Skip to content Skip to footer

Loading Results

Carbon Border Adjustment Mechanism

EU border levy to prevent carbon leakage

As part of the ‘Fit for 55 package’ that was published on 14 July 2021 by the European Commission, a proposal for a European Union Carbon Border Adjustment Mechanism (‘CBAM’) was released. The CBAM will be a levy on the importation of certain goods (i.e. cement, iron and steel, aluminium, electricity, and fertilisers). It is envisaged that the CBAM will enter into force as per 2023, whereby a transition period will apply between 2023 and 2026.

Background CBAM

The role of the CBAM is to address the risk of carbon leakage and to reinforce the EU ETS. It is designed to ultimately replace the existing free allowances mechanism applied in the EU ETS. The current EU ETS contains substantive free allowances which are meant to safeguard competitiveness of EU industry and to avoid carbon leakage.That system has been effective in addressing the risk of leakage but it also dampens the incentive to invest in greener production. In the Commission's new proposal for a revised ETS, however, the number of free allowances for all sectors will decline over time so that the ETS can have more impact in fulfilling the EU's climate goals. Without accompanying measures this would mean that the risk of carbon leakage would increase. To address this risk of carbon leakage in a different way, the CBAM is introduced, which aims to ensure equivalent carbon pricing between imports and domestic products.

Legal framework

Proposed EU instrument: EU regulation

The CBAM proposal takes the form of an EU Regulation as opposed to a Directive. According to the European Commission, this instrument will ensure direct applicability of a number of provisions concerning goods imported in the Customs Union. In addition, an EU regulation requires uniform and consistent application and enforcement throughout the Union. In practical terms, the CBAM Regulation, if adopted, will be directly applicable and binding for all EU Member States as of 1 January 2023, i.e. no implementation of the CBAM would be required in the various EU Member States. 

Legal basis: Article 192 (1) of the TFEU 

Article 192(1) of the Treaty on the Functioning of the European Union (‘TFEU’) serves as the legal basis of the CBAM proposal. In accordance with Articles 191 and 192(1) TFEU, the EU shall contribute to the pursuit, inter alia, of the following objectives: preserving, protecting and improving the quality of the environment, promoting measures at international level to deal with regional or worldwide environmental problems, and in particular combating climate change.

EU legislative procedure: the ordinary legislative procedure

The CBAM proposal can be adopted based on the ordinary legislative procedure (previously known as “co-decision”) following a consultation by the Economic and Social Committee and the Committee of the Regions. This procedure may be particularly lengthy. During the first reading, the European Parliament examines the European Commission's proposal and may approve it without modifications or amend it. Subsequently, the Council of the EU (previously the Council of Ministers) may decide to accept Parliament's position, in which case the legislative act is adopted, or it may amend Parliament's position and return the proposal to Parliament for a second reading. The Council of the EU decides by qualified majority, unless its position differs from that of the European Commission, in which case unanimity is required. Please note that the vast majority of the European Commission’s proposal is adopted at this stage. It is also important to note that there is no time limit on Parliament's and Council’s first reading.

Envisaged entry into force: in principle, 1 January 2023

The proposed entry into force of the CBAM is 1 January 2023, with some of the provisions applying only during the transitional period (1 January 2023 - 31 December 2025) and others starting to be applied in 2026.

Application of CBAM 

The CBAM will be a levy calculated by reference to the Greenhouse gas emissions embedded in Cement, Electricity, Fertilisers, Iron and Steel, Aluminium (the exact goods currently in scope are listed in an Annex to the CBAM Regulation) as imported into the EU Customs Union. 

Import of the goods in scope can only be done by a declarant authorised by the competent authority. The definition of the declarant is linked to the definition used in the EU customs legislation. 

In general, the import levy will be based on the actual emissions embedded in the imported goods. When actual emissions cannot be adequately determined, the embedded emissions may also be determined by reference to default values. Under the CBAM, similar as under the EU ETS system, a certificate per tonne CO2 emitted (‘CBAM certificate’) during the production of the goods in scope has to be surrendered. The CBAM certificates form their own pool of certificates, outside the EU ETS pool. The price of the CBAM certificates will be calculated as the average of the closing prices of all auctions of EU ETS allowances conducted in auctioning platforms during each calendar week. 

