Scope of the carbon border adjustment mechanism
The European Union is working on a comprehensive reform of its carbon border adjustment mechanism (CBAM) to address the risk that companies relocate production to countries with weaker environmental standards. The reform is also intended to protect the competitiveness of European industry. It is designed to align climate ambition with industrial resilience, including maintaining production capacity and jobs within the EU.
Under the current CBAM framework, coverage focuses mainly on basic materials, including steel, aluminium, cement and electricity. From 2028 onward, the mechanism is planned to extend deeper into the industrial value chain. It would cover around 180 additional products, with machinery and industrial equipment expected to feature prominently where steel and aluminium content is high.
Reporting methodology and safeguards
The European Commission’s reform proposal builds on lessons from the CBAM transitional phase. It includes stricter emissions reporting requirements and stronger safeguards aimed at preventing circumvention. The revised methodology would also account for production waste from steel and aluminium manufacturing.
The approach is intended to ensure equal treatment between domestic and imported goods. It also seeks to close loopholes that could be used to bypass CBAM obligations. The Commission’s proposal is presented as part of a broader effort to strengthen compliance controls as coverage expands.
Temporary decarbonization fund and financing
A key element of the reform package is a temporary decarbonization fund. The fund would target EU-based companies that remain exposed to the risk of relocating production abroad. Financial support would be conditional on verified investments in emissions reduction.
The fund would be financed through CBAM revenues, alongside additional contributions from member states. This structure links eligibility to emissions-reduction investments while using CBAM-related income as a funding source.
Timeline for financial implementation and emissions trading changes
CBAM entered its transitional phase in October 2023, allowing companies inside and outside the EU time to adapt within a predictable and proportionate framework. After two years of transition, the financial component is scheduled to begin applying gradually from 1 January 2026. This rollout would coincide with changes under the EU Emissions Trading System.
The phased removal of free emission allowances under the EU ETS is scheduled to continue until 2034. The Commission also points to an assessment that CBAM is influencing decarbonization beyond EU borders, including through awareness and technical assistance provided to trading partners.