Unpacking CBAM: the ‘carbon tax’

The EU CBAM applies to six industries at present: cement, iron and steel, aluminium, fertilisers, electricity and hydrogen. However, the EU has made clear that it is prepared to expand coverage to other sectors in the future, with a proposal already in place to extend the CBAM’s parameters to include downstream products such as car parts, washing machines, and refrigerators. This addition was put forward in December 2025, a few weeks before the scheme’s full introduction, and was referred to the relevant parliamentary committee in February 2026. If approved, these additions would come into effect on 1 January 2028.

The CBAM is a key component of the EU’s sustainability planning, forming part of its efforts to decarbonise. Having concurrently watered down its commitments to phase out internal combustion engine vehicles by 2035, the EU’s CBAM - and its proposed expansion - steps in as a climate policy tool targeting carbon-intensive supply chains and industries, including automotives.

What does this mean for businesses?

Importers affected by the legislation must apply for CBAM authorisation by 31 March 2026. The purchase of CBAM certificates and the submission of annual declarations and associated payments are scheduled to begin in 2027. Electricity and hydrogen imports are subject to CBAM at all volumes, while for the other listed products, importers must determine whether quantities exceed the 50-tonne annual threshold.

Whilst the primary financial burden lies with importers, suppliers exporting their products to EU countries will also be affected by the CBAM. With the aim to level domestic producers and cheaper carbon-intensive imports, the EU hopes that carbon-intensive suppliers will lose any price competitiveness and encourage the development of lower-carbon alternatives. 

We spoke to a UK-based agricultural products supplier who told us that the EU’s CBAM will likely affect the UK market even before the country’s own CBAM comes into effect:

“Large cargoes of Urea Ammonium Nitrate (UAN) are often shipped from the Caribbean to deep-water ports in mainland Europe, before being trans-shipped onto smaller vessels destined for the UK. As soon as the fertiliser first enters the EU, it becomes subject to CBAM, potentially creating additional cost pressures for UK supply chains.”

Those further down in the supply chain are likely to see the knock-on effect of price increases. That said, regarding the UK’s agricultural sector, the same source explained:

“Nitrogen fertilisers produced within Europe are not subject to CBAM, and these products currently make up a significant proportion of the UK supply market.”

In order to remain compliant and aligned with the developing legislation, businesses must consider:

• ESG horizon scanning - Companies should take a long-term view of the operational challenges posed by CBAM, particularly as other jurisdictions consider similar carbon border measures. Ongoing regulatory horizon scanning will help businesses anticipate supply-chain impacts and make proactive adjustments.
• Deepening supply chain visibility - As CBAM permits discounts where emissions have already been priced elsewhere, businesses should map each stage of their supply chain to understand a product’s exposure to EU and other carbon tariffs.

Navigating risks such as circumvention attempts by suppliers will be imperative. We explore the example of shell factories used to relabel goods’ country of origin to avoid different tariffs in a separate article.    

Consequences for non-compliance and / or circumvention of emissions reporting have become more severe, from widespread reputational damage to hefty fines, as shown by a number of high profile cases in recent years. In this context, assessing concerns with upstream partners and representatives will help businesses limit exposure to reputational, regulatory and legal risks, as well as operational delays, when importing carbon-intensive products. 

The EU’s regulatory shift toward supply chain transparency, including the CBAM, Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD) all place greater requirements on companies to evaluate environmental and human rights risks across their value chains.   

At Risk Advisory, we have more than 20 years experience of navigating changing legislation in Europe. We have mapped complex supply chains to identify risks associated with suppliers, and conducted forward-looking ESG investigative work to help clients evaluate and mitigate risk.