What is the purpose of the CBAM?

CBAM explained

The Carbon Border Adjustment Mechanism (CBAM) is an environmental policy tool that places a carbon price on imported carbon-intensive goods (such as steel, cement, fertiliser, etc.) It effectively acts as a carbon charge applied to the greenhouse gas emissions embedded in products during their manufacture. 

Simply put, if a company manufactures heavy carbon-intensive products outside the EU and exports them to the European market, it is still responsible for the carbon associated with their production. Importers are therefore required to purchase CBAM certificates that reflect the carbon price that would have been paid had those goods been produced under the EU Emissions Trading Scheme (EU ETS).

The Goal of CBAM

The purpose of the CBAM is to prevent ‘carbon leakage’. This is to prevent heavy polluters/companies from moving to other countries with less strict climate policies and/or lower carbon prices to avoid or lower their costs.

The goal of CBAM is to create a level playing field and ensure that carbon costs are equivalent across all imports to the EU, with the larger goal of lowering global carbon emissions in line with international mandates to reduce carbon emissions.

CBAM Updates

In May 2026, the European Commission published a draft implementing act that clarifies how carbon prices paid outside the EU can be recognised under CBAM. This clarification provides detailed rules for demonstrating that companies have already paid a carbon price in the country where the goods were produced. 

This is important because CBAM already allows importers to reduce their CBAM liability where a carbon price has been paid in a third country. However, until now, there has been limited detail on how this should be proven, calculated and verified in practice. 

The proposed rules are intended to prevent companies from being charged twice for the same emissions. For example, if a steel producer exporting to the EU has already paid a recognised carbon tax or emissions trading cost in its home country, that amount may be deducted from the CBAM charge owed at the EU border.

The draft implementing act sets out detailed rules on several key areas, including which foreign carbon pricing systems may be recognised under CBAM, the evidence companies must provide to demonstrate that a carbon price has already been paid, and how carbon prices paid in foreign currencies should be converted into euros. It also clarifies how rebates, exemptions, free allowances and other forms of compensation should be treated when calculating any deduction, as well as whether and how carbon credits can be taken into account.

Importantly, the draft rules allow both domestic and international carbon credits to contribute towards a recognised carbon price under CBAM, potentially reducing the amount payable by importers. However, the European Commission has proposed strict conditions and limitations on their use, reflecting concerns around the environmental integrity and verification of certain crediting schemes. As a result, while carbon credits may help lower CBAM liabilities in some cases, companies will need to demonstrate that the credits meet the EU's eligibility requirements and are supported by robust evidence.

In practice, the update gives businesses more clarity but also creates a higher burden of proof. Exporters to the EU will need strong records, verification and documentation if they want carbon prices paid outside the EU to be recognised.