The Carbon Border Adjustment Mechanism (CBAM) represents a transformative policy tool aimed at addressing carbon leakage and promoting global climate action. By leveling the playing field for carbon-intensive industries, CBAM seeks to align economic competitiveness with environmental responsibility. As a leader in carbon markets, ClearBlue Markets is committed to providing actionable insights on critical regulatory developments like CBAM, helping businesses navigate its complexities.
CBAM emerged in response to global climate initiatives such as the Paris Agreement, which intensified focus on reducing greenhouse gas (GHG) emissions. However, disparities in carbon pricing across regions posed challenges, including carbon leakage—where companies relocate production to jurisdictions with less stringent climate policies.
The European Union spearheaded CBAM’s development as a solution to these challenges. Initially proposed as part of the European Green Deal, CBAM targeted key carbon-intensive sectors like steel, aluminum, cement, fertilizers, hydrogen, and electricity. By attaching a carbon price equal to European emission allowances to imports from non-EU countries, the mechanism sought to equalize the cost of carbon emissions between domestic producers and foreign competitors.
Current Implementation Status
The EU began CBAM’s implementation in October 2023 with a transitional phase focused on reporting obligations. Importers of covered goods must now provide data on embedded emissions, paving the way for full financial implementation in 2026. At first, only 2.5% of imported emissions will have to be covered with the CBAM certificates but the percentage will gradually increase and reach 100% by 2034.
Starting January 2025, the following updates to CBAM regulations will take effect:
Key industries currently covered include steel, aluminum, cement, fertilizers, hydrogen, and electricity. For instance, ArcelorMittal, a major steel producer, has already begun adapting its supply chains to meet CBAM’s requirements by focusing on decarbonizing its production processes and working with suppliers to lower embedded emissions. Similarly, cement manufacturers like Holcim are integrating CBAM into their operational strategies by accelerating investments in carbon capture and storage technologies.
Global Responses to CBAM
CBAM’s introduction has sparked diverse reactions worldwide. The United States has introduced its own Clean Competition Act, which some view as a precursor to a CBAM-like mechanism. Meanwhile, Canada’s Output-Based Pricing System (OBPS) in effect in British Columbia, includes elements that could align with CBAM in the future, particularly through its carbon pricing framework for heavy emitters. China has also decided to include more industries into its National ETS from 2025 to limit the CBAM compliance costs while the UK is starting its own UK CBAM starting 2027.
While CBAM is a landmark policy, it faces notable challenges such as potential hindering of economic growth of developing countries and administrative complexity to manage emissions data across complex supply chains. Moreover, CBAM causes many trade concerns as it is being flagged as protectionist by many trade partners and causes risk of dirtier production being exported elsewhere. When it comes to electricity’s inclusion in CBAM, it risks disrupting existing cross-border electricity flows.
Potential Expansion CBAM’s scope is expected to broaden beyond the initial industries. The EU has signaled interest in including chemicals, plastics, oil&gas and more final products in the next phases of CBAM. For example, the automotive industry is preparing for potential inclusion by focusing on reducing emissions across their supply chains.
Global Harmonization CBAM’s success could inspire similar initiatives globally. Canada is actively discussing potential alignment between its OBPS and CBAM to facilitate smoother trade flows. Meanwhile, Japan’s government is exploring a carbon pricing mechanism that could serve as a regional complement to CBAM. Additionally, a coalition of African nations led by Kenya is advocating for CBAM-inspired frameworks that account for the unique needs of developing economies.
Technology and Innovation Impacts CBAM will likely accelerate the adoption of low-carbon technologies. For instance, companies like Siemens and ABB are developing advanced industrial solutions to help manufacturers lower their carbon footprints. However, a risk of exporters sending greener products to the EU and dirtier ones elsewhere remains.
Navigating the complexities of CBAM requires expert guidance, and ClearBlue Markets is uniquely positioned to assist businesses in adapting to this evolving regulatory landscape:
The Carbon Border Adjustment Mechanism is reshaping the intersection of trade and climate policy, presenting both challenges and opportunities for global businesses. As CBAM evolves, its influence on industries, trade relationships, and climate progress will only grow. ClearBlue Markets’ deep expertise in carbon markets positions us as a trusted partner for businesses navigating these changes. Connect with us today to learn how we can help you turn CBAM compliance into a competitive advantage.