Updates to EU CBAM: Balancing climate and competitiveness

As discussed in our February legal briefing, the EU Commission has recently proposed a sustainability "Omnibus" package, intended to deliver on its simplification agenda by amending certain key legislation - the Corporate Sustainability Reporting Directive ("CSRD"), the Corporate Sustainability Due Diligence Directive ("CS3D") and the Carbon Border Adjustment Mechanism Regulation ("CBAM") with concurrent changes to the detail of the Taxonomy Regulation. The Omnibus proposes to dramatically reduce the number of companies subject to mandatory sustainability reporting under CSRD and ease obligations under the CS3D for active human rights and environmental due diligence.

In this briefing, we consider the proposed changes to CBAM, which would remove the majority of formerly covered participants from its scope. However, in a way that arguably cannot be said of proposed changes to other sustainability regulations, the Commission appears to have been careful to preserve the aims and expected outcomes from the CBAM regime.

For more information on the proposed changes to CSRD and CS3D, see our briefing.

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Introduction to CBAM

The CBAM Regulation introduced an innovative framework to discourage the offshoring of manufacture of carbon intensive goods destined for the EU by imposing a financial charge on the embedded carbon contained in those goods or their raw materials, such as cement, steel, iron, aluminium and electricity. Emissions which have already been accounted for via a carbon pricing mechanism in the country of manufacture are offset against the import charge. CBAM is intended to level the playing field between importers into the EU who choose to manufacture overseas, particularly in jurisdictions where the environmental protection regulation may not be so stringent, and EU importers subject to the EU's Emission Trading System ("EU ETS"). Under the latter, high emitting businesses must pay for the carbon they emit over and above any allowances. Free allowances will be phased out up to 2034 as the corresponding CBAM obligation ramps up.

As climate change is a global issue, the EU's rationale behind imposing a carbon charge on imports is to encourage overseas countries to level up climate protection – export of products with high levels of unaccounted for carbon to the EU will rapidly become uneconomic.

During CBAM's transitional period, which will run from 1 October 2023 to the end of 2025, traders will be required to report on the quantity of goods which will be covered by CBAM, the goods' embedded and indirect emissions, and the carbon price due in the country of origin. Then, from 1 January 2026 when CBAM enters its definitive phase, relevant entities importing carbon-intensive goods into the EU will be required to pay a levy on the embedded emissions of those goods.

See our legal briefings on CBAM here and here for further background on the regime.

The proposed changes to CBAM introduced under the Omnibus are intended to simplify the mechanism for importers and exclude small importers from CBAM obligations while preserving the regime's core purpose, to capture most emissions from imported goods.

Simplifying CBAM for small CBAM importers: A new de minimis threshold

A central element of the CBAM simplification package is the introduction of a new method of determining when importers become subject to the charge. As a reminder, CBAM currently covers all shipments of covered goods over a "negligible value" – currently EUR 150 – meaning that a very large number of importers would be subject to the regulation even where importing on a one-off basis. This threshold is also susceptible to being abused, a fact not unnoticed by the Commission given that Article 27 of the current CBAM Regulation on circumvention explicitly calls out the artificial division of shipments as a practice that the Commission must take action against.

The revised regulation proposes to bring importers into its scope based on a cumulative mass-based threshold, which will initially be set at 50 tonnes of CBAM goods per year. This means that from 1 January 2026, importers that import total volumes of all CBAM goods in aggregate below this threshold will be exempt from the CBAM authorisation and declaration obligation and from the obligation to purchase CBAM certificates. Instead, they will be required to self-identify as "occasional CBAM importers" when lodging their customs declarations and self-monitor import volumes to ensure that that they do not exceed the threshold over the year. An adjustment to the anti-circumvention provisions will be implemented to prevent importers artificially splitting imports across different entities to evade CBAM obligations. Hydrogen and electricity would not be subject to the mass-based threshold, as neither sector has a large number of occasional importers.

It is predicted that this change to scope will exempt approximately 91% of importers, while still capturing over 99% of the emissions from CBAM-covered imports. In this regard, the Commission seems to have achieved a balance between environmental protection and regulatory burden (which many would argue has not been achieved in relation to the other proposed changes to sustainability regulations). Despite that, early indications from the European Parliament are that some factions are likely to push for an even lighter scope, with a higher threshold of 100 tonnes and a potential delay of 2 years before the definitive phase begins. As the Commission's own analysis shows, raising the threshold significantly has a relatively marginal impact on covered emissions.

The cumulative mass-based threshold will not be fixed indefinitely. The Commission will set it each year (by July) after analysing customs import data over a 12-month period and determining what mass-based threshold would need to implemented to ensure 99% coverage of emissions from CBAM goods. The threshold will be based on a calculation of 99% of total embedded emissions for all importers, rounded to the nearest ten for simplicity. The threshold will only be updated if the new value deviates by more than 5 tonnes from the current threshold. The annual reassessment ensures the threshold adapts to significant movements in trade patterns and emission intensities (but does not change arbitrarily).

