EU CBAM Phase 2: What Importers Must Prepare for Financial Obligations in 2026

What Is CBAM and Why Does Phase 2 Matter?

The EU Carbon Border Adjustment Mechanism (CBAM) is the world’s first carbon border tax—a landmark EU regulation that puts a carbon price on imports of selected carbon-intensive goods entering the European Union. Established under EU Regulation 2023/956 and entering its transitional reporting phase in October 2023, CBAM ensures that imported goods from countries with weaker carbon pricing are subject to the same carbon cost as EU producers operating under the EU Emissions Trading System (EU ETS). Phase 2 brings full financial obligations beginning January 1, 2026—transforming CBAM from a reporting exercise into a real cash cost for importers.

For U.S., Chinese, Indian, and other non-EU exporters supplying steel, aluminum, cement, fertilizers, hydrogen, and electricity to European customers, CBAM represents one of the most significant new trade compliance obligations in decades. The European Commission estimates CBAM will cover €5–10 billion in annual import values when fully phased in, affecting thousands of companies globally.

CBAM Covered Sectors and Goods

CBAM currently covers six carbon-intensive sectors, selected because they are most exposed to carbon leakage risk and together represent a significant share of EU ETS emissions:

• Iron and Steel: Includes most steel products (hot-rolled coil, rebar, beams), pig iron, and direct reduced iron (DRI). Covers CN codes 7206–7229, 7301–7326.
• Aluminium: Unwrought aluminium, aluminium products, and selected downstream articles. Covers CN codes 7601–7616.
• Cement: Clinker, Portland cement, aluminous cement, and hydraulic cements. Covers CN codes 2507, 2523, 2524, 6811, 6812.
• Fertilizers: Ammonia, nitric acid, nitrates, and urea. Covers CN codes 2808, 2814, 2834, 3102, 3105.
• Hydrogen: Electrolytic hydrogen and by-product hydrogen. CN code 2804.
• Electricity: Electricity imports from non-EU countries via interconnectors.

The European Commission has committed to reviewing CBAM scope extension beyond 2026, with organic chemicals, polymers, and other carbon-intensive imports potentially added in subsequent phases. Companies in adjacent sectors should monitor scope extension timelines closely.

The CBAM Timeline: From Transitional to Financial Obligations

CBAM operates in two distinct phases:

• Transitional Phase (October 2023 – December 2025): Importers must register as CBAM declarants, collect embedded emissions data from non-EU producers, and submit quarterly CBAM Reports to the CBAM Transitional Registry. No financial obligation (no CBAM certificates to purchase) during this phase. This is a data collection and compliance infrastructure build period.
• Phase 2 — Full Implementation (January 1, 2026 onwards): Importers must purchase and surrender CBAM certificates corresponding to the embedded carbon emissions in imported goods. Certificate price is linked to the EU ETS weekly average allowance price. Annual CBAM declarations due May 31 each year. Importers can deduct carbon prices already paid in the country of production.

How CBAM Certificates Work: The Financial Mechanics

Starting in 2026, every authorized CBAM declarant (EU importer or customs representative) must:

• Register in the CBAM Registry: Only EU-established entities (or their authorized representatives) can be CBAM declarants. Non-EU exporters cannot directly engage with CBAM—they must work through their EU importing customers.
• Calculate Embedded Emissions: Determine the tonnes of CO₂e embedded in each shipment using the methodology specified in Commission Implementing Regulation 2023/1773—either actual monitored emissions data from the production facility or default values published by the Commission.
• Purchase CBAM Certificates: Buy CBAM certificates from EU member state national authorities at the weekly average EU ETS price. At €60–80/tonne (current EU ETS range), a 1,000-tonne steel shipment with 1.8 tCO₂/t embedded emissions creates a CBAM liability of ~€108,000–144,000.
• Claim Carbon Price Deductions: If the exporting country has an effective carbon price (e.g., UK ETS, California ETS, Canadian carbon price), the equivalent carbon cost already paid can be deducted from the CBAM liability—preventing double taxation.
• Surrender Certificates Annually: By May 31 each year, surrender certificates equal to the verified embedded emissions of the prior year’s imports. Excess certificates can be repurchased by the national authority; shortfalls incur penalties of €100/tonne unreported emissions.

