New EU measure reshapes global decarbonisation landscape

MUCH of 2025 has seen reportage around perceptions of European weakness and decline. However, the EU will be seeking to move further and faster in 2026 to try to regain its economic and political footing.

One of the measures that will be rolled out next week (Jan 1) is the full application of the EU’s Carbon Border Adjustment Mechanism (CBAM).

The new EU measure has been much criticised from at least two different perspectives. Firstly, opponents of CBAM, including some Asian governments such as China and India, have slammed the scheme as a unilateral trade measure and/or green protectionism.

However, the policy has also been criticised by other stakeholders, including non-governmental organisations, for not going far or fast enough.

The EU’s big push with CBAM will see the 27-member EU adopting the world’s first fully operational Border Carbon Adjustment (BCA) policy to begin charging costs based on the emissions intensity of imported goods.

It is the first time that the price of carbon in a defined jurisdiction will be externalised beyond borders to try to encourage cleaner industrial production.

In response, companies around the world, particularly in high-emissions, export-intensive sectors, have been rapidly preparing for CBAM, and a potential new era of BCA proliferation.

One significant change with CBAM is that wider parts of corporate bureaucracies such as trade departments, which were previously often not directly involved in sustainability efforts, need to engage more in calculating emissions.

Besides tariffs and taxes, carbon emissions and the corresponding carbon tax will have to be accounted for as export costs.

Furthermore, if there are overlaps with pre-existing rules – including EU Reach regulation aimed at improving chemical safety and protecting human health – additional burdens could arise, necessitating adjustments for efficient operations.

CBAM moves from transition into full application

The EU regulation establishing CBAM originally came into force in 2023 with a transition phase which runs until the end of this month.

This gradual introduction is aligned with the phase-out of free allowances under the EU Emissions Trading System (ETS), the world’s first international emissions trading system established in 2005, to support decarbonisation of European industry.

After Jan 1, a levy equivalent to the emissions produced in the manufacturing process of the imported products will be required in the form of purchasing CBAM certificates. 

As part of this process, EU importers or their indirect customs representatives importing more than the single mass-based threshold of 50 tonnes of CBAM goods into the EU will have to apply for the status of authorised CBAM declarants. 

They will buy CBAM certificates from national authorities in their EU country of establishment. The price of the certificates will be calculated based on the auction price of EU ETS allowances expressed in euros/tonne of CO2 emitted, as a quarterly average in 2026 and as a weekly average from 2027 onwards.

EU importers will declare emissions embedded in their imports and surrender the corresponding number of certificates each year. If importers can prove that a carbon price has already been paid during the production of the imported goods, the corresponding amount can be deducted.

The primary goal is to prevent so-called carbon leakage. Recent research by the Organisation for Economic Co-operation and Development indicates that carbon leakage can have a significant impact on reducing the effectiveness of domestic carbon pricing policies, offsetting emissions reductions by around 13 per cent.

The transition period from 2023 to 2025 has served at least three purposes for Brussels. Firstly, allowing for impacted firms to prepare for CBAM; secondly, giving time for negotiations with non-EU countries; and thirdly, allowing the EU to finalise detailed regulations.

Last week’s CBAM announcement, which was part of a larger EU Clean Industrial Deal implementation package, includes clearer operational rules, new documents covering calculation methodologies, default values, and verification.

The package also reinforces enforcement, closes circumvention loopholes, and introduces targeted extensions and support measures, and provides further implementation clarity.

Specific measures include extension of CBAM to downstream products; addressing carbon leakage risks further down the value chain.

The extension covers around 180 product categories, mainly industrial supply-chain goods with high steel or aluminium content, alongside some household appliances. For these downstream goods, CBAM will apply only to the emissions embedded in CBAM-covered input materials, not to downstream manufacturing processes.

The extension is not a big surprise. While CBAM initially applied to imports of certain goods and selected precursors whose production is heavily carbon-intensive and at most significant risk of carbon leakage, it will ultimately seek to capture more than 50 per cent of the emissions in ETS covered sectors. 

The Commission has also strengthened its ability to address circumvention risks. New measures include enhanced reporting requirements to improve traceability of CBAM goods, clearer treatment of emission-intensity mis-declarations, and the inclusion of pre-consumer steel and aluminium scrap in CBAM calculations.

To manage remaining carbon leakage risks during the first years of CBAM’s full application, the Commission has proposed a temporary decarbonisation fund. This is designed to support EU producers of CBAM goods that remain exposed to competitive pressure on non-EU country markets as free allocation under the ETS is phased out.

Taken together, with the CBAM definitive period starting next week, an increasing number of exporting firms outside the EU, including in Asean, are adapting their business strategy to incorporate carbon management. It will be a significant corporate test, especially for small and medium sized exporters, given the significant new burdens on them.  

The writer is an associate at LSE IDEAS at the London School of Economics