The European Union has been putting a price on greenhouse gas (GHG) emissions since the launch of the EU Emissions Trading System (EU ETS) in 2005, which was the world’s first and one of the largest carbon markets. By requiring polluters to pay for their carbon emissions, the EU ETS has driven significant decarbonisation, reducing emissions from power and industry plants by about 47% between 2005 and 2023.
Under the 2023 revision of the ETS Directive, the EU ETS scope expanded in 2024 to include maritime transport, and the emissions cap has been tightened to deliver a 62% reduction by 2030 compared to 2005 levels.As part of this climate strategy, the EU is introducing the Carbon Border Adjustment Mechanism (CBAM). This CBAM regulation links the cost of carbon for imported goods to the EU’s domestic carbon pricing system, ensuring that decarbonisation efforts inside the EU are not undermined by carbon-intensive imports.
The Carbon Border Adjustment Mechanism (CBAM) is the EU’s tool to place a fair price on the carbon emitted during the production of certain goods imported into the EU, while encouraging cleaner industrial production in non-EU countries.
CBAM works like a carbon tariff: EU importers must declare the embedded emissions of certain carbon-intensive goods and purchase CBAM certificates corresponding to the EU carbon price. This aims to prevent carbon leakage, which is the relocation of production to jurisdictions with lower climate standards.
The current scope of CBAM covers cement, aluminium, fertilisers, iron and steel, hydrogen, and electricity. The table below outlines the covered product categories and examples:
| Product category | Example product |
| Cement | White Portland cement (whether or not artificially coloured) |
| Aluminium | Aluminium tube or pipe fittings (e.g., couplings, elbows, sleeves) |
| Fertilisers | Ammonia, anhydrous or in aqueous solution |
| Iron & Steel | Tubes, pipes, and hollow profiles of cast iron |
| Hydrogen | Hydrogen imported from outside the EU |
| Electricity | Electricity imported from outside the EU |
Timeline:
Exporters to the EU in the covered sectors will need to disclose product-level embedded emissions and ensure data transparency across their supply chains. This marks a major shift in global trade competitiveness, as carbon intensity will directly determine market access, pricing, and long-term customer relationships. While CBAM’s immediate impact will be felt most strongly in sectors such as steel, aluminium, cement, fertilisers, electricity, and hydrogen, its influence extends beyond the EU and prompting governments, investors, and supply chain partners worldwide to reassess sourcing strategies, production methods, and decarbonisation roadmaps.
Example: Steel
According to European Steel in Figures 2024, the EU’s top 10 imports of finished steel products by country of origin in 2023 (in thousand tonnes) were as follows:
| Rank | Country | Volume (‘000 tonnes) | Percentage |
| 1 | South Korea | 3,177 | 12.42% |
| 2 | India | 2,863 | 11.20% |
| 3 | Taiwan | 2,391 | 9.35% |
| 4 | Turkey | 2,269 | 8.87% |
| 5 | China | 2,206 | 8.63% |
| 6 | Vietnam | 2,165 | 8.47% |
| 7 | Japan | 1,776 | 6.94% |
| 8 | Egypt | 1,287 | 5.03% |
| 9 | Ukraine | 1,169 | 4.57% |
| 10 | Indonesia | 767 | 3.00% |
| Others | 5,503 | 21.52% | |
Table 2: EU’s top 10 imports of finished steel products by country of origin in 2023 (in thousand tonnes)
These figures highlight that steel exports from both Asia and the Middle East will be significantly exposed to CBAM-related compliance costs.
Oil and gas exports are currently outside CBAM’s scope. However, the Middle East holds a significant share in several sectors that are covered.
The Gulf Cooperation Council (GCC) accounted for about 8.7% of global aluminium production in 2024. The United Arab Emirates (UAE) alone produced 2.7 million metric tons of primary aluminium in 2022, representing 1.4% of its GDP in 2018. In the cement sector, Turkey supplied 38.9% of the EU’s cement and clinker imports in 2024, while Egypt accounted for 8.9%.
