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3. How does the CBAM work?
• The CBAM has been designed to comply with the EU’s international commitments and
obligations including World Trade Organisation (WTO) rules. The CBAM system mirrors
the EU ETS and works as follows:
o CBAM is applied on the actual embedded emissions in the goods imported in the
EU, determined according to a methodology that is in line with the reporting of
emissions under the EU ETS for the production of the same goods in the EU.
o As from the entry into force of the definitive period of CBAM in 2026, EU importers
will buy CBAM certificates corresponding to the carbon price that would have
been paid, had the goods been produced under the EU's carbon pricing rules.
o Conversely, if a non-EU producer has already paid a carbon price in a third country
on the embedded emissions for the production of the imported goods, the
corresponding cost can be fully deducted from the CBAM obligation.
• The CBAM will therefore help reduce the risk of carbon leakage while encouraging both,
producers in non-EU countries to green their production processes as well as countries to
introduce carbon pricing measures.
• To provide businesses and other countries with legal certainty and stability, the CBAM is
being phased in gradually and initially applies only to a selected number of goods in
sectors at high risk of carbon leakage: iron/steel, cement, fertilisers, aluminium, hydrogen
and electricity. In the transitional period, which started on 1 October 2023, a reporting
system applies for those goods with the objective of facilitating a smooth roll-out and to
facilitate dialogue with third countries. Importers will start paying the CBAM financial
adjustment in 2026.
4. How does CBAM interact with the EU Emissions Trading System (ETS)?
• The EU Emissions Trading System (ETS) is the world's first international emissions trading
scheme and the EU's flagship policy to combat climate change. It sets a cap on the amount
of greenhouse gas emissions that can be released from power production and large
industrial installations. Allowances must be bought on the ETS trading market, though a
certain number of free allowances is distributed to industry to prevent carbon leakage. In
order to step up the incentive to decarbonise, the CBAM will progressively be introduced
as free allowances are reduced. Under the EU ETS, the number of free allowances declines
over time for all sectors. For CBAM sectors, the decline accelerates as from 2026, so that
the ETS can have maximum impact in fulfilling the EU’s ambitious climate goals. At the
same time, the CBAM financial adjustment is phased in according to a gradual schedule.
• The CBAM will be based on a system of certificates corresponding to embedded emissions
in CBAM products imported into the EU. The CBAM departs from the ETS in some limited
areas where it was needed, as it is not a ‘cap and trade' system. For example, and unlike
the EU ETS, an unlimited number of certificates can be purchased. Nevertheless, the price
of CBAM certificates will mirror the ETS allowance price.