The EU made imports pay the same carbon price as home-made steel

Europe's carbon price applies to its own factories but not to the imported goods they compete with. To keep industry from relocating, the EU handed out free emission allowances — a fix that blunts the price signal exactly where it should bite. As the EU tightened its 2030 climate targets, it had to phase those free permits out without pushing steel, cement and fertiliser production, and its emissions, offshore — the failure mode economists call carbon leakage.

The answer was the Carbon Border Adjustment Mechanism. In its transitional phase from October 2023, importers of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen had to report the embedded emissions of their goods quarterly, but paid nothing. From 1 January 2026 the definitive regime applies: authorised importers must buy and surrender CBAM certificates covering those embedded emissions, priced from EU ETS allowance auction prices. If the producer already paid a carbon price abroad, the charge is only the difference.

The design is a mirror, not a tariff: the border charge equals what the same goods would have cost in permits inside the EU, and it shrinks toward zero as the foreign producer decarbonises or its government starts pricing carbon. A dedicated registry and accredited verifiers back the emissions data. Estimates put CBAM revenue at about €7.2bn a year, with a formal review set for 2027.

Mirror the EU carbon price onto imports

Tying certificates to ETS auction prices means the border charge can never undercut or overshoot the domestic carbon price.

Charging only the difference against carbon prices paid abroad gives exporting countries a fiscal reason to price carbon themselves and keep the revenue at home.

A reporting-only transition made importers and foreign suppliers build emissions data two years before any money moved.

Phasing in as free allowances phase out keeps overall protection for industry roughly even while the price signal sharpens.

A border charge pegged to your own market price turns 'move the factory' from an escape hatch into a pointless errand — and gives foreign producers and governments a reason to price carbon themselves.

The definitive regime began on 1 January 2026 with authorisation, declaration and certificate-surrender duties. The UK plans a similar mechanism in 2027; Australia, Canada and Turkey have explored versions and US lawmakers have floated bills. China, India and South Africa dispute its WTO legality, and many developing countries call it an unfair tax on their exports. Compliance lagged at first: as of March 2024 only 10% of German and 11% of Swedish firms had filed the required emissions reports.