The Carbon Border Adjustment Mechanism (CBAM) is a key policy initiative introduced by the European Union in 2023 to reduce carbon emissions and prevent ‘carbon leakage’. CBAM is one of the many elements of the EU Green Deal, which is aiming to reduce GHG emissions by 55% by 2030, and works in conjunction with the EU Emissions Trading System (EU ETS). Over the next year, CBAM will be in its transition phase, slowly integrating in phases in 2025. The full scope of this mechanism will become effective January 1, 2026. This blog explains the specifics of CBAM as well as its significance. It also provides actionable steps to prepare your business for its implementation.
Understanding CBAM
CBAM ensures that the price of imported goods into the EU is subject to the same emission prices as domestic products produced within the continent. This will prevent carbon leakage – which is where a country relocates their production and associated emissions to a country with lower costs. It will also level the playing field for producers. Under the EU ETS, only EU-based producers must purchase certificates. However, this raises the prices of domestic products versus the imported versions.
Key Products Affected by CBAM:
- Iron and Steel
- Aluminum
- Electricity
- Cement and other mineral products
- Certain fertilizers
- Hydrogen
According to a study by McKinsey, it is estimated by 2030 (assuming no changes are made to supply chains or production technology), CBAM will increase the cost of core products – specifically aluminum by 70% and steel by 40%.
Why is CBAM significant?
This mechanism is the first of its kind globally and supports the EU’s goal to become climate-neutral by 2050 – becoming the first continent to do so. It balances out competition for EU-based producers, who currently face higher costs and more stringent climate regulations compared to their global counterparts with lower carbon costs. For those non-EU producers, they will now face higher costs to import to the EU and ensure that they comply with the necessary CBAM requirements.
Additionally, CBAM has significant implications for Asian businesses, particularly those exporting to the EU. These companies will need to adapt by adjusting their supply chains, investing in cleaner technologies, and enhancing carbon reporting to meet the new standards, which could also lead to stricter environmental policies in Asian countries.
How to Prepare Your Business for CBAM
To effectively prepare for this mechanism and understand the impact it will have, businesses will need to:
- Identify the products they produce that will be impacted under CBAM
- Conduct an assessment of the emissions created, or carbon intensity, of their supply chains
- Calculate a total carbon footprint assessment to understand areas of improvement
- Forecast the financial impact of CBAM. There is a need to understand that there will be potential increases in product costs and the new certification fees. Businesses will now need to budget this cost into their financial strategy
- Understand the risks of non-compliance and identify opportunities to reduce carbon emissions, decrease costs, and increase competitive standing
How Cority Can Help to Prepare your Business for CBAM
Cority’s Sustainability Cloud offers software solutions to help companies understand their total carbon footprint across their value chain. It also helps to identify areas of risk and opportunity in preparation for CBAM. With Cority, companies can centralize sustainability data, calculate GHG emissions, manage supplier compliance, and more.
Key Features of Cority’s Solutions
Sustainability Performance Management
Collect data and get a comprehensive view of total carbon emissions from produced goods. Our automated GHG emissions functionality calculates emissions across Scopes 1-3, using over 1 million built-in emissions factors from international standards such as the GHG Protocol, Defra, US EPA, and IEA. Users can also upload their own custom factors allowing alignment with CBAM-provided emissions factors. This ensures companies have the precise calculation of emissions embedded in products, aiding in the accurate reporting and purchasing of CBAM certificates.
Compliance and Reporting
Gain peace of mind knowing that your organization’s reporting and compliance processes are in line with global best practices and regulatory requirements through our dedicated Frameworks module, making it easier to adapt to CBAM’s rules.
Supply Chain Management
Onboard suppliers, manage compliance reporting and conduct audits. Our compliance dashboards make it simple to analyze and report on the compliance status of suppliers across the value chain.
As new guidelines and mandates launch each year, it is helpful to have services and support from a trusted advisor. Our team of ESG and sustainability experts support organizations to respond to ensure compliance with changing regulations and advance their sustainability strategies across their value chain and beyond.
