Carbon Border Tax expected to raise €10bn for EU
The EU’s Carbon Border Adjustment Mechanism (CBAM), commonly referred to as the Carbon Border Tax, is set to become fully operational from 1 January 2026. This marks the final stage of the EU’s pioneering initiative to align international trade with its ambitious climate goals.
First proposed in July 2021, CBAM aims to place a fair price on the carbon emissions embedded in certain imported goods, ensuring that foreign producers are held to similar climate standards as those within the EU. The mechanism is expected to generate over €10 billion annually, helping fund the EU’s Green Deal and climate transition efforts.
A cornerstone of the EU’s climate strategy
The Carbon Border Tax forms part of the broader EU Green Deal, which sets out the EU’s goal of achieving climate neutrality by 2050. This has been supported by reforms to the EU Emissions Trading System (ETS) and a revision of the Energy Tax Directive (ETD).
In parallel, the EU introduced a plastic packaging levy in 2021, charging €800 per tonne on non-recyclable plastic waste—a clear signal that environmental taxation is becoming a core policy tool.
Transitional phase (2023-2025)
From October 2023, the EU initiated a transitional phase for CBAM. During this period:
- Importers of high-emission goods (steel, aluminium, fertilisers, cement, electricity and hydrogen) must submit quarterly reports on the embedded carbon emissions in their products.
- No payments are required yet – this phase is focused on data collection and system readiness.
This transitional phase continues until 31 December 2025, giving businesses time to adapt to the complex reporting obligations and prepare for financial compliance from 2026.
What is the Carbon Border Tax?
When EU-based companies create products they will be required to purchase a permit for climate-warming carbon emissions. This incentivises emissions reduction and increases product costs. In contrast, foreign producers have historically faced no equivalent regulation, resulting in cheaper, more carbon-intensive imports.
This means that the imports are then sold cheaper in the European Union. There are concerns that the manufacture of products will be outsourced beyond the EU to avoid these taxes. This is known as a ‘carbon leakage’. To avoid this undermining, the CBAM will adjust the price of imports to accurately reflect the carbon content.
As the EC has stated, “EU importers will buy carbon certificates corresponding to the carbon price that would have been paid, had the goods been produced under the EU’s carbon pricing rules. Conversely, once a non-EU producer can show that they have already paid a price for the carbon used in the production of the imported goods in a third country, the corresponding cost can be fully deducted for the EU importer. The CBAM will help reduce the risk of carbon leakage by encouraging producers in non-EU countries to green their production processes.”
Business impact: What to expect
The full financial impact of CBAM will only be realised in 2026, the reporting burden is already significant. Businesses importing covered goods must ensure they:
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Understand their supply chain emissions
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Build processes for quarterly emissions reporting
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Prepare for carbon certificate purchase and pricing mechanisms
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Engage suppliers to improve emissions transparency
There are still open questions around enforcement, price volatility and whether CBAM will expand to other sectors (e.g. chemicals or plastics). However, it’s clear that environmental taxes are becoming mainstream tools for fiscal and climate policy.
Looking ahead
The Carbon Border Tax is more than just a compliance issue, it’s a strategic shift in how global trade intersects with sustainability. With mandatory financial adjustments beginning in 2026, 2025 is the year for businesses to move from planning to action.
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