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Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM) was presented in July 2021 by the European Commission and serves as a tool to equitably price carbon emissions generated during the production of carbon-intensive goods entering the EU. It aims to incentivise clean industrial practices outside the EU while maintaining the region's climate objectives. By ensuring that imported goods have paid a price reflecting their embedded carbon emissions, CBAM establishes parity between imported and domestically produced goods in terms of carbon pricing.
The mechanism is introduced gradually and applies first to selected products at high risk of carbon leakage: iron, steel, cement, fertiliser, aluminium, electricity generation and hydrogen production. The products covered by the system would be both ‘simple’ and ‘complex’ goods. This means primary materials, as well as semi-manufactured goods that use primary materials as inputs. As to the emissions covered, direct emissions are considered for all sectors, while indirect emissions are also covered, except in those sectors, where indirect cost compensations via state aid is in force, such as in the case of the hydrogen sector.
The scheme began in October 2023 with a two-year transition period until the end of 2025, during which importers must report emissions in their goods. Starting in 2026, the CBAM gradually replaces ETS free allowances to prevent carbon leakage, with full implementation by 2034. For example, in 2030, EU ammonia producers will receive only 50% of previous free allowances, while ammonia importers will pay for about 50% of their shipments' embedded emissions.
In October 2025 the co-legislators approved the simplification of the CBAM. This ‘Omnibus’ package entails that companies importing less than 50 tonnes of CBAM goods annually will be exempt from CBAM obligations – which will explode 90% of companies but include over 99% of the emissions. Importers covered by CBAM will also have it easier to meet reporting requirements, calculate emissions, and manage financial liability.
In December 2025 the European Commission also presented its expedited CBAM review proposal, aiming to strengthen the scheme. In it, the Commission proposed to extend the scope of the CBAM to include over 180 steel and aluminium-heavy products. This action, in better reporting and tracing practices are aimed to avoid circumvention practices. The Commission also presented an emergency break mechanism under Article 27a, whereby the Commission would have the preparative to suspend selected goods from the CBAM should their inclusion have a substantial negative effect on the EU single market. Although this proposal has a valid basis, the way it is formulated could have problematic effects on CBAM sectoral decarbonisation.
In December 2025 the Commission also proposed a Temporary Decarbonisation Fund to temporarily support EU producers of CBAM goods and mitigate carbon leakage. It does so by reimbursing a portion of the EU-ETS carbon costs between 2026-2027 for goods still facing carbon leakage risks, with support contingent upon demonstrated decarbonisation efforts.
What's in it for hydrogen?
In general, the mechanism is expected to accelerate decarbonisation efforts both in the EU and abroad, by equalising the carbon price of domestic products and imports. With the progressive phase-out of free allowances under the ETS between 2026-2034, the industrial sectors covered by the mechanism will be subject to the full carbon price. This would create a stronger incentive to decarbonise industrial processes. Thus, the role of green hydrogen is expected to increase, especially in sectors where there are few other alternatives, such as in steel and fertilisers production.
However, there are certain issues with the CBAM framework for the well-designed coverage of the hydrogen sector. Firstly, although it is foreseeable that in the coming years a substantial portion of the imported renewable hydrogen by 2030 will be in the form of hydrogen carriers, only one of those carriers is included in the CBAM (ammonia), while others (e.g. methanol, e-kerosene) are omitted, which could have a distortive effect on the European market. This has so far not been remedied through the end of 2025 revision process, but is still considered by the European Commission in future revisions.
Links to Legislation and additional information:
The CBAM Regulation in the EU’s Official Journal
Guidance Document on CBAM implementation for importers of goods into the EUProposal for the Omnibus I
