European importers of steel, aluminium, fertilisers and other covered goods must establish whether carbon costs incurred in producing countries qualify for deductions under the EU Carbon Border Adjustment Mechanism (CBAM). The financial treatment depends not simply on the existence of a foreign carbon tax or emissions trading system, but on the carbon price effectively paid for the embedded emissions associated with imported products.
Article 9 of the EU CBAM Regulation allows authorised declarants to reduce their certificate obligations where qualifying carbon prices have effectively been paid in a third country. The framework links this relief to goods whose embedded emissions are determined using actual emissions data, alongside the applicable requirements for documenting eligible carbon payments.
Importers must also account for rebates, compensation and other arrangements that reduce the effective carbon price. Supporting documentation must include evidence of payment and independent certification meeting the relevant requirements.
Domestic carbon pricing does not automatically qualify for relief
The distinction is commercially significant for trade with countries operating domestic carbon pricing systems. Türkiye, China, Kazakhstan and South Africa, among other industrial economies, are implementing or developing carbon taxes and emissions trading arrangements.
However, the existence of a national carbon pricing mechanism does not automatically reduce an importer’s EU CBAM liability. The relevant consideration is the carbon cost actually borne in relation to the embedded emissions of the imported goods, subject to the applicable EU requirements.
A manufacturer receiving substantial free emissions allowances, for example, may incur a lower effective carbon cost than the headline price quoted in its domestic carbon market suggests. Rebates and compensation schemes can similarly reduce the amount an EU importer may be entitled to recognise.
Consequently, importers need to distinguish between a published national carbon price and the qualifying cost attributable to the production of the goods they purchase.
Supplier-level evidence complicates cross-border accounting
Companies importing steel, aluminium or fertilisers from multiple suppliers face a detailed accounting task. They must establish the origin of the goods, determine the associated production emissions, identify eligible carbon payments and demonstrate the connection between those payments and the imported products.
The process becomes more complex when manufacturing involves precursor materials sourced from multiple installations or countries. In such supply chains, importers need sufficiently detailed records to connect production emissions and qualifying carbon costs with the relevant goods.
The requirements place greater importance on coordination between suppliers, producers, emissions verifiers and authorised EU declarants. General information about a country’s carbon tax or the environmental performance of a manufacturer may not, by itself, establish eligibility for a reduction.
Standardised carbon price references could support future calculations
EU rules also provide for the potential development of standardised third-country carbon price references from 2027, subject to European Commission decisions and the applicable methodology.
Such references could simplify certain calculations by providing standardised information on foreign carbon pricing. However, a reference value would not necessarily represent the actual carbon payment made by every individual installation.
The European Commission’s implementing work has examined issues including verification procedures, proof of payment, currency conversion and the qualifications required of independent certifiers. These elements are relevant to establishing whether claimed foreign carbon costs satisfy the conditions for recognition under the EU framework.
Foreign carbon costs become relevant to industrial credit assessments
For banks financing industrial exporters, the effective carbon payments associated with production may become an additional consideration in assessing credit exposure. Companies with similar production costs and emissions intensity could face different conditions in the European market because of differences in domestic carbon pricing arrangements and the documentation available to importers.
Suppliers able to demonstrate actual emissions and eligible carbon payments may therefore be better positioned in commercial negotiations than competitors providing only general environmental certificates or headline national carbon price information.
The central requirement is an auditable link between the production installation, embedded emissions, carbon price effectively paid and EU authorised declarant claiming the reduction. Establishing that connection is essential to determining whether foreign carbon payments can be recognised in CBAM certificate calculations.
