised by the Nederlandse Emissieautoriteit (NEa) available here. This can give an overview of CBAM costs based on the EU's default values. With these in hand you can compare them with the costs of your actual embedded emissions using the correct formulas.
3 – How to prepare yourself
For companies in-scope of the CBAM, preparing yourself for the new rules can be a challenge. Doing so requires a clear understanding of your company’s supply chain, and operations. Below, we have created a guide on what companies can do to prepare:
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Register as an Authorized CBAM declarant.
The first thing companies need to do is to become authorized CBAM declarants or to appoint one as their indirect customs representatives. To do so, companies must register on the CBAM Authorisation Management Module. The module has been live since March 2025, as such, for companies not yet registered, this is the first step towards CBAM compliance.
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Map out your supply chain.
Whether you are using default values or actual emissions data to determine how many CBAM certificates you need to get, the first step is the same. Companies need to understand their supply chains and gain a clear picture of their products and the material composition within them (CBAM reports and certificates are only meant to cover the net-weight of the products). Depending on what kind of data is available, this can inform how companies set up their reporting methodologies and determine the overall costs of CBAM compliance.
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Collect and assess emissions data.
Based on what your supply-chain mapping exercise delivers, you can start collecting data and calculating the embedded emissions in your imports. If working with actual emissions data, this requires close cooperation with non-EU suppliers to ensure data is collected in line with CBAM methodologies, verified where required, and delivered within the prescribed reporting timelines. Where such data is not available or dependable, companies may need to rely on default values in the short term, while progressively improving data quality to reduce compliance costs and risk over time.
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Purchase CBAM certificates and report on your emissions
With your verified emissions data in hand, you can calculate the exact number of CBAM certificates required for purchase through the CBAM Declarant Portal Starting in 2027, you must ensure on a quarterly basis that you cover at least 50% of the embedded emissions for all goods imported since the beginning of the calendar year. In addition, you are required to submit a formal CBAM declaration by September 30th of each year over the preceding calendar year. This report must detail the total net weight of imports, the associated embedded emissions, and the specific number of certificates to be surrendered.
4- How we can help
At Good Growth Collective we believe that Sustainability goes beyond compliance. Creating tailor-made, future-proof, and innovative solutions for businesses that want to become sustainable, delivers value for people, planet and profit. For that reason, we use our mix of senior expertise and junior drive to help companies in their sustainability journeys. When it comes to CBAM compliance we can help you engage with suppliers, collect data, and report on your emissions, thereby ensuring you purchase CBAM certificates and comply before the upcoming deadlines.