Embedded Emissions Calculation: The Technical Core

The most technically demanding aspect of CBAM compliance is accurately calculating embedded emissions—the greenhouse gas emissions released during the production of goods, including both direct (Scope 1) emissions and indirect (electricity-related Scope 2) emissions, as defined under CBAM’s specific methodology. Key calculation principles:

• Direct Embedded Emissions: Combustion of fossil fuels + process emissions (e.g., limestone decomposition in cement kilns) + non-CO₂ GHGs (N₂O from fertilizers, PFCs from aluminium) converted to CO₂e.
• Indirect Embedded Emissions: Electricity consumption during production × emission factor for the electricity grid. CBAM uses country-specific default electricity emission factors or actual monitored values with metering data.
• Precursor Materials: For complex goods, embedded emissions include emissions from upstream precursor materials (e.g., pig iron used to make steel, ammonia used to make fertilizers). This creates complex upstream supply chain tracing requirements.
• Monitoring Plans: Non-EU producers must implement CBAM-compliant monitoring plans at production facilities—analogous to EU ETS installation monitoring plans—to generate actual emissions data that can replace default values.

Importer Compliance Action Plan: What to Do Before 2026

Companies importing CBAM-covered goods into the EU must take immediate action:

• Identify CBAM exposure: Audit all EU imports by CN code to determine which goods fall within CBAM scope. Calculate annual import volumes and embedded emissions exposure using default values for initial assessment.
• Register as CBAM Declarant: Apply through the national competent authority in the EU member state of customs clearance (e.g., Destatis in Germany, HMRC equivalent in the Netherlands). Authorization requires AEO (Authorized Economic Operator) status or equivalent.
• Engage non-EU suppliers: Request embedded emissions data and ask suppliers to implement CBAM-compliant monitoring at their production facilities. Suppliers providing verified actual data can reduce CBAM liability vs. conservative default values.
• Quantify CBAM financial liability: Model the 2026+ financial exposure using EU ETS forward price curves. Factor into procurement contracts, pricing, and supply chain strategy.
• Evaluate supply chain restructuring: Assess whether shifting to lower-carbon suppliers (or domestic EU production) is economically preferable to absorbing the CBAM cost.

CBAM’s Impact on Global Trade Flows

CBAM is already reshaping global trade patterns and investment decisions. Key dynamics: (1) Steel trade diversion: High-carbon steel exporters (Russia, China, Turkey, India) face the largest CBAM liabilities, while low-carbon steel producers (Swedish HYBRIT, electric arc furnace producers) gain competitive advantage; (2) Carbon price arbitrage: Countries with explicit carbon pricing (UK, Canada, Japan) can deduct equivalent charges, reducing effective CBAM costs—creating a trade incentive for carbon pricing adoption; (3) Supply chain reconfiguration: Multinational companies are evaluating whether to shift production to EU facilities or low-carbon third-country suppliers to avoid CBAM costs; (4) WTO implications: China and others have filed WTO challenges to CBAM, arguing it violates GATT non-discrimination principles—legal proceedings that could take years to resolve.

CBAM and the EU Green Deal: The Broader Policy Context

CBAM is a cornerstone of the EU’s Fit for 55 package, designed to achieve a 55% emissions reduction by 2030 vs. 1990 levels under the European Green Deal. Critically, CBAM revenues flow to the EU budget and contribute to the EU’s post-2021 financial framework, with a portion earmarked for EU climate initiatives. The gradual phase-in of CBAM financial obligations corresponds with the phase-out of free EU ETS allowances for covered sectors—ensuring that EU producers and importers face equivalent carbon costs over time. By 2034, free ETS allowances for CBAM sectors will be fully eliminated, making CBAM the primary carbon cost equalization mechanism for EU industrial trade.