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The EU Carbon Border Adjustment Mechanism (CBAM) entered its definitive phase in January 2026, requiring importers to register, report, and account for the carbon content of covered goods.
The financial obligation, purchasing and surrendering CBAM certificates, follows in February 2027, covering emissions from 2026 imports. The mechanism places a carbon price on imports of cement, steel, aluminum, fertilizers, hydrogen, and electricity, calibrated to the EU Emissions Trading System (EU-ETS) price on a phase-in schedule that tracks the drawdown of free EU ETS allowances, reaching full equivalence by 2034, with deductions available where a carbon price has already been paid in the country of origin.
Price is not the point
The debate surrounding the CBAM has focused largely on its price effects. That focus is understandable, but it misses what the mechanism is actually doing. Plant-level modeling of aluminum and steel production simulates a carbon price equivalent to $100 per ton of CO2, roughly in line with recent EU ETS levels, and finds that global emissions fall by 18.45 megatons when carbon pricing is paired with a CBAM, against 17.12 megatons from carbon pricing alone (Clausing et al., 2025).
The border adjustment, in other words, contributes roughly 1.3 megatons on top of what carbon pricing already achieves on its own. In sectors that together account for 14% of global CO2 emissions, that is a modest increment. The same modeling suggests CBAM revenues will be similarly limited: domestic carbon pricing is expected to do the heavy lifting, and high-emission foreign producers may partially avoid the mechanism by redirecting output to unregulated markets.
A global MRV infrastructure
The CBAM is creating an incentive to build what did not exist before: a global infrastructure for measuring, reporting, and verifying the carbon content of traded goods. No voluntary agreement had managed to create it.
Its relevance extends well beyond the CBAM itself: verified emissions data at the level of individual facilities and products are the foundational input that carbon pricing systems, international carbon markets under Article 6, and any serious effort at cross-border climate policy coordination all require. The CBAM is beginning to apply the compliance pressure needed to force that prerequisite into existence, and its consequences are likely to outlast any particular certificate price. How far that infrastructure develops will depend on governance decisions not yet taken, but the compliance pressure now in place is of a kind no voluntary framework had previously managed to generate.
The infrastructure that markets alone could not build
The EU ETS spent years constructing a monitoring, reporting, and verification framework for emissions at the installation level. The CBAM asks for something harder: the same rigor applied to products crossing the EU border, potentially passing through multiple tiers of suppliers in multiple countries. As Pauline Miquel notes, CBAM is trying to replicate the logic of the EU ETS beyond Europe, but the shift from plant-level pricing to product-level accounting changes everything about how the mechanism operates (Miquel, Climate Economics, ep. 19, 2026).
From installation to product
Modeling that accounts for indirect upstream emissions suggests that the CBAM’s reduction in embodied emissions could fall from 8.84% for direct imports to 5.19% for total supply-chain emissions, as the mechanism induces substitution toward non-targeted inputs that are themselves carbon-intensive (Walczak, Huremovic and Rungi, 2025).
The default value problem
To handle cases where verified data are unavailable, the Commission set default values, country-specific emission factors calibrated to worst-case scenarios. The Indonesian steel default is set at approximately nine tons of CO2 per ton of steel, against a European average of roughly 1.5 to 2 tons. The defaults were published on December 17, 2025, seventeen days before the mechanism entered force. The late timing reflects the operational pressure the mechanism is under, but the deeper point is structural: the CBAM depends on emissions data that largely do not yet exist, and is using financial pressure to force their creation.
For importers, the operational reality is demanding. Companies that have never thought in terms of carbon are now required to integrate emissions accounting into procurement systems, supplier contracts, and ERP platforms, with guidance that arrived weeks before the obligation took effect.
What compliance is actually forcing
Early signs suggest the effects on corporate behavior are already materializing. As Pauline Miquel observes, procurement decisions that previously turned on price and quality are now incorporating a third variable: the carbon intensity of the supplier (Miquel, Climate Economics, ep. 19, 2026). Carbon intensity is becoming a criterion of commercial selection, not a sustainability disclosure. Suppliers in China, India, and Southeast Asia that depend on European market access are beginning to build emissions monitoring systems not out of climate conviction but because it is becoming a condition of doing business.
