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Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism (CBAM) is part of the European Union’s Fit for 55 package. It 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 emission 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 will gradually replace 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 the Clean Industrial Deal, presented together with the Omnibus package, the Commission also expedited the CBAM review process to the end of 2025. This means the Commission is currently evaluating including more ETS sectors, certain downstream goods and indirect emissions under the CBAM, in addition to evaluating measures to help exporters of CBAM goods to have a level playing field. This review will be presented parallel with a legislative proposal on the same topics.
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. Secondly, CBAM only covers a very limited number of downstream products (screws, bolts). This could put European-based manufacturers of electrolyser and fuel cell systems at a disadvantage vis-à-vis their international competitors. With the review to be presented and to take effect in Q2 2026, this may change.
Links to Legislation and additional information:
