Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) is a European Union instrument designed to ensure fair competition between EU production and imports of goods from countries where climate regulations are less strict. The mechanism reduces the risk of “carbon leakage” (i.e. the transfer of production to jurisdictions with lower emission requirements) and tightens reporting requirements for importers.

Since 1 October 2023, importers to the EU are required to report the carbon footprint of imported goods through a CBAM declaration. Importers of regulated goods into the EU must become CBAM declarants or have a representative (i.e. an intermediary) with CBAM status. 

Ultimately, CBAM aims to make importers of certain goods pay fees to cover the difference between the emissions charges in the country of production and those under the EU Emissions Trading System (EU ETS).

The goal is to ensure a level playing field for companies outside the EU and those operating in the EU and subject to relevant emissions regulations when it comes to climate policy compliance. As such, CBAM would be applicable to EU imports of many Ukrainian products, with conservative estimates suggesting that over 1,000 Ukrainian exporting companies and about 15% of Ukraine's total exports to the EU fall under CBAM. The regulation applies to key Ukrainian industries, including metallurgy, fertilisers, cement, electricity, and aluminium. Ferrous metallurgy is considered the most vulnerable to EU CBAM import regulations, accounting for the largest share of approximately USD3 billion in annual exports to CBAM countries.

During the transitional period (between 1 October 2023–31 December 2025), the mechanism only requires the carbon footprint of imported goods to be disclosed.

However, after this stage, these carbon footprints become the basis for the mandatory purchase of CBAM certificates, which will be available for purchase from 1 February 2027 and retroactively applied to emissions from imports in 2026. 

These regulatory changes will have a significant impact on both business profitability and investment decisions. In the short term, companies will have to comply with reporting requirements, including collecting emissions data and filling out the relevant documentation. In the long term, customer will demand decarbonisation efforts to reduce products’ carbon footprints, and climate change mitigation measures will need to be integrated into a broader strategy for cost-effective emission minimisation.