Modeling suggests that more than 50% of the change in embodied emissions under the CBAM could come from reallocation of demand rather than changes in production technology, as EU importers redirect purchases toward lower-emission suppliers (Walczak, Huremovic and Rungi, 2025). That reallocation requires knowing which suppliers are cleaner, which in turn requires measurement. The CBAM is creating the conditions for that measurement infrastructure to be built, by making it commercially necessary.
The Article 6 connection: Towards a regulatory answer
The CBAM’s design creates a concrete fiscal incentive for exporting countries to adopt domestic carbon pricing. When exporters face a CBAM charge, revenue flows to the EU. If the exporting country introduces a recognized domestic carbon price, its exporters receive a deduction and the government captures revenue that would otherwise go to Brussels.
Spillover effects and the recognition question
China expanded its ETS in March 2025 to cover aluminum, cement, and steel, in sectors that align directly with the initial CBAM coverage (Clausing et al., 2025). Mehling, Dolphin and Ritz (2025) document a powerful spillover effect, finding evidence that the CBAM has contributed to accelerating carbon pricing roadmaps across multiple EU trading partners, including Brazil, India, Thailand, and Indonesia. Whether that incentive is preserved or diluted depends on a question the current framework has only recently begun to answer: whether carbon credits under Article 6 of the Paris Agreement can qualify as a recognized carbon price for CBAM deduction purposes.
A design choice with systemic consequences
The Commission’s provisional answer did not emerge without precedent. The European Commission’s December 2025 CBAM expansion proposal had already opened the door formally, stating that the forthcoming implementing regulation on carbon price deductions may consider carbon credits under Article 6 of the Paris Agreement. That opening was initially tentative, but its inclusion in a Commission proposal was significant. It coincided with the EU’s separate decision that up to 5% of its 2040 climate target may be met through high-quality international carbon credits, with Article 6.4 identified as the quality benchmark.
The substitution problem
The implications of that opening cut in two directions. If Article 6 credits are recognized, exporters gain a compliance pathway that does not require their governments to adopt broad domestic carbon pricing. A domestic carbon price imposes costs on all emissions from covered sectors, regardless of whether output is exported to the EU. Article 6 credits, by contrast, can be purchased for the subset of emissions associated with EU exports, leaving domestic production untouched.
As Mehling argues, if exporters can satisfy the CBAM through credit purchases rather than domestic regulation, governments lose a key reason to absorb the political cost of comprehensive carbon pricing (Renewable Matter, 2026). If Article 6 credits are not recognized, the deduction mechanism retains its full force as a driver of domestic carbon pricing adoption. How the European Commission resolves this question in the implementing regulation will shape the relationship between border carbon adjustment and international carbon markets.
A concrete architecture emerges
That tentative opening became a concrete architecture with the draft implementing regulation published by the Commission on May 13, 2026. Article 6.2 and 6.4 credits can qualify as a recognized carbon price under CBAM, but on two conditions: the operator must already be subject to a domestic carbon price mechanism that allows international credits for compliance, and those credits cannot cover more than 10% of its confirmed emissions under that mechanism. The draft carries no official Commission status and has not been adopted. But for the first time, there is a concrete indication of where the deduction framework is headed.
The 10% cap: a limit, not a prohibition
The draft implementing regulation suggests the Commission is aware of this trade-off and has chosen a quantitative limit rather than a prohibition. The 10% cap on international credits is justified in the draft’s recitals explicitly on those grounds: to encourage domestic decarbonization and ensure that most compliance efforts are pursued within the exporting country. Critically, the draft also makes clear that international credits under Article 6 can only be used as a deduction pathway within an existing domestic carbon price mechanism and thus that the Article 6 credits are relevant only when purchased from a third country. An exporter without domestic carbon pricing cannot claim a deduction by purchasing Article 6 credits directly. The incentive to adopt domestic carbon pricing is therefore preserved as a structural condition, not merely as a policy preference.
