CBAM and the EU Emissions Trading System (ETS) are two sides of the same policy coin. Understanding how they interact is essential for importers managing their carbon cost exposure — because the relationship between them directly determines how much CBAM will cost you, now and in the future.
CBAM is the EU’s mechanism for extending the EU ETS carbon price to imported goods. The EU ETS puts a carbon cost on EU manufacturers; CBAM puts an equivalent cost on importers. As free ETS allowances for EU producers are phased out (2026–2034), CBAM certificate obligations will increase proportionally. By 2034, CBAM will fully mirror the ETS carbon price with no free allowance offset, creating complete carbon cost parity between EU and imported goods.
Key Takeaways
- CBAM exists to prevent carbon leakage — production shifting to countries without carbon pricing
- CBAM certificate prices track the EU ETS allowance price weekly, creating direct cost linkage
- Free ETS allowances for EU producers are being phased out between 2026 and 2034
- As free allowances decrease, CBAM obligations increase proportionally — meaning costs escalate every year even if the ETS price stays flat
- By 2034, imported goods will face the full EU ETS carbon price through CBAM, making accurate emissions data and strategic planning essential
The Carbon Leakage Problem
The EU ETS has been the cornerstone of EU climate policy since 2005. It works by capping total emissions from covered industries and requiring companies to hold allowances for each tonne of CO2 they emit.
The problem: if EU manufacturers face a carbon cost that their non-EU competitors don’t, production may shift to countries with weaker climate policies. This is carbon leakage — and it’s bad for two reasons:
- Economic harm — EU manufacturers lose competitiveness, leading to job losses and industrial decline
- Climate ineffectiveness — global emissions don’t decrease; they just move elsewhere
For decades, the EU addressed carbon leakage by giving free ETS allowances to exposed industries (steel, cement, aluminium, etc.). This shielded them from the full carbon cost but created a different problem: it weakened the price signal that was supposed to drive decarbonisation.
How CBAM Changes the Equation
CBAM provides a fundamentally different solution to carbon leakage:
Instead of shielding EU producers from carbon costs (free allowances), CBAM extends the carbon cost to imports. This maintains a level playing field while preserving the full price signal for both EU and non-EU producers.
The transition is happening on a defined schedule:
| Year | Free ETS Allowances | CBAM Adjustment |
|---|---|---|
| 2025 | Full free allocation | No CBAM cost (transitional reporting only) |
| 2026 | 97.5% free allocation (2.5% phase-out begins) | CBAM certificates required (adjusted for remaining free allowances) |
| 2027–2033 | Progressive reduction | CBAM obligations increase proportionally |
| 2034 | Zero free allowances | Full CBAM cost — complete parity |
This schedule looks straightforward on paper. In practice, managing the transition requires constant recalculation of your obligations as the free allowance factor changes annually, the ETS price fluctuates weekly, and embedded emissions data from your suppliers must be verified and updated. The interaction between these variables means that small changes in any one input can significantly alter your total exposure — making accurate cost modelling a specialist exercise rather than a spreadsheet task. If you’re trying to forecast your exposure over the phase-out period, we can help you model it.
The Pricing Linkage
CBAM certificate prices are derived directly from EU ETS auction prices on a weekly cycle, ensuring that imported goods face the same carbon cost per tonne of CO2 as goods produced within the EU. This direct linkage means your CBAM costs are exposed to ETS price volatility — a variable that is difficult to forecast and impossible to control.
Unlike ETS allowances, CBAM certificates are non-transferable and cannot be traded or hedged on carbon markets. This limits the financial instruments available for managing your carbon cost exposure and makes the timing and strategy of certificate purchases a specialist discipline in its own right. Getting certificate procurement wrong — buying too early, too late, or in the wrong quantities — has direct financial consequences that compound over the phase-out period.
What This Means for Importers
Escalating Costs Through 2034
Even if the EU ETS carbon price stays flat, your CBAM costs will increase every year as the free allowance phase-out progresses. The “CBAM adjustment factor” — which reduces your certificate obligation to account for remaining free allowances — decreases annually.
For businesses importing steel, cement, aluminium, and other covered goods, the cost trajectory through 2034 is significant. But quantifying your specific exposure depends on variables that interact in complex ways: the embedded emissions intensity of your specific suppliers, the ETS price at the time of surrender, the applicable free allowance factor for that year, and any carbon price paid in the country of origin that can be deducted.
ETS Price Volatility
Your CBAM costs move with the ETS carbon price. If the ETS price rises from current levels, your certificate costs increase proportionally — on top of the free allowance phase-out. Carbon price forecasts vary widely, and scenario planning across multiple price trajectories is essential for robust financial planning.
The Data Challenge
The single biggest factor in determining your CBAM costs is the embedded emissions figure for your imported goods. Reliance on default values — which are set conservatively above typical production emissions — will likely mean paying significantly more than you need to as the definitive period progresses.
