CBAM Explainer: How the EU Carbon Border Adjustment Mechanism Works

A detailed guide to implementation timeline, sectoral scope, embedded emissions calculation, and operational mechanics.

Abhishek Das Co-founder, Climate Decode

January 28, 2026 | 10 min read

The Carbon Border Adjustment Mechanism (CBAM) was formally signed into law in May 2023 as part of the EU's Green Deal. The regulation has been phased in gradually to allow industry time to adapt:

• October 2023 – December 2025 (Transitional Phase): Importers report embedded emissions quarterly. No financial penalties — reporting only. This phase allows supply chains to align data and systems.
• January 1, 2026 (Definitive Regime): Financial liability begins. Importers must surrender CBAM certificates quarterly, matching the reported emissions value. Full CBAM Factor of 97.5% applies (meaning 97.5% of the cost mirrors the EU ETS price).
• Phase-in through 2034: CBAM Factor decreases annually as free EU ETS allowances phase out. By 2034, CBAM Factor reaches 0% and full carbon price applies (no free allowances offset).

This gradual phase-in is intentional — it gives covered sectors time to decarbonise before facing full financial exposure. (Source: EU, Regulation 2023/956 — Carbon Border Adjustment Mechanism)

Key Insight: CBAM started as reporting-only in October 2023. From January 1, 2026, financial liability applies — CBAM Factor 97.5%, declining to 0% by 2034.

CBAM Implementation Phases

The EU CBAM currently covers six carbon-intensive sectors:

• Cement — Including clinker and blended cement
• Iron and steel — Primary iron, crude steel, and downstream products
• Aluminium — Primary aluminium and downstream aluminium products
• Fertilisers — Ammonia, urea, and other key fertiliser inputs
• Hydrogen — Only covers hydrogen imported as standalone product (not embedded in other goods)
• Electricity — Direct imports of electricity only

Products are identified by Combined Nomenclature (CN) codes. EU Customs administrations determine whether goods fall under CBAM scope based on CN classification and regulatory definitions.

Key Insight: Six sectors are covered: cement, iron/steel, aluminium, fertilisers, hydrogen, and electricity. Product scope is defined by CN codes and regulatory definitions.

CBAM Covered Products by Sector

CBAM includes a de minimis exemption for small-volume importers. If your annual imports of a covered good fall below 50 tonnes, you are exempt from CBAM reporting and financial liability.

Important caveat: The 50-tonne threshold applies per good and per importer, per calendar year. If you exceed 50 tonnes of ANY covered product in a year, you become liable for the entire year — even if you only exceeded the threshold in Q4.

Note: The threshold does NOT apply to electricity and hydrogen imports. All electricity and hydrogen imports above the definitional scope are covered, regardless of volume.

Key Insight: Below 50 tonnes/year per good = exempt. Exceeding it once = liable for entire year. Threshold does not apply to electricity or hydrogen.

To participate in CBAM, an importer must register as an Authorized Declarant (AD) in the CBAM Registry. Registration requires:

• EORI number: Economic Operators Registration and Identification number, issued by EU Customs authorities
• Compliance history: Demonstrated customs compliance record
• Financial guarantee: Security deposit (usually 10% of estimated annual CBAM liability) held with Customs
• Quarterly reporting: Submission of CBAM declarations to the EU Carbon Registry for each quarter

Declarants must report embedded emissions within 28 days of end of each quarter. By the end of the following month, they must surrender CBAM certificates equivalent to reported emissions (from January 2026 onward). (Source: EU CBAM Registry, Implementing Regulation 2023/1773)

Key Insight: Authorization requires EORI number, clean compliance history, and financial guarantee. Quarterly reporting mandatory; monthly certificate surrender from Q1 2026.

CBAM mirrors the EU ETS methodology for calculating embedded emissions. The price of a CBAM certificate tracks the weekly average price of EU ETS allowances. Embedded emissions include:

Direct emissions: Scope 1 emissions from production (e.g., fuel combustion, process emissions from clinker production in cement).

Indirect emissions: Scope 2 emissions from purchased electricity. For cement and fertilisers, indirect emissions are included in the CBAM calculation.

Carbon price deductions: If the producer already paid a carbon price in the exporting country (e.g., under India's CCTS), a credit can be deducted from CBAM liability. However, the EU must recognize the scheme as equivalent — currently, only EU ETS, certain linked systems, and a limited set of other schemes qualify.

Calculation formula: CBAM liability = (embedded emissions in tonnes) × (weekly EU ETS price per tonne) × (CBAM Factor) − (recognized carbon price paid abroad). (Source: EU, CBAM Regulation 2023/956, Article 7)

Key Insight: CBAM price mirrors EU ETS weekly average. Includes direct and indirect emissions. Deductions for recognized carbon prices paid abroad — but India's CCTS is NOT yet recognized.

CBAM Reporting and Certificate Surrender Timeline

Since the CBAM Registry opened in January 2026, adoption has been rapid. Within the first week of definitive regime, over 12,000 operators submitted initial applications. Early data shows:

• 1.6M+ tonnes of embedded emissions declared in the first six days of reporting
• Iron and steel dominates early reporting at 98% of total declared emissions
• Average CBAM Factor 97.5% for 2026 (phasing down 2.5% annually through 2034)

Penalties for non-compliance: Failure to register, late reporting, or insufficient certificate surrender incurs sanctions ranging from fines (2-10% of declared liability) to suspension of authorization and customs hold on goods.

The financial guarantee requirement (typically 10% of annual CBAM liability) provides a buffer, but true non-compliance carries escalating consequences. Authorities are expected to be strict on enforcement given the scheme's importance to EU climate credibility. (Source: European Commission, CBAM Implementation Reports)

Key Insight: CBAM Factor starts at 97.5% in 2026 and reaches 0% by 2034 — at which point full CBAM liability applies to all covered imports.

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About the Author

Abhishek Das Co-founder, Climate Decode Co-founder of Climate Decode, with 8+ years of experience across carbon markets, pricing analytics, and policy interpretation spanning compliance and voluntary systems. His work sits at the intersection of regulated carbon markets and long-term decarbonisation strategy, translating complex market and policy signals into decision-grade insight. He has worked extensively across the global Voluntary Carbon Market and key compliance systems including the EU ETS, UK ETS, and WCI, covering carbon pricing and valuation, supply–demand analysis, offset project assessment, and financial modelling. At Climate Decode, Abhishek leads the analytics layer underpinning TerraNova and Canopy, developing India-specific carbon price scenarios, CCTS compliance pathways, and forward-looking decarbonisation roadmaps that integrate regulatory trajectory, market risk, and long-term capital planning. Speak to Abhishek → LinkedIn →

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