EU carbon border levy enters ‘definitive’ phase in 2026, with first payments due in 2027

On New Year’s Day in Europe, container ships will unload coils of steel, bags of cement and pallets of aluminum much as they always have. Customs officials will stamp documents, trucks will roll out of ports and factories will keep humming.

Behind the scenes, however, every tonne of those materials will start accumulating a new kind of charge: a future bill for the carbon dioxide released in making them, linked directly to the price of pollution inside the European Union.

The EU’s carbon border adjustment mechanism, or CBAM, moves from a trial run to its “definitive regime” on Jan. 1, 2026. It is the world’s first large-scale attempt to apply a carbon price to imported goods at the border. Yet the first actual payments will not be due until 2027, creating a yearlong gap in which legal obligations mount but cash does not yet change hands.

CBAM is a cornerstone of the bloc’s climate and industrial strategy. The system is intended to ensure that foreign producers of carbon-intensive goods face a cost for their emissions comparable to that paid by manufacturers inside the EU under its Emissions Trading System (ETS). European officials say that is essential to prevent “carbon leakage,” where companies relocate production to countries with looser climate rules or EU factories are undercut by more polluting imports.

“This mechanism is about fairness. It combats carbon leakage and encourages our partners to decarbonize,” EU climate commissioner Wopke Hoekstra said late last year, adding that many governments that criticize the measure in public “recognise its rationale” in private.

The scheme is also reshaping trade politics from New Delhi to Brasília, and prompting companies worldwide to re-evaluate how and where they produce basic materials, even before any money is paid into EU coffers.

From reporting-only to real liabilities

CBAM was established by Regulation (EU) 2023/956 and has been in a transitional phase since October 2023. During this period, importers of certain goods — including cement, iron and steel, aluminum, fertilizers, electricity and hydrogen — were required to submit quarterly reports detailing the greenhouse gases embedded in their imports and any carbon price already paid in the country of origin. No financial adjustment was due.

That changes in 2026, at least on paper. From Jan. 1, only authorized CBAM declarants will be allowed to import covered products into the EU above small quantity thresholds. These importers must register with national authorities, obtain a CBAM account in a central registry and, starting with 2026 imports, file annual declarations of the volume and verified emissions of each product they bring in.

In principle, they must then buy and surrender CBAM certificates corresponding to the emissions embedded in those imports, minus any explicit carbon price already paid abroad. The price of each CBAM certificate is tied to the weekly average auction price of allowances under the EU ETS.

However, after businesses complained of heavy administrative burdens and incomplete technical rules, EU lawmakers adopted a “simplification” package in 2025 — Regulation (EU) 2025/2083 — that delays the financial side of CBAM by a year.

Under that amendment, member states will not start selling CBAM certificates for 2026 imports until Feb. 1, 2027. The first deadline to surrender certificates, covering all goods imported in calendar year 2026, is Sept. 30, 2027.

In practical terms, that means 2026 is the first year in which imports create a legally enforceable CBAM obligation, but the related cash outflows will not occur until the following year.

Tax and accounting specialists say the lag does not make the costs any less real for companies.

“Firms are now accruing a carbon liability every time they import a covered product into the EU, even if the invoice from customs will only arrive a year later,” said one European tax adviser who works with heavy industry clients. “Boards and auditors will expect those costs to be modeled and provisioned from 2026 onward.”

How the mechanism works

Once fully operational, CBAM will initially cover around 300 customs product codes. The core list includes:

• Cement and clinker
• Iron and steel products, from basic slabs to some downstream items such as screws and bolts
• Aluminum products
• Certain fertilizers
• Electricity
• Hydrogen, along with some chemical precursors

The European Commission has also proposed adding roughly 180 additional steel- and aluminum-intensive downstream goods, such as machinery, vehicle parts, domestic appliances, tools and construction equipment, to counter what officials call “downstream carbon leakage.”

The charge applied to each importer is calculated in several steps:

1. Measure embedded emissions. The declarant must determine the greenhouse gases embedded in the imported goods, measured in tonnes of carbon dioxide equivalent. Where possible, this is based on actual emissions data from the plant where the goods were produced, verified by an accredited third party.

If such data are unavailable or do not meet EU standards, importers must use default emission values published by the Commission. Officials have said these defaults will be set conservatively, in effect penalizing firms that cannot provide credible information.

1. Credit carbon prices paid abroad. Any “explicit carbon price” paid in the country of origin — such as a domestic emissions trading system or carbon tax — is deducted to avoid double charging. Only carbon prices that are comparable in scope and effectively paid can be credited.

2. Apply the EU carbon price. The importer multiplies the net emissions by the CBAM certificate price, linked to the market value of EU ETS allowances. For 2026 imports, certificates bought in 2027 will reflect the average ETS prices recorded during 2026.

