
The climate change continues to be a central topic in the global regulatory landscape. Although numerous industries and companies have committed to voluntary emission-reduction goals, national governments and international organizations are increasingly pushing to expedite the shift toward a net-zero economy. In this article, the EU’s Carbon Border Adjustment Mechanism in the framework of the EU ETS will be tackled.
What’s the EU ETS?
The EU ETS, or European Union Emissions Trading System, is one of the world’s largest carbon markets and a key tool in the EU’s strategy to combat climate change to be aligned with the objectives set by the Green Deal to achieve the Paris Agreement. The system was launched in 2005 and it is the world’s first carbon market. It reduces overall EU emissions while generating revenue to fund the green transition. The system includes emissions from electricity and heat production, industrial manufacturing of aluminium, steel, cement and hydrogen sectors, and aviation—sectors responsible for about 40% of the EU’s total greenhouse gas emissions. In 2024, it expanded to also cover emissions from maritime transport.
It is a “cap-and-trade” system for reducing greenhouse gas emissions. The system sets a limit (“cap”) on the total amount of certain greenhouse gases that can be emitted by companies covered by the system, and the cap is gradually reduced over time to lower the total emissions while the price of allowances is expected to increase due to demand-supply mechanism. Within this “cap”, companies receive or buy emission allowances (permits) that grant them the right to emit a certain amount of carbon dioxide (CO₂) or equivalent greenhouse gases: one allowance = one ton of CO₂.
In this “cap-and-trade” system, companies that reduce their emissions can sell excess allowances to other companies that need more, creating a financial incentive to reduce emissions.
Moreover, at the end of each year, companies must surrender enough allowances to cover their emissions. If they emit more than their allowances, they face hefty fines. On the contrary, if they emit less, they can sell their surplus allowances for a profit.
In order to protect the European companies, the EU introduced the Carbon Border Adjustment Mechanism that will enter its definitive regime in 2026 affecting EU’s importers.

What’s the CBAM?
The European Union’s Carbon Border Adjustment Mechanism (CBAM) is a tool aimed at assigning a fair cost to the carbon emissions generated during the production of carbon-intensive goods imported into the EU.
This mechanism promotes cleaner industrial practices in countries outside the EU by ensuring that the carbon costs for imports align with those for domestically produced goods, thus supporting the EU’s climate goals without risking competitive disadvantages. Moreover, the CBAM has been designed to align with World Trade Organization (WTO) rules.
EU importers of goods subject to the CBAM requirements will need to register with national authorities, where they can also purchase CBAM certificates. The cost of these certificates will be determined based on the weekly average auction price of EU Emissions Trading System (ETS) allowances, expressed in euros per ton of CO2 emissions.
CBAM declarants will be able to apply for the authorised CBAM declarant status via the CBAM registry. Their application will be processed by the national competent authority of the EU member state where they are established. Starting from 1st January 2025, operators of installations (i.e. factories, plants, or facilities) involved in activities covered by the Carbon Border Adjustment Mechanism (CBAM) will be able to register officially with the relevant authorities. This status will become mandatory as of 1st January 2026 for the import of CBAM goods in the EU customs territory.
Every year, EU importers will declare the total carbon footprint associated to their imports and compensate it with the corresponding number of certificates. 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.
On 1st October2023, the CBAM began its implementation in the transitional phase, with the initial reporting period for importers concluding on 31st January 2024. This gradual rollout ensures a measured, predictable, and balanced transition for both EU and non-EU businesses, as well as for public authorities.
How will the embedded emissions be calculated?
The emissions will be determined using methods specified by the regulation, based on data regarding actual emissions produced during the manufacturing process, which will be supplied directly to importers by manufacturers from third countries. Additionally, standard emission values will be provided by the European Commission, calculated to reflect the default emissions levels of the least efficient EU installations for that category of goods.
How firms subject to the CBAM will have to report the data?
As of 2026, companies will be required to submit an annual report no later than May 31st of the following year. During the transitional period (until 31.12.2025), however, companies must also submit quarterly reports, due by the end of the month following the end of each quarter.
The quarterly report should include the following details: the total quantity of imported goods in tonnes or megawatt hours of electricity used, total actual emissions in tonnes of CO2 per tonne or per megawatt hour, total embedded indirect emissions in tonnes of CO2 per tonne (excluding electricity), and the carbon price paid in the country of origin.
From 2026 onward, the annual report will need to cover: the total quantity of goods imported in tonnes or megawatt hours, the total embedded emissions in tonnes of CO2 per tonne or megawatt hour, and the total number of CBAM certificates surrendered based on the total embedded emissions, adjusted for any carbon price already paid in the country of origin, if applicable.
Challenges and opportunities for companies

According to McKinsey statistics (source: https://www.mckinsey.com/capabilities/operations/our-insights/operations-blog/new-opportunities-capturing-value-from-cbam-regulation), the CBAM will affect strongly primary aluminium production, with an expected 70% cost increase by 2030, followed by a +40% and +19% cost increase by 2030 for steel and polymers respectively. For companies heavily reliant on these materials, maintaining a business-as-usual approach could prove costly. A top-down McKinsey’s analysis of a typical European automotive company indicates that inaction could shrink profits by 20 to 40 percent over the remainder of this decade. Roughly half of these losses would stem from the direct costs associated with compliance—or non-compliance—with CBAM regulations, while the other half would result from declining demand as consumers increasingly opt for lower-emission alternatives.
Increasing costs are not the only aspect to be highlighted. The Carbon Border Adjustment Mechanism also presents substantial opportunities, especially for companies that reduce emissions more quickly than their competitors and therefore may reach better positioning and attract customers from higher-emitting rivals. The most proactive firms could see even greater growth, benefiting from price premiums for products with superior environmental performance and adopting new green business models.
Another way to mitigate the costs of carbon taxes may be through a redefinition of the organization’s value chain. Substituting materials, implementing waste-reduction programs, or enhancing process efficiency can offer dual advantages: lowering both tax liabilities and the direct costs of energy, water, or waste. In conclusion, new business models with an outlook towards circular approaches can generate revenue streams with minimal associated emissions.
Would you like to know if your company is subject to the Carbon Border Adjustment Mechanism? Find the official checklist on the European Union website: https://op.europa.eu/en/publication-detail/-/publication/c0dc964b-8f3e-11ee-8aa6-01aa75ed71a1/language-en
If you have any questions or need further information, please reach out to Axevera Consulting at elisa.barni@axevera.com or simone.consalvi@axevera.com.
Sources:
https://climate.ec.europa.eu/eu-action/eu-emissions-trading-system-eu-ets/what-eu-ets_en
https://taxation-customs.ec.europa.eu/carbon-border-adjustment-mechanism_en
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