The European Union (EU) has taken a strong step in its fight against climate change with the creation of the Carbon Border Adjustment Mechanism (CBAM). This tool was created with the aim of aligning trade policies with the EU’s ambitious climate objectives, and to prevent the emission reductions achieved within its borders from being cancelled out by an increase in imports from countries with laxer environmental regulations.
For the past few years, the EU has led the world in efforts to reduce greenhouse gas (GHG) emissions by imposing strict regulations on its industrial sectors. However, this policy has also created a competitive disadvantage for European producers, who must bear high costs to meet these environmental standards.
In this situation, many companies may be tempted to relocate their production to third countries where environmental requirements are lower. This phenomenon, known as ‘carbon leakage’, not only threatens the European industry, but also compromises global efforts to mitigate climate change.
The CBAM is intended to act as a ‘climate equaliser’, requiring imported products to take on an equivalent cost of carbon as products manufactured within the EU already do.
How does the CBAM work?
The CBAM works on the basis of a simple but powerful principle: the polluter pays. This means that European importers of certain goods will have to declare the carbon emissions generated during the production of those goods in the country of origin. From 2026, they will also have to purchase so-called CBAM certificates, the price of which will be calculated based on the cost of carbon on the European Emissions Trading System (EU ETS).
This mechanism does not penalise specific countries but focuses on the implicit emissions of products. If a foreign producer can demonstrate that it has already paid a price for carbon in its country of origin, this amount will be deducted from the total required by the EU.
Products affected by the CBAM
In its initial phase, the CBAM will apply only to a set of products considered to be highly carbon-intensive and at high risk of leakage. These include:
- Cement
- Iron and steel
- Aluminium
- Electricity
- Hydrogen
- Nitrogen-based fertilizers
This list will gradually expand as the mechanism becomes more consolidated and its calculation and control methodologies are refined.
Implementation phases: Transitional and full application
1. Transitional phase (1st of October 2023 – 31st of Decembre 2025)
During this transitional period, importers will be required to comply with a quarterly reporting obligation, in which they must declare the direct and indirect emissions associated with their imports. However, they will not be obliged to make any payments or purchase certificates yet.
The aim of this stage is to serve as a learning period for all parties involved: companies, national authorities and European bodies. It will familiarise them with the processes, test the calculation methods and improve the traceability of emissions, thereby preparing the ground for the full implementation of the CBAM.
The first report, for the last quarter of 2023, had to be submitted by the 31st of January 2024, through the Transitional Registry of the European Commission: cbam.ec.europa.eu/declarant
2. Final phase (starts on the 1st of January 2026)
From 2026, importers will have to declare annually the quantity of imported goods and associated emissions and submit the corresponding number of CBAM certificates purchased. The first declaration will be in May 2027, for imports during 2026.
The price of these certificates will be linked to the value of ETS allowances, dynamically adjusting to the market. In addition, over the period 2026-2034, free allowance allocations for European producers will be phased out gradually to ensure fair competition between local and imported goods.
The fertilizer sector
One of the sectors directly affected by CBAM is the nitrogen fertiliser sector, which is key to agriculture. This category includes products such as ammonia, nitric acid and urea, all of them are essential for the formulation of nitrogen-containing fertilisers.
It is important to note that fertilisers containing phosphorus and/or potassium are excluded. However, some intermediate chemicals required for their production are also included.
Emissions to be reported
For the fertilizer sector, the main greenhouse gases that must be reported are:
- Carbon dioxide (CO₂): emitted in various chemical processes.
- Nitrous oxide (N₂O): generated particularly in the production of nitric acid, with a much higher warming potential than CO2.
Emissions should be calculated by production route, in other words, considering the technology used in each installation. This allows for a more accurate estimation of the environmental impact and better traceability of the reported data.
A tool to move towards climate neutrality
The CBAM is not just a trade measure. It is a strategic commitment by the EU to achieve a 55% net reduction in emissions by 2030 and to reach climate neutrality by 2050. The success of the mechanism will depend both on its successful implementation and on cooperation with international trading partners.
The implementation of the CBAM represents a significant step towards carbon neutrality in the European Union and is a major breakthrough in addressing the global climate crisis.
April 2025
Sun Chemicals Services Team
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