Understanding CBAM: A Comprehensive Overview
September 20, 2025
Introduction
In recent years, climate change has become one of the most pressing challenges facing governments, businesses, and individuals worldwide. To mitigate its effects, regulatory frameworks are being introduced to encourage sustainable practices, reduce emissions, and promote environmental accountability. Among these measures is the Carbon Border Adjustment Mechanism (CBAM), a policy initiative designed to address carbon leakage and ensure fair competition between domestic producers and foreign importers. This article provides an overview of CBAM, its purpose, and its potential impact on businesses and global trade.
What Is CBAM?
CBAM is a regulatory tool introduced by the European Union (EU) to align imported goods with the region’s ambitious climate goals. Essentially, it applies a carbon price to imports of certain goods, ensuring that foreign producers face the same carbon costs as companies within the EU. By doing so, it seeks to prevent companies from relocating production to countries with less stringent environmental regulations, a practice known as carbon leakage.
The mechanism works by requiring importers to purchase CBAM certificates that reflect the carbon emissions embedded in their products. The cost of these certificates is linked to the EU’s Emissions Trading System (ETS), which sets a price for carbon emissions within the bloc. This system ensures that both domestic and foreign producers operate on a level playing field regarding carbon costs.
Why Is CBAM Necessary?
One of the biggest challenges in global climate policy is that different countries have varying levels of environmental regulation. While the EU has committed to significant emission reductions under the European Green Deal, other regions may not enforce comparable standards. Without a measure like CBAM, European industries could face unfair competition from imports produced in countries with lower environmental requirements.
CBAM helps address this imbalance by ensuring that imports reflect their true environmental cost. It encourages foreign producers to adopt greener practices if they want to maintain access to the EU market. At the same time, it provides an incentive for countries outside the EU to implement stronger carbon reduction policies, ultimately contributing to global climate goals.
Which Sectors Are Affected?
Initially, CBAM focuses on sectors with …



