Carbon Border Adjustment Mechanism (CBAM)

The Carbon Border Adjustment Mechanism (CBAM) is a regulatory instrument of the European Union designed to put a price on greenhouse gas emissions embedded in certain goods imported into the Union's customs territory. Established by Regulation (EU) 2023/956, it complements the EU Emissions Trading System (EU ETS) by requiring importers to comply with rules equivalent to those binding on European producers^[1]. Its purpose is to prevent the risk of carbon leakage — the relocation of production to countries with less stringent climate requirements — whilst creating incentives for decarbonisation in third countries. Fertilisers are among the first sectors covered, alongside cement, aluminium, electricity, hydrogen, and steel.

Operation and reporting obligations

CBAM rests on a requirement for authorised importers to declare and surrender certificates. Before 31 May each year, these declarants must submit a CBAM declaration through a central registry for the preceding calendar year, the first deadline falling in 2027 for 2026 imports^[2]. The declaration covers the total quantity of each type of good imported, the embedded emissions expressed in tonnes of CO₂ equivalent per tonne of product, and the number of CBAM certificates to be surrendered after accounting for any carbon price paid in the country of origin and the adjustment linked to free allocation of allowances in the EU^[2]. Embedded emissions must be calculated in accordance with methods laid down in the regulation and verified by an accredited verifier^[1].

Certificates and adjustments

CBAM certificates are sold to declarants by Member States through a common central platform, managed by the European Commission, at a price reflecting that of EU ETS allowances^[3]. The declarant may reduce the number of certificates to be surrendered by demonstrating a carbon price effectively paid in the third country of origin, less any rebates or compensations granted in that country^[4]. This reduction may also be claimed by reference to annual default values by third country, where these can be determined^[5]. Supporting documents must be retained for four years after the declaration year and certified by an independent person^[5].

Transitional phase and progressive implementation

A transitional period without financial adjustment opened on 1 October 2023 and ends on 1 January 2026^[1]. During this phase, importers were required to submit quarterly reports on embedded emissions, the last report covering the fourth quarter of 2025 to be submitted before 31 January 2026^[6]. From 2026, the financial mechanism takes effect on a gradually increasing basis, in parallel with the progressive reduction of free EU ETS allowance allocations to European producers^[6][2]. For ammonia, free allocations still represent 97.5% in 2026, then decline progressively to 0% by 2034^[7]. Product benchmarks for ammonia and nitric acid are set based on the 10% most efficient installations in the Union^[7].

Recent simplifications

An amending regulation introduces several simplifications. It lowers the minimum rate of certificates that the declarant must hold at the end of each quarter relative to embedded emissions since the start of the calendar year from 80% to 50%^[1]. It aligns the system boundaries of certain finishing processes in aluminium and steel with those of the EU ETS, excluding emissions from these steps when carried out by installations not covered by the trading system, outside integrated sites^[1]. Declarants may now rely on information from their declaration of the previous year for the same products and same third countries^[1].

Implications for the fertiliser sector

CBAM directly covers nitrogenous fertilisers (prilled urea, ammonium nitrates, UAN solutions), NPK fertilisers, and nitrophosphates, whose embedded emissions include carbon dioxide and nitrous oxide^[8]. Ammonia, the central precursor of these fertilisers, is particularly targeted owing to the carbon intensity of its production via the Haber-Bosch process. The adjustment seeks to restore competitive parity between ammonia produced in Europe, subject to ETS costs, and imports from regions without equivalent carbon pricing. This regulatory development strengthens interest in green and blue ammonia projects.