But obtaining accurate, verified emissions data from non-EU suppliers is one of the most technically demanding aspects of CBAM compliance. It requires navigating complex calculation methodologies, verification standards, and installation-level data requirements that most non-EU suppliers are unfamiliar with. The gap between what the regulation requires and what most suppliers can currently provide is substantial — and bridging it requires specialist expertise in both the regulatory framework and supplier engagement. Our team works with importers to run supplier data programmes that replace costly default values with verified actuals — talk to us if this is a challenge you’re facing.
Strategic Implications
The 2026-2034 phase-out creates an eight-year window in which importers’ decisions will have compounding consequences. Supplier data quality, supply chain composition, carbon price assumptions, and compliance infrastructure all interact in ways that make the difference between CBAM being a managed cost and an escalating liability.
The challenge is that optimising across these dimensions simultaneously requires specialist modelling capability. Each variable affects the others — a supplier change alters your emissions profile, which changes your certificate requirements, which interacts with the ETS price trajectory and the free allowance phase-out schedule. Businesses that approach this piecemeal consistently underestimate their exposure. Talk to our team to build a CBAM cost strategy that accounts for all of these variables together.
For EU Producers: The Other Side
While this article focuses on importers, EU producers under the ETS also need to understand the transition:
- Declining free allowances mean EU producers face higher net ETS costs year on year
- CBAM protection partially offsets this by ensuring imports face equivalent costs — but only for covered goods
- Competitiveness depends on emissions intensity — the most efficient EU producers benefit most from CBAM, while high-emission producers face rising costs from both declining free allowances and market pressure
Why the CBAM-ETS Relationship Demands Expert Guidance
The interaction between CBAM and the ETS creates a regulatory and financial environment where cost modelling, compliance obligations, supplier engagement, and strategic sourcing decisions are all deeply interconnected. Each element operates on a different timescale — ETS prices move weekly, free allowance factors change annually, and supplier emissions data requires ongoing verification cycles.
The consequence of this complexity is that getting any single element wrong cascades into the others. A cost modelling error leads to a certificate shortfall. A supplier data gap triggers default value pricing. A missed compliance deadline invites enforcement scrutiny. The businesses that manage the CBAM-ETS transition successfully are those that treat it as an integrated programme requiring specialist oversight — not a series of isolated compliance tasks.
Getting any of these elements wrong has direct financial consequences — and the costs of non-compliance under the definitive period are substantial.
How Clearscope Helps
We help importers understand and manage the CBAM-ETS relationship through our CBAM compliance services:
- Cost trajectory modelling — we build bespoke models projecting your CBAM costs through the 2034 phase-out under multiple ETS price scenarios, so you can plan with confidence rather than guesswork
- Supplier data programmes — we design and manage the process of obtaining verified embedded emissions data from your non-EU suppliers, replacing costly default values with actual data
- Compliance management — we handle registration, certificate management, quarterly reporting, and annual declarations, ensuring you meet every deadline and requirement
- Strategic sourcing analysis — we quantify the CBAM cost implications of your supply chain options, helping you make informed decisions about where and from whom you source covered goods
- Ongoing monitoring — as the ETS price moves and the free allowance factor changes, we update your cost projections and compliance position so you are never caught off guard
The CBAM-ETS transition is not a one-time compliance exercise — it is an evolving obligation that will affect your cost base for the next decade. We help you manage it as a strategic business issue, not just a regulatory one.
Contact us to model your CBAM cost trajectory and build a compliance strategy.
Frequently Asked Questions
Are CBAM certificates the same as EU ETS allowances?
No. ETS allowances can be traded and hedged on carbon markets; CBAM certificates are non-transferable and can only be purchased through the CBAM registry. However, they are priced identically — CBAM certificate prices are derived directly from weekly ETS auction prices.
Why are free ETS allowances being phased out?
With CBAM now handling carbon leakage through border adjustment, free allowances are no longer needed. The phase-out is gradual (2026-2034) but the trajectory is fixed — and the cost implications for importers escalate significantly each year.
Will CBAM make imported goods more expensive than EU goods?
No — CBAM aims for carbon cost parity, not protection. Imported goods face the same carbon cost per tonne of CO2 as EU-produced goods. But achieving this parity requires accurate emissions data — without it, importers pay default rates that are typically higher than necessary.
How does CBAM interact with carbon prices in non-EU countries?
Importers can deduct carbon prices paid in the country of origin from their CBAM obligations, preventing double-counting. However, documenting and claiming these deductions requires verified evidence that meets specific EU requirements — the process is technically demanding and often requires specialist support.
Can I manage CBAM compliance without specialist support?
The interaction between ETS pricing, phase-out schedules, supplier emissions data, foreign carbon price deductions, and evolving regulations creates a level of complexity that most businesses underestimate. Specialist support typically reduces both compliance risk and overall cost — particularly by replacing expensive default values with verified supplier data.