CBAM Explained: How the EU Carbon Border Adjustment Mechanism Impacts Regional Trade

The European Union's Carbon Border Adjustment Mechanism (CBAM) represents one of the most significant changes to international trade policy in decades. For regional exporters and logistics providers, understanding CBAM is essential for maintaining market access and competitiveness.

What is CBAM?

CBAM is the EU's mechanism to prevent carbon leakage—the phenomenon where companies relocate production to countries with less stringent climate policies. It requires importers of certain goods into the EU to purchase certificates corresponding to the carbon price that would have been paid if the goods had been produced under the EU's carbon pricing rules.

The mechanism applies to six sectors: cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen—sectors with high carbon intensity and significant trade exposure.

Implementation Timeline

The transitional phase began October 1, 2023, requiring importers to report embedded emissions without financial obligations. From January 1, 2026, full implementation begins with certificate purchases required. Sales of CBAM certificates through the EU's central platform will begin in February 2027, covering 2026 imports. Certificates purchased in 2027 will be priced using the average 2026 EU ETS allowance value. The system will be fully phased in by 2034.

2025 Simplification Package

On October 20, 2025, Regulation (EU) 2025/2083 entered into force, marking the first formal revision of EU CBAM with significant changes:

De Minimis Exemption: Companies importing less than 50 tonnes of CBAM goods annually are now exempt from CBAM obligations. This exempts approximately 182,000 importers (mostly SMEs) while still covering over 99% of emissions in scope.

Extended Deadlines: The annual CBAM declaration and certificate surrender deadline moved from May 31 to September 30 of the following year.

Reduced Cash Requirements: The quarterly requirement to hold certificates equal to 80% of embedded emissions is reduced to 50%, easing liquidity pressure.

80/20 Rule: Starting July 1, 2024, at least 80% of reported embedded emissions must be based on actual data from upstream producers; no more than 20% may rely on default values.

Calculation of Carbon Costs

CBAM certificates are priced based on the weekly average auction price of EU Emissions Trading System (ETS) allowances. Importers can deduct any carbon price already paid in the country of origin, preventing double taxation.

Embedded emissions include both direct emissions from production processes and indirect emissions from electricity consumption. As of January 1, 2025, only the EU method of calculation is accepted—third-country national systems and default values are no longer permitted.

Impact on UAE and GCC Exporters

UAE manufacturers exporting aluminum, steel, cement, and fertilizers to the EU face significant compliance requirements. The UAE's aluminum sector (including Emirates Global Aluminium, one of the world's largest producers) and steel manufacturers must establish robust emissions measurement systems.

Industries must invest in both emissions tracking and potentially carbon reduction technologies to remain competitive. Some GCC producers may benefit from lower grid carbon intensity compared to coal-heavy competitors.

Logistics Sector Implications

Freight forwarders and customs brokers face increased documentation requirements. CBAM declarations require detailed emissions data that must flow through the supply chain alongside traditional trade documentation.

New service opportunities emerge for logistics providers offering CBAM compliance support, emissions calculation assistance, and documentation management.

Preparation Strategies

Exporters should ensure emissions measurement and reporting systems use the EU methodology now that only this method is accepted. Engage with EU importers to align compliance processes and documentation flows.

The UAE Ministry of Economy is monitoring CBAM developments and may coordinate responses with GCC partners. Regional producers should track policy developments and consider early decarbonization investments.