In contrast to the EU ETS, the CBAM certificates cannot be traded through a system of auctions, nor will the CBAM establish quantitative limits to import, so as to ensure that trade flows are not restricted. Moreover, while the EU ETS applies to installations based in the Union, the CBAM should be applied to goods imported into the customs territory of the Union.

Each Member State shall appoint a competent authority to carry out the obligations under the CBAM. The competent authority of each Member State shall establish a national registry of declarants authorised in that Member State in the form of a standardised electronic database containing the data regarding the CBAM certificates of those declarants.

In order to give the authorised declarants flexibility in complying with their CBAM obligations and to allow them to benefit from fluctuations in the price of EU ETS allowances, the CBAM certificates should be valid for a period of two years from the date of purchase. The competent authority of each Member State shall, on request by a declarant authorised in that Member State, re-purchase the excess of CBAM certificates remaining on the account of the declarant in the national registry after the CBAM certificates have been surrendered. The number of certificates subject to re-purchase shall be limited to one third of the total CBAM certificates purchased by the authorised declarant during the previous calendar year. The re-purchase price for each CBAM certificate shall be the price paid by the authorised declarant for that certificate at the time of purchase. The authorised declarant should build up during the year the amount of certificates required at the time of surrendering, with thresholds set at the end of each quarter.

Scope of the CBAM

Countries in scope 

The CBAM shall apply to goods originating in countries outside the CBAM territory (i.e. EU Member States, Iceland, Norway, Liechtenstein and Switzerland as well as a number of small territories /exclaves such as Büsingen, Heligoland, Livigno, Ceuta, Melilla). In this respect, the non-preferential rules of origin from EU customs legislation determine whether or not the goods originate in a third country. In short, this means that goods obtain the origin of the country where they are wholly obtained, but goods for which the production involves more than one country or territory, shall be deemed to originate in the country or territory where they underwent their last, substantial stage of manufacture.

Goods in scope 

The CBAM shall apply to goods that are considered to have a high risk of carbon leakage and carbon emissions. Per the current proposed CBAM regulation these are electricity, fertilisers, cement, aluminium, iron and steel. These goods are further specified in sub-categories with the relevant CN codes (commodity codes) as used within the Customs Code. The CN codes not only concern base materials but also a number of predefined semi-finished goods (e.g. railways, cans, pipes, structures of prefabricated buildings, tanks, containers, rack rails, aluminium foil, aluminium plates, etc.). Other non-predefined semi-finished goods and finished goods are not yet in scope. The European Commission has the powers to broaden the goods in scope and to expand/limit the countries in scope.

Emissions in scope 

The emissions that are in scope are the (direct) ‘emissions’ of greenhouse gases from the production process of goods of which the producer has direct control. Although ‘indirect emissions’ from the production of electricity, heating and cooling consumed during the production processes are also defined in the CBAM Regulation, these will not be considered for the determination of the CBAM certificates that need to be surrendered in the post-transitional period. It may be that in the future the CBAM will be extended to also cover indirect emissions. 

Use of inward and outward processing 

The CBAM Regulation takes into account the customs processes inward and outward processing. In case a product is produced in the EU by using the customs procedure inward processing and this production process uses goods that are in scope of the CBAM, a CBAM levy will be applicable upon importation of the finished product for the emissions that are embedded in these goods. This is also in case when the processed product itself is not in scope for the CBAM. 

In case the customs procedure outward processing is used and the processed product that returns to the EU is in scope for the CBAM, the CBAM only applies for the emissions of the processing operation in the third country.