Simplifying CBAM for large CBAM importers

The simplification measures introduced for large importers who continue to be in the scope of CBAM address authorisation, emission calculation, reporting, and financial liability.

Authorisation of declarants: The Commission will simplify the process of authorising CBAM applications, notably by making the obligation for national competent authorities to consult with other authorities and/or the Commission before granting authorisation to a CBAM declarant optional. Declarants may also more freely delegate their obligations to third parties, while remaining primarily liable for the fulfilment of their obligations.
Emissions calculation and verification: Several measures will be introduced to simplify the methodology of calculating embedded emissions. Key to simplification is the option for declarants to use default emissions values on an ongoing basis, rather than needing to measure actual embedded emissions or provide evidence of why this cannot be achieved in order to use default values. Default values will likely be higher than actual emissions, encouraging use of actual emissions data where available. The process of determining default values for exporting countries will also have more regard for what is technically feasible, though declarants may still challenge default values based on "reliable data". Additionally, declarants will no longer have to verify emissions data based on default values.
Reporting deadline: The current annual deadline for declarants to both submit their annual CBAM declaration (including a verification report if actual values are used) and surrender the corresponding number of certificates is 31 May. It is proposed to move this deadline to 31 August in order to provide more time for declarants. The repurchase deadline and certificate cancellation date would correspondingly be moved to 30 September and 1 October respectively.
Financial Liability: Several critical aspects of financial liability under CBAM have been updated to reduce the financial strain on importers:
- Purchase and repurchase of CBAM certificates: The "80% rule" currently requires CBAM declarants to hold, at the end of each quarter, sufficient certificates to cover at least 80% of embedded emissions at default values of goods imported since the beginning of the year. Conversely, only one third of total CBAM certificates purchased by a declarant are eligible to be repurchased by national competent authorities. In combination, these two rules risk CBAM declarants holding (and having paid for) redundant certificates. The draft text proposes to reduce the number of certificates required to be held to 50% rather than 80%, and national competent authorities will be permitted to buy back all held certificates. This change effectively reduces the liquidity burden on importers, ensuring that they are not forced to hold an excessive number of certificates prematurely.
- CBAM sales for 2026: To reduce financial risks and uncertainties for importers, CBAM certificates for the 2026 compliance year will only be available for purchase starting from 1 February 2027, providing more time to determine 2026 values before the purchasing period begins.
- Third country carbon prices: The evidentiary burden on an importer claiming a reduction in its CBAM liability on account of the carbon price paid in a third country is currently high, including the need for certified third party evidence of effective payment. The Commission will establish default values for third country carbon prices averaged over a year, which importers may use as an alternative to reliance on actual certified data.

Conclusions

While proposed changes to CSRD and CS3D grab most of the attention flowing from the Omnibus package, EU importers of CBAM goods as well as overseas producers of those goods are likely to be very interested in the eventual outcome of negotiations. The proposal remains at an early stage; further debate, discussion and proposals from the European Parliament and the Council will emerge over the coming months.

The Commission's March 2025 European Steel and Metals Action Plan trails yet more changes to CBAM, designed to further protect EU producers of CBAM goods from carbon leakage. These are expected to include the inclusion of certain steel and aluminium-intensive downstream products, and strengthened anti-circumvention measures to prevent "resource shuffling", whereby green products are exported to the EU whilst carbon-intensive products are still produced for other markets.

CBAM has been criticised as a trade-disrupting protectionist measure with disproportionate effects on developing countries. However, since its introduction, the UK has followed suit and is expected to introduce its own CBAM from 2027, which would neutralise costs between the two trading partners. China announced in June 2024 that it would introduce a "carbon footprint management system" – not a CBAM, but a means by which Chinese businesses could efficiently provide data to foreign customers and potentially manage their emissions better. Even the US has a "CBAM style" bill before the Senate at present; the Foreign Pollution Fee Act would impose a percentage levy on imported products to account for their pollution intensity. In contrast to President Trump's other trade policies, a CBAM seems logical and potentially even positive, though previous similar legislation has failed to progress and climate legislation seems poorly aligned with President Trump's overall messaging.

The EU is prioritising the competitiveness of EU businesses ahead, it seems, of almost all other policy goals at present. Its Clean Industrial Deal and Action Plan for Affordable Energy, both announced on the same day as the Omnibus package, should drive an increase in renewable generation capacity and grid infrastructure upgrades within the EU, and thereby demand for components which may be in the scope of CBAM. The EU will want to ensure that CBAM operates effectively to prevent this parallel policy from inadvertently driving up its imported emissions and rewarding lower standards in other parts of the world.

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