According to the OECD, CBAM applies to direct (Scope 1) emissions for all covered products, and to indirect emissions (Scope 2) emissions only for cement and fertilisers. For other products, including aluminium, the initial focus is on Scope 1 emissions. This means that Middle Eastern producers with low-carbon power systems could have a competitive advantage.
In the UAE, the share of solar in electricity generation grew from 0.08% in 2013 to 8.58% in 2024. Clean power from renewables and nuclear accounted for 28% of total generation in 2023, with solar and wind contributing 8.4%. This low-carbon energy mix reduces Scope 2 emissions and strengthens competitiveness in CBAM calculations for energy-intensive sectors such as aluminium, steel, and cement, where Scope 2 emissions can have a significant effect on compliance costs.
Under CBAM, EU importers will bear the cost for emissions generated outside the EU. As a result, non-EU countries must take steps to reduce emissions during production, as the UAE has done, or risk losing market share if EU buyers opt for lower-emission alternatives. In other words, efforts to reduce carbon emissions are now as critical to international competitiveness as price and product quality.
Fig1. CBAM Preparation Roadmap for Exporters & Importers
For compliance with CBAM regulation, exporters to the EU (i.e., non-EU installation operators) should begin preparing their registrations early. This includes measuring embedded emissions of the goods to be exported and evaluating potential market impacts to adjust pricing or supply strategies where necessary.
Since January 1, 2025, the new CBAM Registry portal has enabled non-EU operators to register and share embedded emissions data in a single submission. This eliminates the need to provide the same data separately to multiple EU importers (CBAM declarants), reducing both confidentiality risks and administrative burdens.
From the same date, EU importers acting as CBAM declarants have also been able to apply via the Registry for “authorised CBAM declarant” status. As part of preparation, importers should assess the share and emissions profile of non-EU goods in their supply chain and review procurement strategies if CBAM costs could affect competitiveness. This designation will become mandatory from January 2026 for importing CBAM-covered goods into the EU.
Accordingly, exporters should work closely with EU buyers and importing partners at an early stage to establish methods for information sharing and data exchange, and to coordinate the necessary registration and application timelines. This joint preparation will be critical for ensuring compliance and optimizing costs
CBAM is directly linked to the EU Emissions Trading System (EU ETS), with CBAM certificate prices tied to the prevailing EU ETS carbon price. This ensures that imports bear a carbon cost equivalent to that faced by EU producers, maintaining fair competition while supporting decarbonisation goals.
European Commission official documents do not explicitly state that voluntary carbon market (VCM) credits cannot be used to meet CBAM payment obligations. However, under the scheme, only a carbon price, such as a carbon tax, fee, or compliance-based allowance paid in the country of origin, is eligible for deduction from the CBAM payment.
This “carbon price deduction” could, in principle, apply to the use of Internationally Transferred Mitigation Outcomes (ITMOs) under Article 6 of the Paris Agreement, which are government-authorised international carbon credits traded between countries to achieve their climate targets. That said, the exact eligibility criteria for recognising such credits as a valid carbon price under CBAM remain unclear.
Beyond direct compliance, CBAM could act as a catalyst for broader adoption of carbon pricing worldwide, encouraging more jurisdictions to introduce carbon taxes or CBAM-type measures. This “regulatory spillover effect” could expand the scope and liquidity of global compliance carbon markets.
CBAM marks a major turning point in global trade by directly linking market access to carbon performance. Competitiveness will be determined not just by meeting technical standards but also by carbon intensity, data transparency, and proactive decarbonisation. While its current scope is limited, CBAM’s design signals the EU’s intent to fully integrate climate policy into trade, potentially accelerating the global adoption of carbon pricing. For companies in the Middle East, Asia, and beyond, investing in low-carbon production, renewable energy integration, and precise emissions reporting is essential not only to avoid CBAM costs but also to secure long-term market relevance. Those who act early will be best positioned to lead in the emerging low-carbon economy.
The CBAM transitional period began in October 2023, with full implementation starting in January 2026.
The current scope of CBAM covers cement, aluminum, fertilizers, iron and steel, hydrogen, and electricity. The list may be expanded in the future.
Exporters to the EU should register early in the CBAM Registry, establish data-sharing methods with EU importers, and coordinate timelines to ensure smooth compliance.
