The global supply chain is experiencing one of the greatest changes in decades. A new reality is now being faced by companies trading with Europe: the Carbon Border Adjustment Mechanism, or CBAM.
If your organisation exports to the EU or is part of a supply chain that does, being aware of CBAM compliance is not only about meeting the regulations; it is a matter of remaining competitive in a market that is becoming more carbon-conscious.
What Is CBAM and Why Was It Created?
The Carbon Border Adjustment Mechanism is the revolutionary policy of the European Union that aims to avoid carbon leakage. Simply put, it levels the playing field between EU producers who already operate under strict carbon pricing rules and manufacturers in countries with less stringent environmental regulations.
Here’s the core issue: EU companies pay for their emissions under the Emissions Trading System (ETS). The absence of CBAM would allow companies to offshore production to other nations where regulations are much less restrictive or import cheaper goods manufactured by high-carbon-emitting countries, undermining the climate ambitions of the EU.
CBAM compliance deals with this by introducing a carbon price on some imports into the EU, so that foreign manufacturers pay the same amount of carbon price as competitors in Europe.
The mechanism is mainly applicable to cement, steel, aluminium, fertilisers and electricity, which are traditionally carbon-intensive sectors. The EU has already declared its intentions to extend it to other goods by 2030.
How CBAM Actually Works: The Transition Phase
CBAM compliance rolled out in a phased approach, which is important to understand. From October 2023 through December 2025, we’re currently in the transition period.
During this phase, importers must report the embedded emissions in their imported goods, but they don’t pay the actual carbon charges yet. It is a documentation and tracking phase that is constructing the infrastructure of the actual enforcement that starts in 2026.
Starting January 2026, companies must:
- Continue calculating and reporting embedded emissions
- Purchase and surrender CBAM certificates corresponding to those emissions
- Manage direct financial exposure to EU carbon pricing
The financial impact will depend on the carbon intensity of the products and the prevailing EU carbon price.
Step-by-Step Compliance Approach
A structured pathway to help companies understand their responsibilities and be ready to implement CBAM is as follows.
Step 1: Assess Your Product Portfolio
The initial practical action towards compliance with CBAM is determining which of your products are within the scope of CBAM. Check your exports to the EU and classify them.
- Do you ship cement, steel products, aluminium, fertilisers, or electricity?
- Are your products downstream goods that may fall within CBAM’s scope?
The indirect emissions are also subject to CBAM, and thus, this evaluation must be comprehensive.
Step 2: Map Your Supply Chain and Carbon Data
This is where many organisations struggle with CBAM compliance requirements. You need to understand the embedded emissions in your products, not just from your facility, but from your suppliers as well. This requires:
- Direct emissions from your manufacturing. (Scope 1)
- Indirect emissions obtained through purchased electricity. (Scope 2)
- Upstream emissions by your supply chain. (Scope 3)
This data may be difficult to obtain with a supplier who is small or located in areas where there is no effective emissions monitoring system. Start this dialogue early.
Note: CBAM focuses primarily on direct (Scope 1) emissions and, in some cases, indirect electricity-related emissions (Scope 2), rather than full Scope 3 accounting.
Step 3: Calculate Embedded Emissions
After the data is obtained, determine the carbon content in each product. The EU gives some methodologies for this calculation, but accuracy is important. Undervaluing your emissions would lead to fines or additional carbon costs. Excessive estimation may result in paying more than is required.
Why This Matters Beyond Compliance
CBAM compliance is about more than just meeting regulatory requirements. It is changing the way the world conceptualises carbon accounting and trade. The rest of the world is monitoring them attentively; such mechanisms could spread to other markets, and the observance of CBAM would be an early signal of global trade patterns.
Companies that take the initiative now to have strong carbon tracking and reporting in place will have fewer issues navigating the future regulations.
Conclusion
Achieving CBAM compliance requires a structured approach, clear data governance, and ongoing attention. Organisations which begin early, know their emissions, set up proper reporting mechanisms, and can find decarbonisation opportunities will be much better placed than those who wait until it is too late and penalties are unavoidable.
The path forward isn’t about seeing CBAM compliance as just another regulatory burden. It’s about recognising that carbon accounting and climate responsibility are now central to global trade. Those who adopt this change will be in a better position to match the demands of the market, as well as the future of sustainable business.