As the European Union’s Carbon Border Adjustment Mechanism (CBAM) transitions from reporting obligations to financial enforcement, the question of who bears the cost – and at what magnitude – is reshaping global trade. 

From January 2026, the mechanism will impose carbon levies on imports of steel, aluminium, cement, fertilisers, hydrogen, and electricity, with projections suggesting revenues exceeding $80 billion annually by 2040; yet these costs are not distributed evenly.

The CBAM could well be Europe’s most ambitious attempt to reconcile climate policy with industrial competitiveness, addressing the risk that stringent domestic emissions regulations might simply export pollution to jurisdictions with more lax standards. By pricing carbon embedded in imports at the same rate applied to European producers under the EU Emissions Trading System (ETS), the mechanism aims to eliminate the competitive advantage of high-carbon goods whilst incentivising global decarbonisation. 

By the 2030s, CBAM will compel businesses to make a critical decision: invest in decarbonisation or risk losing access to the EU market. But this attempt to level the playing field could inadvertently produce an uneven terrain in terms of geographical distribution.

Who will pay?

The burden of CBAM compliance will fall overwhelmingly on a concentrated group of trading partners. Russia, China, Turkey, India, and Ukraine are projected to account for more than 50% of total CBAM certificate demand by 2030, based on current trade flows. Turkey, China, and India export substantial volumes of steel and aluminium to the EU, with Turkey alone sending more than 60% of its aluminium exports and a third of its steel exports to European markets.

The impact varies considerably by sector and geography. For India, iron and steel represented 78% of CBAM exports to the EU in 2023, valued at over €5 billion, whilst aluminium accounted for a further €1.4 billion. The country’s reliance on the European market – with 25% of its iron and steel exports destined for the EU – makes it particularly vulnerable to CBAM’s cost implications. 

By contrast, whilst China faces the highest absolute CBAM costs, its relative exposure is cushioned by the fact that only 9% of its iron and steel and 12% of its aluminium exports go to Europe, with most shipments directed toward Southeast Asia.

Despite modest exports in absolute terms, lower-income countries such as Mozambique, Zimbabwe, and Cameroon face disproportionate exposure relative to their economic size. Mozambique, which sends more than half its CBAM-covered aluminium to the EU, sees these exports account for 7% of its GDP. For such economies, the mechanism risks imposing undue costs that could impede development trajectories absent compensatory support from Brussels.

At home, European importers bear the immediate responsibility for purchasing and surrendering CBAM certificates, though these costs are likely to flow back through supply chains. EU businesses must prepare for the phasing out of free emissions allowances; this gradual transition means domestic producers will face escalating carbon costs in parallel with the ratcheting up of border levies.

How much?

The scale of CBAM’s financial impact will be determined by two variables: the volume of carbon-intensive imports and the price of emissions allowances under the EU ETS. Current estimates suggest revenues of €1.5 billion annually once the mechanism becomes operational in 2026, rising to approximately €9 billion by 2030 across all targeted sectors. By the end of the free allocation phase-out in 2034, that figure could climb substantially, with some projections exceeding $80 billion per annum by 2040.

These revenue forecasts rest heavily on assumptions about carbon prices. The EU ETS price is expected to remain relatively stable at around €70-75 per tonne of CO₂ by 2030, with mitigation efforts supported by complementary policies. 

Beyond that point, however, prices are projected to surge. Analysts anticipate carbon prices reaching approximately €130 per tonne by 2040, driven by an increasingly stringent decarbonisation context as the emissions cap approaches zero.

For individual products, Wood Mackenzie estimates that by 2034, CBAM fees could increase the delivered cost of steel to the EU by approximately 56% for Indian producers and 49% for Chinese exporters, assuming both domestic carbon costs and CBAM charges. For hot-rolled coil imported from India, CBAM certificate costs could reach 80% of product value by 2030; the same product from the United States would incur costs of just 6%.

Recent legislative updates have attempted to moderate the compliance burden. The introduction of a de minimis threshold – exempting businesses importing below 50 tonnes of material annually – removes approximately 180,000 enterprises from reporting requirements whilst still capturing 99% of embedded emissions. Simplifications to emissions calculations and the extension of reporting deadlines to August 2026 provide additional relief.

When?

The CBAM timeline unfolds in deliberate stages, each ratcheting up the financial consequences. The transitional phase, which began in October 2023, imposed quarterly reporting obligations without financial penalties – a period designed to test compliance infrastructure and gather emissions data. This grace period ends on 1 January 2026, when the definitive regime begins and importers must start purchasing certificates.

The financial obligations commence in earnest from February 2027, when CBAM certificates become available for purchase. Importers will be required to surrender certificates corresponding to the embedded emissions of goods imported during 2026, with pricing based on the quarterly average closing price of EU ETS allowances during the relevant import period. This retrospective calculation creates some uncertainty, as businesses must purchase certificates before the final verified emissions data becomes available.

The initial years feature a partial shield for producers as the free allocations under the EU ETS decline gradually, aligned to benchmark adjustments with the phase-in of the EU CBAM costs: 

• 2.5% in 2026
• 5% in 2027
• 10% in 2028
• Accelerating to 22.5% in 2029 and 48.5% in 2030 

The free allocation phase-out intensifies through the early 2030s – 61% in 2031, 73.5% in 2032, 86% in 2033 – culminating in complete removal by 2034. This nine-year transition cushions the shock for European industry whilst gradually equalising costs between domestic and imported goods.

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Looking further ahead, the pathway to 2050 remains somewhat nebulous. The EU’s objective of climate neutrality by mid-century implies that CBAM will persist as a structural feature of the trading system, though its design may require modification. Current ETS market architecture is projected to reach its limits in the 2040s, necessitating reforms to accommodate very low emissions environments and potential negative emissions technologies. Whether CBAM continues as a border mechanism or evolves into a different instrument once emissions approach net zero remains an open question for policymakers.

The price of CBAM, ultimately, is not merely financial. It represents a wager that trade policy can be harnessed to climate objectives without fracturing the global economic order. As the mechanism unfolds through the decades ahead, its success will be measured not only in revenues collected or emissions avoided, but in whether it catalyses a genuine international shift toward low-carbon production – or simply redistributes pollution to markets beyond Europe’s regulatory reach.

For more information, register to join the CarbonChain webinar ‘CBAM in 2026: Who Will Pay and How Much?’ here!