What happened?
On 1 January 2026, the Carbon Border Adjustment Mechanism (CBAM) entered the definitive regime, after a transitional phase from 2023 to 2025 (European Commission, n.d-a). Importers of iron and steel, cement, fertilisers, aluminium, hydrogen and electricity are subject to CBAM obligations and must account for carbon emissions embedded in these goods through CBAM certificates linked to the EU carbon market. For most covered goods, imports of 50 tonnes or less per year fall below the mass threshold, although electricity and hydrogen have different rules (EC, 2025b). Certificate purchases for 2026 imports begin in February 2027, with the first declaration due by 30 September 2027 (EC, 2026a; Ernst & Young, 2025).
Why does it matter?
It matters because CBAM could change international trade by accounting for the carbon cost of production. The cost of an imported product may depend not only on tariffs and production costs, but also on its production method. The EU is linking the cost of certain imports to emissions generated during production. CBAM became the first fully operational border carbon adjustment policy to charge costs based on the emissions intensity of imported goods when it entered its definitive stage in 2026 (EC, 2025a). The significance extends beyond the EU, as around 23 percent of global emissions are embedded in traded goods (Manini, 2025). Approximately 156 million tonnes of CBAM goods were imported into the EU between the fourth quarter of 2023 and the second quarter of 2025 (EC, 2025a). If market access becomes increasingly linked to carbon costs, cleaner technologies could become important to industry competitiveness and influence trade flows. CBAM has also raised concerns among trading partners over its trade effects and compatibility with international trade rules (EC, 2025a).
Background
CBAM was introduced to tackle carbon leakage. Under the EU Emissions Trading System (EU ETS), EU companies bear the cost of their emissions, making carbon-intensive products more expensive. Carbon leakage can occur in two ways: when an EU company shifts or establishes production outside the EU in a country with less stringent environmental policies to avoid higher carbon costs, or when foreign imports enter EU markets without a comparable carbon cost, giving them a cost advantage. CBAM addresses these risks by ensuring that the price of certain imports reflects their embedded carbon emissions (EC, n.d.-b). CBAM is also being introduced alongside the reduction of free allowances under the EU ETS, which have protected European industries from some carbon costs. These allowances are scheduled to decline by 2.5 percent in 2026 and 5 percent in 2027 (International Carbon Action Partnership, 2026).
What are the implications?
CBAM could reshape trade flows by making the carbon intensity of production an additional factor in the competitiveness of exported goods. Producers using cleaner technologies may gain a relative advantage over more carbon-intensive producers (Rocchi & Elkerbout, 2026). However, developing and least developed countries may face greater difficulties because of their limited capacity to invest in cleaner production. United Nations Conference on Trade and
Development (UNCTAD, 2021) estimated that a CBAM could reduce global CO2 emissions by only around 0.1 percent, while also reducing exports from developing countries in targeted sectors. CBAM has also become a source of tension with major trading partners. Brazil, China and
India have been among the countries most vocal in opposing the mechanism and have raised concerns about its implications for trade and international climate and trade rules (Otto, 2025). It is also becoming part of trade negotiations, with the EU-India FTA including discussions on CBAM-related flexibilities (Arora, 2026). Overall, CBAM links market access more closely to the carbon intensity of production, but its uneven effects raise questions about its effectiveness and inclusiveness.
What happens next?
Payments will begin in 2027, while the rules evolve. The European Commission is considering possible extensions to additional sectors and downstream goods (EC, 2025a). As carbon costs become part of market access, they could create incentives for industries to adopt cleaner technologies and make lower-carbon products more competitive. At the same time, a WTO dispute over CBAM and similar measures in other economies could shape whether CBAM develops into a wider trade standard or creates new divisions in international markets.