The EU CBAM – the first mechanism of its kind – is designed to level the playing field by aligning the carbon costs of EU producers with those of imported goods. This pioneering initiative is likely to inspire similar measures in other regions, with the UK considering its own CBAM by 2027 and various other legislative proposals in the US aiming to address carbon emissions in international trade. Australia and Japan also announced that similar mechanisms are being considered.

During the transitional phase of EU CBAM, from October 1, 2023, to December 31, 2025, importers to the EU – which, of course, include those from the GCC – are required to report the greenhouse gas (GHG) footprint of CBAM products, including fertilizers, on a quarterly basis. From 2026 onwards, the stakes will rise as companies must purchase CBAM certificates to cover the carbon emissions embedded in the imported goods – a move that could significantly impact market prices, profit margins, as well as the demand for regular and low-carbon products.

Moreover, the EU Commission is considering extending the scope of CBAM to include polymers and organic chemicals, with a decision expected before 2026. This expansion could later encompass petroleum products and other sectors, further increasing the pressure on industries to adapt to this new carbon-conscious landscape.

EU CBAM coverage: Products and emission scopes

EU CBAM is designed to target products with significant carbon footprints, and its current scope reflects this focus. As of now, CBAM applies to fertilizers, hydrogen, aluminum, steel and electricity. In the fertilizer sector the following products are currently covered: urea, ammonia, nitric acid, and certain mixed fertilizers

By 2026, the EU is expected to evaluate expanding CBAM to cover organic chemicals and polymers. Products under consideration include methanol, ethylene, ethylene dichloride, vinyl chloride monomer, HDPE, LDPE, normal alpha olefins and hexene.

By 2030, all product groups currently covered by the EU ETS could potentially fall under CBAM. This includes crude petroleum, petroleum products, and inorganic chemicals.

In terms of emissions covered, for fertilizers, EU CBAM covers both direct and indirect emissions, which broadly correspond to Scope 1, Scope 2, and some elements of Scope 3 (related to specific precursors). The emission boundaries, as well as the requirements to the EU CBAM GHG methodology, processes and risks and controls environment for EU CBAM purposes, have been set out in the CBAM regulations.

Additionally, while there is potential for CBAM to extend to transportation emissions in the future, the EU ETS has already begun covering emissions from shipping as of 2024, setting a precedent for broader carbon accountability.

EU CBAM costs starting 2026

The costs associated with EU CBAM from 2026 onward will hinge on several factors, including the choice between using actual emissions data versus default values, fluctuations in carbon prices within the EU ETS market, and whether additional precursors and/or transportation emissions are included under CBAM.

One key feature of the CBAM implementation is the gradually declining “discount” available from 2026 to 2034. This discount is designed to align CBAM obligations with the free EU ETS allowances, which will be phased out by 2034. This alignment aims to ensure that products produced within the EU and imported from third countries are treated equally under the carbon pricing regime.

While the “CBAM benchmarks” have yet to be published, they are expected to be based on a combination of the existing EU ETS benchmarks. The emissions subject to CBAM will be calculated using the below formula: Embedded emissions – (CBAM Benchmark × CBAM Factor).

One significant factor influencing CBAM costs is the availability of quality data on the actual emission intensity, which should be calculated according to the CBAM methodology, supported by the required documentation and verified in compliance with CBAM requirements. If actual emissions data is unavailable (or deemed unreliable), default values for the definitive period will apply.

The European Commission plans to publish a separate set of default values for the definitive period, which are expected to be country-specific. These default values are also anticipated to include a top-up to further “stimulate” alignment with the CBAM methodology.

For producers of “cleaner” products with emissions lower than the default values, it is critical to ensure implementation of the CBAM methodology and have all the necessary documentation in place.

EU CBAM: Way forward

As of January 1, 2026, the costs associated with EU CBAM will not only affect the EU market but also significantly influence producers of CBAM-covered goods. Depending on the carbon intensity of these goods, CBAM costs could become substantial, potentially comprising a significant portion of gross export revenue. Here are some critical considerations for companies aiming to navigate this landscape effectively:

1. Robust methodology and IT systems. For CBAM goods currently within scope, such as fertilizers, it’s crucial to ensure that a comprehensive CBAM methodology, along with robust processes and control environments, is fully implemented before January 1, 2025. The integration of advanced IT tools should also be considered to streamline compliance and reporting, making it easier to manage the complexities of CBAM.

2. Reconsidering trading structures. Starting in 2026, only authorized CBAM declarants will be permitted to import CBAM products into the EU. Companies must carefully consider whether to appoint a third-party service provider or a group company as the authorized declarant. This decision will have significant implications for trading structures, including contractual relationships, financing, and the management of CBAM certificates, the prices of which will be closely aligned with the volatile EU ETS market.

3. Potential market impact. The introduction of CBAM is likely to affect market dynamics, influencing the demand and supply of both “regular” and “green” products. Companies must assess how CBAM will impact the competitiveness of their products against major competitors and its potential influence on profit margins. This assessment should include a consideration of how market positioning may shift as customers and partners increasingly prioritize low-carbon alternatives.

4. Decarbonization agenda. CBAM costs should not be viewed in isolation but rather as a component of a broader organizational decarbonization strategy. Companies should explore how these costs align with existing and planned decarbonisation measures, ensuring that CBAM compliance contributes to the overall sustainability goals of the organization.

5. Leveraging green energy. Companies that utilize “green” energy sources, such as renewable electricity, “green” hydrogen, or carbon capture and storage (CCS) technologies, need to pay special attention to CBAM’s specific rules in these areas. Ensuring that decarbonization efforts are recognized under CBAM will be essential for minimizing costs and maximizing the environmental benefits of these investments.