What Is CBAM?
CBAM (Carbon Border Adjustment Mechanism) is a regulation developed by the European Union (EU) that supports the EU's goal of becoming carbon neutral by 2050 and aims to reduce the risk of carbon leakage. Carbon leakage, which the EU wants to prevent, refers to the risk that producers may shift their production processes to countries with less rigorous environmental laws due to the EU's strict carbon rules, potentially increasing global emissions. To prevent this, CBAM applies carbon pricing to imported products with high emissions.
The Goals of CBAM
CBAM serves three core goals:
1. Preventing Carbon Leakage:
As part of its fight against climate change, the EU has introduced carbon pricing mechanisms in line with its emission reduction targets. However, some countries outside the EU have looser regulations on carbon emissions. This can disadvantage EU producers and may lead them to relocate operations to countries with less strict rules — resulting in emissions moving elsewhere rather than being reduced overall. CBAM aims to reduce this risk and prevent carbon leakage.
2. Protecting the EU Internal Market:
To reduce carbon emissions, the EU introduced the Emissions Trading System (ETS) in 2005. Under this system, organizations in certain sectors subject to the ETS must pay a fee proportional to their greenhouse gas emissions. As this system became more established within the EU, however, a competitive gap emerged between products produced in the EU (which are subject to emission fees) and imported products (which are not). CBAM aims to close this gap through a carbon pricing system for imported goods.
3. Encouraging Global Climate Action:
CBAM isn't just about reducing emissions within the EU — it also aims to encourage climate action globally. To avoid the added costs introduced by this mechanism, countries exporting carbon-intensive products to the EU will be encouraged to develop their own carbon pricing policies and take steps to reduce emissions.
How Does CBAM Work?
CBAM functions as a carbon pricing mechanism applied to specific product groups. In the initial phase, CBAM covers certain sectors with high carbon intensity. These include industries such as cement, steel, aluminum, fertilizers, and electricity. CBAM sets a price based on the carbon emissions generated during the production of these goods.
Implementation Process
1. Determining Carbon Content:
Under CBAM, the embedded emissions of goods to be imported into the EU are calculated. Producers must report the carbon footprint of their products. These calculations are based on the energy sources used in production and production efficiency (fugitive gases and energy losses).
2. Carbon Pricing:
A carbon price is applied to imported goods based on their embedded emissions. This price will be aligned with those charged to local producers in carbon-priced sectors within the EU. For example, if a steel producer in the EU is subject to a specific carbon price per ton, steel imported from outside the EU will face a similar price.
3. Accounting for External Carbon Prices:
If a carbon pricing mechanism already exists in the exporting country, CBAM takes this cost into account. In other words, if the producing country already applies a carbon price, that cost can be deducted from the carbon price due in the EU. This way, CBAM encourages carbon pricing globally and seeks to balance the cost of carbon emissions.
CBAM Transition Phase
CBAM, which came into force on October 1, 2023, will be fully implemented in two phases.
- Transition Phase (2023-2025): This current phase was designed to help companies exporting to the EU get used to the process and adapt to the regulations. During this period, companies are expected to prepare quarterly CBAM reports and submit them to the EU. However, financial obligations such as purchasing certificates or paying a carbon tax aren't required in this phase. In today's transition phase, CBAM calculations and reporting largely reflect process adoption. That said, thanks to the added value these processes deliver to companies, their financial impact has clearly already begun.
- Full Implementation (Post-2026): This is when CBAM fully comes into force. Starting in 2026, products imported into the EU are expected to have CBAM reports, and the carbon emissions of these products will need to be paid for. With the end of the transition period, a compliance report will be prepared, and all products currently in the ETS carbon pricing system are expected to be added to CBAM's scope by 2030 — alongside final compliance modifications that will give the mechanism its final form.
CBAM Emission Calculations
Emissions under CBAM fall into two scopes:
- Scope 1 Emissions: This scope covers direct carbon emissions from the product's production process. It includes emissions from natural gas and other gases used, as well as fugitive emissions.
- Scope 2 Emissions: This scope covers indirect emissions during production — primarily electricity consumption. Electricity itself doesn't generate emissions at the point of use, but the emissions from its generation are added to the product's carbon footprint as indirect carbon emissions.
These calculations are typically done manually using Excel templates with pre-built formulas available on the EU CBAM website. To calculate, you find the consumption figures on your invoices and multiply them by emission factors. You can obtain these factors from your own country if it provides emission factors for that source, or from sources like the IPCC (UN) and DEFRA (UK). One thing to watch carefully is the units of the emission factors and the units of the data you've collected — they must match. Detailed guidance and data for the calculation can be found on the EU CBAM website.
CBAM Reporting
A CBAM report fundamentally requires complete information in four areas:
- Information about the exporting company
- Quantity of imported goods in tons
- Embedded emissions of the product
- Electricity consumption in MWh
CBAM reporting isn't currently mandatory for companies in Turkey, but going forward it will happen through the EU's CBAM Portal. However, since importing companies within the EU are required to make these declarations, they may also request CBAM reports from external exporters during the current period. It's important to have CBAM reports ready ahead of time, because starting January 1, 2026, EU importers that fail to submit these reports will face significant penalties. As a result, these importers will avoid bringing in goods without a CBAM report.
The CarbonSmart CBAM Module
In a period when even obtaining the data factors needed for emission calculations — let alone running the calculations — takes significant time, CarbonSmart is with you through its CBAM module. Thanks to our advanced algorithms and user-friendly interface, you can automatically run your calculations and reports on our platform without any special training. Processing thousands of rows of data in Excel, finding and tracking emission factors, performing uncertainty calculations, and producing reports compliant with EU regulations all take unnecessary time and effort — let our AI-powered advanced algorithms handle them for you.
In addition, our platform integrates with ERP systems for real-time data flow. This allows you to instantly calculate all of your emissions and develop AI-powered reduction strategies at the source. Using the same system, you can detect energy losses and anomalies that disrupt your production line on the platform. With machine learning, you can reduce energy consumption on one hand, while predicting potential failures ahead of time on the other — lowering your overall production costs.
With CarbonSmart, you can continue your business operations in line with regulations while effectively managing the financial obligations of carbon pricing, which will take full effect on January 1, 2026. For more information, request a demo right now.