Implementation in practice: Design ambition vs. Operational reality
The verification framework, under which reported emissions values must be certified by accredited third-party auditors, exists in the regulatory text. Its practical operation is another matter.
Accredited verifiers with the capacity to audit emissions across global supply chains are scarce, the methodologies they are expected to apply were finalized at the last minute, and 2026 operates with a deferred financial liability: importers accumulate CBAM obligations from January 2026 but cannot purchase or surrender certificates until February 2027.
Many businesses are therefore navigating their first year of obligations without clear visibility on costs, data sources, or supplier engagement strategies, while being asked to treat carbon accounting as a business process rather than a reporting obligation.
Adjusting the timeline, not the problem
Regulation (EU) 2025/2083, the Omnibus simplification package adopted in October 2025, adjusted several parameters in response. A mass-based de minimis threshold of 50 tonnes per importer annually exempts roughly 90% of importers while retaining over 99% of covered emissions. The certificate purchase obligation was deferred to February 2027. These are sensible adjustments to an implementation timeline that was always demanding. They do not resolve the underlying challenge: emissions data are largely unverified, the verification ecosystem is underdeveloped, and the gap between regulatory ambition and operational reality remains substantial.
The equity friction: Capacity, not intensity
Plant-level analysis finds no statistically significant correlation between GDP per capita and emissions intensity (Clausing et al., 2025): knowing a country’s income level tells you virtually nothing about how clean or dirty its production is. Clausing also notes that a country like Mozambique, making aluminum with hydroelectric power, can produce with a much smaller carbon footprint than many assume (Clausing, Climate Economics, ep. 18, 2026). The argument that the CBAM penalizes lower-income countries because their production is dirtier does not hold up under scrutiny.
The institutional gap facing firms
The capacity gap facing producers in developing countries is not separate from the infrastructure problem the CBAM is attempting to solve. It is a direct expression of it. The real fairness problem for developing countries, however, is institutional, not environmental. Lower-income countries have less capacity to demonstrate their emissions performance: engaging accredited verifiers, building supply-chain data systems, navigating the CBAM registry.
Firms without that institutional capacity pay the penalty default rate regardless of their actual emissions. Exemptions based on income level, a commonly proposed remedy, do not address this. Investment in MRV capacity and technical assistance for exporters in developing countries are more directly relevant. The question that matters is not whether to price the carbon in imports from developing countries. It is whether their producers have a fair opportunity to demonstrate how much carbon is actually in their goods.
Conclusions: Infrastructure before markets
The public debate on CBAM has focused on effects that modeling suggests will be real but modest: certificate revenues smaller than projected, and direct emissions reductions that are likely marginal in the context of global industrial output. Measured by those metrics, the mechanism appears to fall short of expectations. But those are not the metrics that will determine its significance.
The more consequential effects operate at a different timescale. The mechanism is creating the pressure to force emissions measurement infrastructure into existence across global supply chains. Carbon intensity is becoming a variable in commercial procurement decisions. And for the first time, a concrete fiscal incentive exists for carbon pricing adoption at a scale no previous instrument had managed to create. If the measurement infrastructure being built today informs investment decisions in new production capacity, the long-run emissions effects could be substantially larger than current models suggest.
A draft implementing regulation published in May 2026 adds a second layer to that infrastructure. Beyond verifying embedded emissions, the CBAM now requires independent certification of the carbon price actually paid on those emissions, carried out by accredited entities under a new scope of accreditation. The mechanism is not only forcing emissions measurement into existence; it is building a parallel system to verify that carbon costs have been genuinely borne.
Whether Article 6 credits will be recognized as a valid CBAM deduction under the terms signaled in the draft implementing regulation, whether the 10% cap on international credits is sufficient to preserve the domestic carbon pricing incentive, and whether the verification ecosystem can close the gap between regulatory design and operational reality: these are governance choices, not technical ones. The CBAM’s lasting significance will be determined less by the price of its certificates than by the decisions taken in the implementing regulations and governance forums that are still being written.