Not every importer is captured. The 2025 reform introduced a mass-based exemption: companies that bring in less than 50 tonnes a year of iron and steel, aluminum, cement or fertilizers are exempt from most CBAM obligations. According to EU estimates, that threshold will remove around 90% of importers by number — largely small and mid-sized firms — while still covering roughly 99% of embedded emissions in those sectors. There is no de minimis threshold for electricity or hydrogen.

Imports from countries fully integrated into or formally linked to the EU ETS — such as Norway, Iceland, Liechtenstein and Switzerland — are exempt so long as the linkage endures.

A new fault line in global trade

European institutions present CBAM primarily as a climate measure designed to support the bloc’s pledge to cut net greenhouse gas emissions at least 55% by 2030 compared with 1990 levels. The mechanism is closely tied to reforms of the ETS that will gradually phase out free emissions allowances for industries such as steel and cement between 2026 and 2034.

“CBAM allows us to strengthen the ETS without giving a free pass to more polluting imports,” one senior EU official said during negotiations on the package. “Without it, we would simply export our emissions and our jobs.”

Major trading partners see it differently.

India has described CBAM as an “instrument of protectionism,” saying it runs counter to the principle that richer countries with a longer history of emissions should bear a larger share of the burden in cutting greenhouse gases. China, Brazil, South Africa, Saudi Arabia and other emerging economies have warned that the measure could increase costs and slow industrial growth in the global South.

Critics also question whether the design complies with World Trade Organization rules on non-discrimination. They argue that linking CBAM to the specifics of the EU’s internal carbon market — including the treatment of free allowances and selective exemptions for closely aligned economies — could amount to de facto discrimination against some exporters.

The European Commission insists the mechanism is compatible with WTO law because it applies the same carbon price to like products regardless of origin, and because any differences in treatment are justified by environmental objectives under the General Agreement on Tariffs and Trade.

Trade lawyers expect one or more governments to file a formal complaint in Geneva once CBAM starts generating significant revenue.

Winners, losers and unintended consequences

At stake is not only the design of Europe’s climate policy, but also who gains and loses in the reordering of global supply chains.

European steelmakers and cement producers have lobbied for years for stronger protection against imports from countries with weaker environmental rules, and broadly welcomed CBAM. At the same time, industry groups warn that the new system, combined with high energy prices and stricter domestic climate rules, could still push some plants to closure if not managed carefully.

Outside the EU, the impact will vary dramatically.

Producers that rely heavily on coal or gas — such as steel mills in parts of China and India or cement plants in North Africa and Turkey — are likely to face higher effective costs on goods sold into Europe, unless they can switch to cleaner energy or capture emissions.

By contrast, companies in countries with abundant low-carbon power, such as hydro-based aluminum smelters in Norway or Canada, may find their products more competitive relative to higher-carbon rivals.

The effect on consumers inside the EU is expected to be gradual. CBAM targets upstream materials rather than finished retail goods, but higher costs for steel, cement and aluminum could eventually filter into prices for housing, infrastructure and manufactured products.

Beyond economics, the mechanism raises questions about climate equity.

Developing countries have argued that they lack the financial resources and technology access to decarbonize heavy industry at the same pace as Europe. Several have called on the EU to earmark a portion of CBAM revenues to help them invest in cleaner production and improve their emissions monitoring systems.

European officials have floated the idea that some proceeds could contribute to international climate finance, but no binding commitment has been made. CBAM is also being discussed in Brussels as a potential “own resource” for the EU budget at a time when fiscal pressures are mounting.

A template, or a warning?

No other major economy has yet launched a carbon border regime as broad as the EU’s. The system will be watched closely by countries considering similar steps, including the United Kingdom and Canada, and by policymakers in Washington who have debated — but not adopted — carbon-related import charges.

The EU is required to review CBAM by the end of 2027, including its impact on developing countries and the possibility of extending it to more products and sectors such as chemicals and plastics. Businesses are bracing for the list of covered goods to grow over time, potentially bringing a wider array of everyday items under some form of “carbon passport.”

For now, the first year of CBAM’s definitive regime will play out largely on spreadsheets and in back-office systems rather than at visible border checkpoints. Importers will adjust contracts, chase emissions data from suppliers and estimate a carbon bill they will not pay until 2027.

When that first bill falls due, the EU’s experiment in pricing carbon at its borders will become tangible for steelmakers in the Ruhr, cement producers in Morocco and policy makers in capitals far beyond Brussels. Whether it pushes the world toward faster decarbonization — or deeper trade and diplomatic rifts — will be tested in the years that follow.