CBAM Under the Spotlight: The EU’s Carbon Border Adjustment Mechanism
CBAM Under the Spotlight: The EU’s Carbon Border Adjustment Mechanism
September 2025
Gus J. Papamichalopoulos, Senior Partner, and Iakovos Koulouris, Senior Associate
Kyriakides Georgopoulos Law Firm
I. Introduction
The Carbon Border Adjustment Mechanism (CBAM) has been established by virtue of the Regulation (EU) 2023/956 of the European Parliament and of the Council (hereinafter the “CBAM Regulation“) with the primary objective of preventing carbon leakage by addressing greenhouse gas emissions embedded into certain carbon-intensive commodities imported into the customs territory of the European Union (EU) from non-EU countries. The sectors currently falling within the scope of the CBAM Regulation (for more information see Annex 1) include cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.
II. Understanding CBAM framework
The legal foundation of the CBAM is laid down in the Regulation, which sets out the general provisions, and the Commission Implementing Regulation (EU) 2023/1773 (hereinafter the “Implementing Regulation“), which specifies the reporting procedures and obligations during the transitional period. The mechanism aims to set a robust framework against carbon leakage, ensure a level playing field between products produced inside and outside the EU, and prepare for the full implementation of the mechanism as of 2026.
The Transitional Period
The transitional period was set from 1 October 2023 until 31 December 2025. During the transitional period, importers are not subject to any direct financial obligation, although they are required to submit quarterly “CBAM reports” providing information on the imported commodities. These reports shall include, amongst other details, the total quantity of imported commodities (expressed in MWh for electricity or in tons for other products), the actual embedded direct and indirect CO₂ emissions, as well as any carbon price effectively paid in the country of origin, considering possible rebates or other forms of compensation. According to the Implementing Regulation, the first CBAM report was due by 31 January 2024 for the fourth quarter of 2023, while the last CBAM report shall be submitted by 31 January 2026 for the fourth quarter of 2025.
CBAM: From Launch to Full Force
From 1 January 2026, CBAM will be fully implemented. Onwards, commodities covered by the Regulation can only be imported into the EU by an authorised CBAM declarant. The authorised declarant, who must be licensed, will be obliged to submit an annual CBAM declaration setting out the embedded emissions of the imported commodities and deliver the corresponding number of CBAM certificates. The pricing of the certificates will be calculated on the basis of the average weekly auction price of EU Emissions Trading System (ETS) allowances, expressed in euros per ton of CO₂. The first annual CBAM declaration for the calendar year 2026 must be submitted by 31 May 2027.
Compliance obligations and Penalties
The obligations of importers go beyond the formal submission of reports and extend to the systematic collection of reliable data from producers in third countries. Such data must cover plant-level emissions and process emission factors, as well as other critical production parameters. In case such data cannot be obtained, the Implementing Regulation allows an estimation based on default values or alternative calculation methods, provided that comparable accuracy is ensured. Failure to comply with these obligations may result in administrative penalties. Specifically, fines range from €10 to €50 per ton of unreported emissions, with the amount determined based on the extent and duration of the infringement. More stringent sanctions are foreseen in cases of repeated or long-term non-compliance.
III. Omnibus Proposal – Towards simplification?
In February 2025, the European Commission published a proposal for amendment of the CBAM Regulation under the “Omnibus package” (COM(2025) 87), in an effort to reduce regulatory burdens on businesses. Amendments to the CBAM have been proposed to simplify its applicability and are structured on the basis of evidence gathered during the first 18 months of the transitional phase.
On 22 May and 27 May 2025, the European Parliament and the Council adopted their positions, with negotiations currently ongoing for the final approval for the package. Based on the available information, the amendments are anticipated to enter into force by early Q4 2025.
Key proposed changes
The proposal introduces several important modifications:
- Exemption related to electricity generation. As per the proposed amendments, the CBAM Regulation provisions will not be applicable to electricity generated entirely within the Εxclusive Εconomic Ζone (EEZ) of an European Economic Area (ΕΕΑ) Member State and imported directly into the EU customs territory. This exemption is based on the geographical particularities of certain EEA countries and the specific market characteristics of their energy sectors, aiming to avoid introducing disproportionate trading barriers in their electricity markets.
The Council has adopted a comparable stance: electricity generated in the EEZ will be treated as originating from that respective state. As a result, electricity generated in the EEZ of a third country would fall under the CBAM Regulation, while electricity generated in the EEZ of an EEA Member State would remain exempt. The same approach will also apply to hydrogen. - Default values for emissions and carbon prices
Declarants will be able to choose between:- reporting actual embedded emissions (except for electricity) or using default values set by the Commission.
- applying either a default carbon price set by the Commission or deducting the carbon price effectively paid in the country of origin.
| If default values are used for emissions, only the default carbon price may be applied, and the former will be calculated based on “best available data”. Starting from 2027, the Commission may publish methodologies and default carbon prices for third countries. |
- Amendments to the penalties regime. Penalties for failure to deliver CBAM certificates may be mitigated, in cases of past compliance, cooperation with authorities, or unintentional non-compliance.