Compliance requirements

Declaration process 

By 31 May of each year, each authorised declarant shall submit a declaration (‘CBAM declaration’), for the calendar year preceding the declaration, to the competent authority. The CBAM declaration shall contain: 

  • the total quantity of each type of goods imported during the calendar year;
  • the total embedded emissions, expressed in tonnes of CO2 emissions; 
  • the total number of CBAM certificates corresponding to the total embedded emissions, to be surrendered, after the reduction due on the account of the carbon price paid in a country of origin and the adjustment necessary of the extent to which EU ETS allowances are allocated free of charge for comparable EU produced goods.

At this same date the authorised declarant needs to surrender a number of CBAM certificates to the competent authority that corresponds to the embedded emissions. The authorised declarant shall ensure that the required number of CBAM certificates is available on its account in the national registry. If this is not the case, the competent authority will request the surrender of the missing CBAM certificates within one month. 

In addition, the authorised declarant shall ensure that the number of CBAM certificates on its account in the national registry at the end of each quarter corresponds to at least 80 per cent of the embedded emissions.

The competent authority of each Member State shall, on request by a declarant authorised in that Member State, re-purchase the excess of CBAM certificates remaining on the account of the declarant in the national registry after the certificates have been surrendered. The request to re-purchase shall be submitted by 30 June of each year when CBAM certificates were surrendered. The number of certificates subject to re-purchase shall be limited to one third of the total CBAM certificates purchased by the authorised declarant during the previous calendar year. The re-purchase price for each CBAM certificate shall be the price paid by the authorised declarant for that certificate at the time of purchase.

By 30 June of each year, the competent authority of each Member State shall cancel any CBAM certificates that were purchased during the year before the previous calendar year and that remained in the accounts in the national registry of the declarants authorised in that Member State.

Carbon price paid in a country of origin

An authorised declarant may claim in its CBAM declaration a reduction in the number of CBAM certificates to be surrendered in order for the carbon price paid in the country of origin for the declared embedded emissions to be taken into account.

Transitional period

During the transitional period, the CBAM mechanism will only apply as a reporting obligation for the declarant without the tax being due. Under this system, the declarant needs to report each quarter to the CBAM authority the total quantity of goods imported in that quarter including the amount of directly and indirectly embedded emissions in the goods and the carbon price due in the country of origin. 


An authorised declarant who fails to surrender, by 31 May of each year, a number of CBAM certificates corresponding to the emissions embedded in goods imported during the previous year shall be liable to a penalty identical to the excess emissions penalty in the year of importation of the goods, for each CBAM certificate that the authorised declarant should have surrendered. 

Alignment with third countries

The European Commission acknowledges that reaching out to third countries would be important with regard to the understanding of and compliance with CBAM requirements. Moreover, the EU will engage with third countries whose trade to the EU is affected by this Regulation to explore possibilities for dialogue and cooperation with regard to the implementation of specific elements of the Mechanism. It should also explore possibilities for concluding agreements to take into account their carbon pricing mechanism. Agreements with third countries could be considered as an alternative to the application of CBAM in case they ensure a higher degree of effectiveness and ambition to achieve decarbonisation of a sector.

Next steps

Although the CBAM is yet a proposal, it is expected that if this regulation will be implemented it could have a significant impact on a wide variety of internationally operating businesses.

Hence, important next steps for companies importing (or relying on the importation of) any of the goods in scope of CBAM (or expected to become in scope of CBAM) is to understand the potential impact of the costs of CBAM on their supply chain and value chain. It is furthermore essential to make sure the correct formalities are taken into account to be able to arrange for a smooth import of goods at the EU border complying with the CBAM to avoid potential penalties.

Follow us

Contact us

Chris Winkelman

Chris Winkelman

Energy - Utilities - Resources Industry, Tax, Partner, PwC Netherlands

Tel: +31 (0)65 154 18 97

Niels Muller

Niels Muller

Partner, Energy transition and sustainable energy, PwC Netherlands

Tel: +31 (0)65 160 08 61

Juliette Marsé

Juliette Marsé

Director (Tax) - Energy, Utilities & Resources, PwC Netherlands

Tel: +31 (0)63 419 61 08

Mohammed Azouagh

Mohammed Azouagh

Manager - Tax, Sustainability and Incentives, PwC Netherlands

Tel: +31 (0)62 380 36 54