As the world grapples with the escalating consequences of global warming, pollution, and resource depletion, curbing carbon emissions has never been more urgent. To help tackle these issues and curb carbon emissions, the European Union introduced its Carbon Border Adjustment Mechanism (CBAM), which is the first carbon border tax in the world. It aims to ensure that imported in the EU carbon-intensive products such as steel, iron, and aluminium bear a similar carbon price to those produced locally. The directive also comes at a time when the EU is raising its climate ambitions by introducing strict rules that occasionally lead to carbon leakage - when climate policies push businesses to move their polluting activities to countries with weaker environmental rules, shifting emissions globally rather than reducing them.

Why was CBAM introduced and what is its timeline?

CBAM, a key component of the Fit for 55 Package, was initially proposed in 2021 to cut down greenhouse gas emissions by 55% below 1990 levels by 2030. “With CBAM, the EU aims to pressure its own industries to decarbonize while ensuring CO2 emissions carry a cost globally,” says Lidia Tamellini, policy officer at Carbon Market Watch.

CBAM officially began its transitional phase on October 1, 2023, following its adoption on May 5, 2023. During this phase, importers bringing goods like steel or iron into the EU from non-EU countries are required to report their greenhouse gas emissions. However, EU buyers won't need to purchase CBAM certificates until the end of 2025.

2025 saw the launch of a new CBAM portal, designed to simplify the process for non-EU producers to upload their emissions data, making it more accessible for importers. Additionally, importers can begin applying for 'authorised CBAM declarant' status, which will become mandatory from 2026.

Starting in 2026, importers will be required to purchase CBAM certificates, with their cost tied to emissions data and the prices of the Emissions Trading System (ETS), a market where companies buy and sell carbon emission allowances. By 2030, the scope of CBAM is set to broaden, eventually encompassing around 50% of all ETS emissions.

Who does CBAM impact and how?

While critical for climate goals, CBAM also introduces administrative and financial pressure on both importers and exporters. Eurofer, the European Steel Association, reported that the EU imported 26 million tonnes of finished steel products in 2023, highlighting the scale of potential impact. Starting in 2026, mandatory CBAM certificates will hit exporters from countries like India and the Middle East hardest, as EU importers bear certificate costs.

“Very few companies are fully prepared for the certificate payment phase in 2026,” says Arif Gasilov, partner of Gasilov Group, a sustainability advisory company based in Azerbaijan. "Fewer than one in five firms have product-level carbon data that meets EU expectations, and most rely on national or regional averages.” Echoing this sentiment, Nilesh Bhattad, Founder, Clean Carbon, further highlights this challenge for Indian exporters. "CBAM is a big shake-up. If you're sending iron, steel, or aluminium into Europe, you're now being asked to report the embedded carbon emissions of your product, down to the last detail,” he states. Bhattad also notes the immediate impact: "We’ve seen several Indian exporters lose orders because they couldn’t submit a valid CBAM report. Some UAE suppliers are facing the same challenge.”

However, CBAM is also pushing companies to adopt greener practices to reduce their emissions. “CBAM has definitely acted as a catalyst. We have begun shifting towards higher scrap metal usage in our production process and have initiated waste heat recovery and material recycling programs in certain facilities,” shared an India metal exporter who wanted to stay anonymous. However, they and many others face challenges: “High upfront capital costs of cleaner technologies and limited availability of low-emission raw materials at competitive prices in our region are major barriers.”

What are the risks and challenges?

Despite its potential, CBAM faces significant hurdles that could weaken its ability to curb global emissions. One major concern is “resource shuffling,” a practice distinct from carbon leakage, where producers send low-emission products to the EU while diverting carbon-intensive goods, like CO2-heavy steel, to markets with looser regulations. Roswitha Becker, spokesperson of thyssenkrupp, a German steel production conglomerate, underlines the importance of adjusting the calculation of the CBAM levy to prevent this.

This issue is compounded by inadequate infrastructure and verification systems, particularly for metal exporters. "The risk for metal exporters (steel, iron, aluminium, etc) is significant. The infrastructure isn’t mature, and verification systems aren’t yet trusted by European regulators,” adds Gasilov.

Data collection poses another challenge, especially for exporters in countries like India. “Many Indian manufacturers don’t have systems to calculate or even track emissions properly,” shares Bhattad. This data gap increased financial strain, as CBAM certificate costs are tied to emissions. For example, a 1,000-ton steel batch emitting 2.5 tons of CO2 per ton above the benchmark could cost an EU importer €250,000

Another hurdle lies in the allocation of CBAM revenues, estimated at €1.5 billion annually but potentially rising if more sectors are included. “All CBAM revenues should support developing economies impacted by CBAM,” Tamellini urges, noting the EU has yet to decide on this.

Simplification

To ease the burden, the European Commission introduced a CBAM simplification package on February 26, 2025, as part of the Omnibus I package, recently backed by the European Parliament. It raises the de minimis threshold to 50 tonnes per year, exempting about 90% of small importers while capturing 99% of emissions. It also allows default CO2 values when precise emissions monitoring isn’t feasible, reducing compliance costs. “The EU has set up a task force to promote global carbon pricing systems, which could lower CBAM costs for countries adopting similar systems, keeping revenues in producing nations,” Tamellini notes.