European Union Carbon Border Adjustment Mechanism (CBAM)

According to the United Nations, as of June 2023 there are 195 signatories to the Paris Agreement to limit their greenhouse gas (GHG) emissions.1 However, the Paris Agreement permits countries to set their own ambitions within certain parameters. Some jurisdictions or regions have undertaken to cut carbon emissions faster than others.

From Paris Agreement to CBAM Regulation

As a front-runner in climate protection and a driver of the global environmental agenda, Europe aims to become the world’s first climate-neutral continent by 2050. The European Green Deal, introduced in 2019 and adopted in 2020, is a roadmap of tax and non-tax policy initiatives designed to achieve this ambitious target2. In September 2020, the EU announced its ambition to cut emissions by 2030 by 55 percent in comparison with 1990 levels.To meet this target, a series of legislative proposals designed to facilitate the necessary acceleration of GHG emissions reduction by 2030 and align the EU’s climate, transport, land use, energy and taxation policies with this milestone target, was adopted by the European Commission in July 2021 under the "Fit for 55 package" banner4.


CBAM as part of the European Green Deal and "Fit for 55"

One component of the Fit for 55 package is the revision of the EU’s current Emissions Trading System (ETS), which, amongst other changes, includes expanding the scope to include new sectors, reducing the overall quantity of allowances (annual cap) and phasing out the annual allocation of free allowances. While encouraging industrial decarbonization, this revision simultaneously drives carbon prices upwards. Such an increase in emissions pricing risks carbon leakage, which would occur if consumers switched from buying EU-produced goods to purchasing substitutes from non-EU countries that have lower emission reduction requirements where a lesser (or no) carbon price is levied, or firms shifted production activities from the EU to these countries in order to save costs that are inevitably incurred when switching to greener production.

While the EU is implementing measures to achieve climate neutrality and is already successfully reducing GHG emissions, it recognizes that many other countries have not yet made reductions or are increasing emissions. The EU, therefore, hopes to both exert global influence on combatting climate change and address potential carbon leakage concerns through the implementation of a CBAM, which was first proposed in 2019 within the EU Green Deal and is an essential element to the Fit for 55 package.

The Carbon Border Adjustment Mechanism Regulation, which entered into force on 17 May 2023 and will come into effect on 1 October 2023, is, therefore, designed to counter the risk of carbon leakage and operates by imposing a charge on the embedded carbon content of certain imports that is equal to the charge imposed on domestic goods under the ETS, with adjustments being made to this charge to take into account any mandatory carbon prices in the exporting country. To ensure that there is no double benefit afforded to EU producers, the CBAM will replace the free ETS allowances currently granted to EU producers assessed to be at high risk of carbon leakage. Therefore, by imposing an equivalent carbon price on the imports of covered goods, the playing field is leveled for both EU producers and EU importers of such goods as partner countries are encouraged to decarbonize their production processes.

Affected products

The new rules will initially affect goods imported from non-EU countries that are particularly carbon-intensive, namely specified goods within the cement, electricity, fertilisers, aluminium, iron, steel and hydrogen sectors, as well as some upstream and downstream products (mainly iron, steel and aluminium). 

CBAM covers imports of covered goods from non-EU countries, except those participating in, or which are linked to, the EU ETS (currently Iceland, Norway, Liechtenstein, Switzerland and five other minor territories).

After implementation of the CBAM, the EU Commission plans to extend the scope of application to all sectors subject to EU emissions trading by 2030.

Products initiality

CBAM implementation to start with reporting obligation in October 2023

In the transitional phase of the implementation of the CBAM, from 1 October 2023 to 31 December 2025, affected companies are subject to a reporting obligation without financial obligations. During this period, importers must determine and document direct and indirect emissions that occur in the course of the production process of the imported goods. This step alone is likely to pose challenges for many companies, as necessary IT solutions for recording and determining carbon dioxide equivalent (CO2e) emissions are often lacking. In addition, affected EU importers are obliged to prepare a quarterly CBAM report that provides information on the imported quantity of CBAM goods, the direct and indirect embedded emissions contained therein (reporting on indirect embedded emissions is initially only for cement, electric power and fertiliser) as well as any carbon taxes effectively paid in the country of production.