Declarants failing to deliver certificates will be required to abide by the obligations in addition to penalties imposed. - Administrative simplifications
|
1. Delayed sale of CBAM certificates: The launch date is expected to be postponed from 1 January 2026 to 1 February 2027. Declarants will be required to purchase certificates by 30 September 2027 corresponding to 2026 emissions. Certificates unused by 1 November 2027 will be redeemed without compensation. 2. Annual schedule adjustments:
3. Quarterly ownership requirement reduction: The obligation for declarants to hold certificates covering at least 80% of embedded emissions by the end of each quarter will be reduced to 50%, alleviating financial pressure. |
September 2025
Gus J. Papamichalopoulos, Senior Partner, and Iakovos Koulouris, Senior Associate
Kyriakides Georgopoulos Law Firm
I. Introduction
The Carbon Border Adjustment Mechanism (CBAM) has been established by virtue of the Regulation (EU) 2023/956 of the European Parliament and of the Council (hereinafter the “CBAM Regulation“) with the primary objective of preventing carbon leakage by addressing greenhouse gas emissions embedded into certain carbon-intensive commodities imported into the customs territory of the European Union (EU) from non-EU countries. The sectors currently falling within the scope of the CBAM Regulation (for more information see Annex 1) include cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen.
II. Understanding CBAM framework
The legal foundation of the CBAM is laid down in the Regulation, which sets out the general provisions, and the Commission Implementing Regulation (EU) 2023/1773 (hereinafter the “Implementing Regulation“), which specifies the reporting procedures and obligations during the transitional period. The mechanism aims to set a robust framework against carbon leakage, ensure a level playing field between products produced inside and outside the EU, and prepare for the full implementation of the mechanism as of 2026.
The Transitional Period
The transitional period was set from 1 October 2023 until 31 December 2025. During the transitional period, importers are not subject to any direct financial obligation, although they are required to submit quarterly “CBAM reports” providing information on the imported commodities. These reports shall include, amongst other details, the total quantity of imported commodities (expressed in MWh for electricity or in tons for other products), the actual embedded direct and indirect CO₂ emissions, as well as any carbon price effectively paid in the country of origin, considering possible rebates or other forms of compensation. According to the Implementing Regulation, the first CBAM report was due by 31 January 2024 for the fourth quarter of 2023, while the last CBAM report shall be submitted by 31 January 2026 for the fourth quarter of 2025.
CBAM: From Launch to Full Force
From 1 January 2026, CBAM will be fully implemented. Onwards, commodities covered by the Regulation can only be imported into the EU by an authorised CBAM declarant. The authorised declarant, who must be licensed, will be obliged to submit an annual CBAM declaration setting out the embedded emissions of the imported commodities and deliver the corresponding number of CBAM certificates. The pricing of the certificates will be calculated on the basis of the average weekly auction price of EU Emissions Trading System (ETS) allowances, expressed in euros per ton of CO₂. The first annual CBAM declaration for the calendar year 2026 must be submitted by 31 May 2027.
Compliance obligations and Penalties
The obligations of importers go beyond the formal submission of reports and extend to the systematic collection of reliable data from producers in third countries. Such data must cover plant-level emissions and process emission factors, as well as other critical production parameters. In case such data cannot be obtained, the Implementing Regulation allows an estimation based on default values or alternative calculation methods, provided that comparable accuracy is ensured. Failure to comply with these obligations may result in administrative penalties. Specifically, fines range from €10 to €50 per ton of unreported emissions, with the amount determined based on the extent and duration of the infringement. More stringent sanctions are foreseen in cases of repeated or long-term non-compliance.
III. Omnibus Proposal – Towards simplification?
In February 2025, the European Commission published a proposal for amendment of the CBAM Regulation under the “Omnibus package” (COM(2025) 87), in an effort to reduce regulatory burdens on businesses. Amendments to the CBAM have been proposed to simplify its applicability and are structured on the basis of evidence gathered during the first 18 months of the transitional phase.
On 22 May and 27 May 2025, the European Parliament and the Council adopted their positions, with negotiations currently ongoing for the final approval for the package. Based on the available information, the amendments are anticipated to enter into force by early Q4 2025.
Key proposed changes
The proposal introduces several important modifications:
- Exemption related to electricity generation. As per the proposed amendments, the CBAM Regulation provisions will not be applicable to electricity generated entirely within the Εxclusive Εconomic Ζone (EEZ) of an European Economic Area (ΕΕΑ) Member State and imported directly into the EU customs territory. This exemption is based on the geographical particularities of certain EEA countries and the specific market characteristics of their energy sectors, aiming to avoid introducing disproportionate trading barriers in their electricity markets.
The Council has adopted a comparable stance: electricity generated in the EEZ will be treated as originating from that respective state. As a result, electricity generated in the EEZ of a third country would fall under the CBAM Regulation, while electricity generated in the EEZ of an EEA Member State would remain exempt. The same approach will also apply to hydrogen. - Default values for emissions and carbon prices
Declarants will be able to choose between:- reporting actual embedded emissions (except for electricity) or using default values set by the Commission.
- applying either a default carbon price set by the Commission or deducting the carbon price effectively paid in the country of origin.
| If default values are used for emissions, only the default carbon price may be applied, and the former will be calculated based on “best available data”. Starting from 2027, the Commission may publish methodologies and default carbon prices for third countries. |
- Amendments to the penalties regime. Penalties for failure to deliver CBAM certificates may be mitigated, in cases of past compliance, cooperation with authorities, or unintentional non-compliance.
Declarants failing to deliver certificates will be required to abide by the obligations in addition to penalties imposed. - Administrative simplifications
|
1. Delayed sale of CBAM certificates: The launch date is expected to be postponed from 1 January 2026 to 1 February 2027. Declarants will be required to purchase certificates by 30 September 2027 corresponding to 2026 emissions. Certificates unused by 1 November 2027 will be redeemed without compensation. 2. Annual schedule adjustments:
3. Quarterly ownership requirement reduction: The obligation for declarants to hold certificates covering at least 80% of embedded emissions by the end of each quarter will be reduced to 50%, alleviating financial pressure. |
