The European Union’s Carbon Border Adjustment Mechanism (CBAM) is aimed at addressing carbon leakage and ensuring a level playing field for European industries and is now being felt in Asia export markets.

CBAM will impose a carbon price on imports into the EU by non-EU producers, thus ‘levelling up’ costs to be equivalent to those of European producers.

It is a regulation Asia manufacturers and producers need to understand as reporting obligations for importers have already commenced and carbon charging through CBAM Certificates will start in 2026.

CBAM will necessitate significant adjustments in supply chains. Manufacturers will need to ensure that their entire supply chain complies with the new carbon pricing rules and we are already seeing a tension arise in the need for carbon disclosures which are not contractual entitlements in the underlying existing contracts.  It is also more of a challenge for some of the goods sold through exchanges or at spot with higher administrative costs and even an element of price volatility with the passing on of the associated carbon costs of import into the EU.  There will be risks associated with errors in reporting and disputes that will arise for over or underpaying the carbon cost as goods enter the EU - will the importers be able to pass those risks on?

Once the carbon footprint of certain carbon-intensive goods, such as cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen, can be assessed, then the associated CBAM Certificates will need to be purchased by importers from 1 January 2026 and these are linked to the EU Emission Trading Scheme carbon price.

The EU's Green Deal was designed to benefit the planet, and that means its impact must be felt far beyond its own borders.  CBAM sends a signal that prices in the ‘true’ carbon impact of manufacturing irrespective of where it occurs on the planet and it is designed to incentivise investment in carbon reduction technologies.  CBAM is but part of a suite of law designed to drive this change such as the Sustainable Batteries Regulations which will also assess and cap the carbon footprint of batteries and introduce mandatory recycling targets.