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Starting Jan. 1, 2026, all companies in carbon-intensive industries will pay border taxes to import certain goods into the European Union

The European Union's (CBAM), effective Jan. 1, represents a significant regulatory shift for companies importing goods into the EU in six carbon-intensive industries: aluminum, cement, steel and iron, electricity, hydrogen, and fertilizers. Under CBAM, importers must now account for and pay taxes based on the greenhouse gas emissions embedded in their products.

The European Commission finalized CBAM in October 2023 as Regulation 2023/956, part of the EU's goal to by 2030. The mechanism aims to "reduce carbon emissions, put a fair price on the carbon emitted during the production of carbon intensive goods imported into the EU and encourage a cleaner industrial production" in alignment with the and the package.

A two-year transition period from 2023 to 2025 phased out the previous (ETS), which had launched in 2005, while allowing companies to build familiarity with CBAM requirements. During this transition, EU importers faced limited obligations: they submitted quarterly greenhouse gas emissions reports detailing direct and indirect emissions but were not required to pay for them. Companies also registered in the CBAM Transitional Registry to prepare for full implementation. 

Addressing "carbon leakage" through border-adjusted emissions pricing

The sectors initially targeted through CBAM, which previously received free emissions quotas under the ETS, must now pay for their emissions. "Carbon leakage" refers to the phenomenon whereby carbon taxes in one region simply shift production to areas with less stringent requirements, failing to reduce overall product-associated emissions. A recent study by the Organisation for Economic Co-operation and Development estimated that every ton of carbon dioxide avoided within the EU (due to the ETS) still results in 0.19 tons of emissions leakage overseas, substantially diminishing the policy's global impact. CBAM seeks to address this challenge by leveling the carbon cost across borders, creating economic incentives for cleaner production regardless of location.

Escalating markup structure for default emissions calculations

Companies that implemented emissions tracking during the 2023-2025 transition period now have baseline data for calculating CBAM fees. However, for companies that did not establish tracking methods, the EU has published that must be used to estimate costs. These defaults are available by country of origin and industry type, based on the EU's estimates of average direct and indirect carbon dioxide equivalent emissions per metric ton of goods produced. 

The default values include an overall "markup" to account for importers whose emissions exceed their country's average and incentivize companies to implement actual emissions tracking. The markup increases over the next three years: 10% in 2026, 20% in 2027, and leveling off at 30% beginning in 2028. The European Commission has stated that it will revise both default values and the markups throughout 2026 and 2027. Using default values may thus incur a greater cost than tracking actual emissions on imported goods.

For companies wishing to implement their own emissions tracking, the EU published in late December 2025. The regulation requires companies to monitor emissions at each production facility, determine which emissions stem from manufacturing activities, and attribute those emissions to individual goods. This demands careful evaluation of production processes, data collection methods, and reporting protocols to establish compliant tracking systems.

Next steps for importers and manufacturers

Companies importing carbon-intensive goods into the EU now face compliance requirements that demand both technical expertise and strategic planning. To address potential financial exposure, meet regulatory obligations, and avoid penalties, importers and manufacturers can carefully evaluate how their products and supply chains are impacted by CBAM, including conducting thorough emissions assessments and implementing robust tracking systems — factors that can help companies reduce the taxes they must pay to comply with CBAM and identify areas in their production chains where they may be able to reduce both emissions and financial costs.

While CBAM currently applies to six industry sectors, the European Commission has indicated potential expansion to additional product categories in future years. Assessing current products and production processes against CBAM requirements can help companies plan changes in sourcing, manufacturing, or emissions reduction strategies to maintain competitiveness in the EU market.