Mandatory registration

As of 1 January 2026, only registered declarants will be allowed to import CBAM goods. The customs authorities of the EU member states are obliged to monitor the movement of goods and to deny the import of CBAM goods by non-registered declarants. Importers who are subject to this registration obligation may apply for authorization from 1 January 2025.

Certificate trading

With the start of certificate trading from 1 January 2026, importers are obliged to purchase sufficient emission allowances for imported embedded emissions during the year. Within the framework of an annual CBAM declaration, the amount of imported embedded emissions will be compared with the acquired emission allowances. If too few certificates have been acquired, financial sanctions may be imposed.

The requirements at a glance:  

  1. Determination of direct and indirect CO2e emissions contained in imported CBAM goods based on actual or default (electricity only) values.
  2. If actual values are used: verification and testing by a certified testing body
  3. Acquisition of CBAM certificates for imported CO2e emissions from the relevant CBAM competent authority
  4. Preparation and submission of an annual CBAM declaration for the CBAM goods imported in the previous calendar year and the associated CO2e emissions (deadline for submission: 31 May of the following year), including comparison of the imported CO2e emissions with the emission allowances acquired during the year and to be released

Gradual introduction of the CBAM:


What does the CBAM mean for business?

  What companies need to do now:

Businesses should already start preparing to adapt to the upcoming changes that are almost upon us. Amongst the most urgent for EU companies to align themselves with the CBAM regulation is the adherence to reporting obligations from 1 October 2023. For businesses to achieve a smooth roll-over in the upcoming transition period and minimize the disruption to their business model and costs, all EU importers of initial covered products must be ready for these transitional period reporting obligations.

Many EU-based corporates will be monitoring the emissions performance of their supply chain to meet the monitoring, verification and reporting standards now expected of most corporate entities. However, few companies will know in what country the actual emissions, relating to the development of their goods, were generated in. Companies that consume products covered within the scope of the EU ETS, (e.g., manufacturing) could face significant additional cost pass-through from existing suppliers if the CBAM is implemented, due to the significant emissions occurring in geographies without commensurate low carbon policies and the emissions associated with transport of the goods to the EU. Corporates should ensure that they understand the geographical composition of their emissions to enable them to undertake a supply chain review, where required, making conscious cost versus carbon trade-offs and ensuring the resilience of their pricing model to the proposed changes.

As more products fall into the scope of the expanded execution of CBAM, more and more businesses will need to prepare for its implementation. It is critical for companies and importers of CBAM goods in the EU to remain well-informed of these developments and begin evaluating the overall impact on their business activity, which may not be limited to a view on their customs data only, but also impact their sourcing and supply chain.


What companies need to do from 2026/2027 onwards:

cbam-what-companies need to do

How KPMG can help

The EU CBAM is associated with significant increases in ambition within the EU ETS, with implications for the future carbon price pathway and the number of free permits received by European producers: it is important to understand the impact of these measures together for the particular industry you are in.

Whether based within the EU or trading with the EU, we encourage companies to consider their own decarbonization strategies, whether it be to ensure that they are prepared for compliance with upcoming legislation, or to ensure that operations are future-ready for medium- and long-term global developments.

KPMG member firms have developed Climate Change and Decarbonization practices. Working alongside KPMG’s Global Trade and Customs practices, ESG Sustainability and Tax and Legal teams, member firms can offer leading approaches working collaboratively with clients on the journey to a low-carbon future.

KPMG ESG professionals can assist you with a climate risk and decarbonization strategy that includes helping you gain strategic foresight and operational value in your decarbonization journey, from emissions measurement to implementation, monitoring and reporting. This is supported by an array of options, such as renewable energy procurement, energy efficiency, circular economy, and supply chain management, and includes assessing and understanding the underlying tax and legal impacts.

Through KPMG Climate Risk Advisory services, we can help you measure, quantify and assess risks and opportunities across supply chains under a wide range of scenarios and understand the impact on business performance.

KPMG member firms also advise clients on the financing and investment aspects of the low-carbon agenda, including fundraising and identifying investment partners and merger and acquisition opportunities, which consist of both debt and equity approaches.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

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Do Thi Thu Ha

Head of ESG
KPMG in Vietnam

Hoang Thuy Duong

Head of Tax
KPMG in Vietnam

Nhan Huynh

Head of Integrated International Tax
KPMG in Vietnam