As soon as January 2026 arrived, firms importing carbon-heavy products into the EU entered a whole new economic paradigm, in which emissions went from mere reports to actual costs. The EU carbon pricing system will be applied to imports through CBAM, thus influencing global trade flows. (A similar system starts in the UK on 1 January 2027.)

The reasoning behind this mechanism is straightforward. If factories inside the EU are obliged to compensate for their carbon emissions when manufacturing their goods according to the EU Emissions Trading Scheme (ETS), other countries producing those products must face similar carbon expenses.

EU ETS is Europe’s carbon trading system. Within the EU ETS, large-scale industry players must purchase carbon allowances for each tonne of CO₂ emitted. As the availability of carbon credits becomes rarer each year, the price of carbon rises.

However, as companies begin to prepare for the cost aspect of the programme, many are finding that the biggest CBAM savings today do not necessarily come from switching to cleaner production. Instead, they come from replacing default emissions values with verified emissions data using EU-approved methodologies and independent verification. In practice, moving away from conservative default values can significantly reduce CBAM exposure even when verified emissions are not especially low.

In the early stages of CBAM implementation, carbon performance alone will not always determine competitive advantage. In many cases, it is the availability of verified carbon evidence that currently defines the cost difference.

Where CBAM costs are really coming from 
CBAM requires all EU importers to report the ‘embedded’ CO₂e emissions (ie the total amount of greenhouse gas emissions) associated with the imported goods. Importers must then compute the actual carbon cost based on the supplier’s reported product-specific emissions data. If no such product-specific emissions data is available, importers must instead apply the default emissions values specified by the European Commission.

To evaluate emissions, manufacturers determine the total amount of fuel and other direct inputs used during the manufacturing process, such as the fuel burned during production at a steel mill. These inputs are then converted into tonnes of CO₂ using EU-approved methodologies. The results are subsequently verified by an independent expert who is accredited under EU rules. This verification process can be expensive and may be difficult to obtain in many developing countries.

CBAM also requires emissions from key precursor materials to be included. This means upstream suppliers’ emissions must also be calculated and verified. If they are not, importers must apply default values for those inputs. Since these upstream processes can account for up to 80% of a product’s footprint, companies may still face significant exposure to default values even when their direct supplier’s emissions are verified.

These default values are in general very high and often represent the maximum possible emissions of the most polluting facility within a specific country/region. A highly efficient steel plant in, for example, India, Brazil or Turkey would be evaluated as if it was the least efficient plant in that region, due to the lack of formally verified emission data which meet EU standards.

Equity issues exist here as well. Developing economy suppliers that have decreased their emissions will likely see no decrease in their CBAM costs if they have not had their improvements officially recognised by the EU. The system rewards verified performance (not just ‘green’ performance). However, obtaining third-party verification requires time, expertise and financial resources, which can present practical challenges for some suppliers.

All these measures take time and resources. If there is no verified data, then EU importers shall use default values. Applying such values to carbon pricing will increase the price of carbon significantly, even if a manufacturing facility uses more advanced technology than others. Therefore, data about carbon emissions has become another aspect of pricing.

Why reducing emissions isn’t enough on its own 
Many people think that simply changing to a more environmentally friendly way of producing something will result in significantly reduced CBAM costs. However, the reality is far more complex.

CBAM for products like steel does not just calculate emissions in isolation. Rather it calculates the difference between a product’s emissions and a benchmark based on the lowest emissions associated with production within the EU.

However, there is a second, commonly overlooked, factor which affects this calculation. For many types of steel products, most of the emissions associated with the manufacturing process occur at the blast furnace stage; upstream of the final production process. Therefore, a producer of finished or semi-finished goods destined for export into the EU may have to rely upon the emissions data provided by its own suppliers; one or two stages back in the supply chain.

Unless these upstream emissions have been verified, then the importer will have to apply default values to those parts of the product’s footprint even if the direct supplier provides accurate numbers.

Many people think that simply changing to a more environmentally friendly way of producing something will result in significantly reduced CBAM costs. However, the reality is far more complex.

How importers can avoid unnecessary costs 
CBAM will now become an inherent part of the cost structure of each shipment into the EU, directly affecting the profitability of imports via the landed cost. Therefore, importers must be aware of the points at which they are vulnerable to default values and how any missing links could translate into financial risk. If there is no verification of emissions data, then the conservative value will be applied, which might result in increased prices on imported products.

It will be important to have more transparent and timely communication with suppliers, setting out expectations on how they will track and calculate their emissions based on third-party verifications. Making assumptions on emissions data without supporting documentation will probably result in unpleasant surprises once the true cost of CBAM becomes evident.

Importers will have to go past the immediate suppliers and capture the emissions data throughout the supply chain, which includes even the raw material suppliers, since missing data higher in the chain may result in applying default values.

As we transition into the cost phase of the CBAM policy, companies that have been able to calculate their own emissions will become better competitors in the new trade environment.

The views and opinions expressed in this article are strictly those of the author only and are not necessarily given or endorsed by or on behalf of the Energy Institute.

• Further reading: ‘The carbon border shift – UK industries will need to brace for CBAM compliance’. UK business leaders need to start building a carbon strategy to ensure CBAM compliance and remain competitive, writes Lili Strege, Carbon Analyst at CFP Energy. 
• ‘EU sets binding 90% emissions reduction target for 2040’. The EU has agreed on a binding target to cut greenhouse gas emissions by 90% from 1990 levels by 2040, while expanding how member states can use carbon credits.