CBAM: Integrating carbon requirements into EU trade agreements

The European Union is actively reshaping its trade policy by building ambitious climate objectives into new Free Trade Agreements (FTAs). This strategic step is a direct response to the introduction of the Carbon Border Adjustment Mechanism (CBAM), which is designed to ensure fair pricing of carbon emissions for imported goods and to level the playing field between European producers, who pay for their emissions under the EU Emissions Trading System (EU ETS), and importers from third countries.

CBAM is a key element of the EU's "Fit for 55" package and requires companies importing carbon-intensive goods into the EU to purchase CBAM certificates. These certificates cover the difference between the carbon price paid in the country of origin and the price of EU ETS allowances. The mechanism covers sectors such as steel, iron, aluminium, cement, fertilisers, electricity and hydrogen. On 1 January 2026, CBAM entered its regulatory phase after the transitional period that ended on 31 December 2025.^[2] Building carbon requirements into trade agreements reflects the EU's ambition not only to decarbonise its own economy but also to encourage similar processes globally.

How does CBAM affect the EU's trade relations?

CBAM is changing the paradigm of the EU's trade relations, making climate policy an integral part of international economic arrangements. The mechanism aims to prevent "carbon leakage", where production moves from countries with strict climate rules to countries with less stringent ones, leading to higher global emissions. With CBAM, goods imported from third countries, which until now could enter the EU market without comparable CO₂ costs, face requirements to compensate for their carbon emissions. This creates a level playing field for European and foreign producers and encourages decarbonisation worldwide.

CBAM certificates are the mechanism's main instrument. They must be purchased and surrendered for a certain share of the CO₂ emissions embedded in imported goods, to align imports with goods produced in Europe that are covered by the European emissions trading system. This encourages the EU's trading partners to introduce their own carbon pricing mechanisms or to invest in green technologies to reduce emissions. In response, some countries, such as the United Kingdom, already plan to introduce their own CBAM system from 1 January 2027, including mandatory registration for imports above £50,000. This points to a global domino effect triggered by EU policy.

Which environmental provisions are being built into new FTAs?

The EU's new Free Trade Agreements (FTAs) increasingly include extended environmental provisions that go beyond traditional trade barriers. These provisions not only reflect the EU's commitment to tackling climate change but also set new standards for global trade. At their core is the requirement for transparency and reporting on carbon emissions: companies importing goods into the EU must report the CO₂ emissions embedded in their products and later purchase the corresponding CBAM certificates.

Beyond the CBAM mechanism itself, the EU is actively promoting the integration of the following aspects:

• Sustainable resource management: commitments on the rational use of natural resources and the protection of biodiversity.
• National carbon pricing systems: the EU encourages trading partners to create their own mechanisms, which may be recognised as equivalent to the EU ETS and reduce CBAM liabilities.
• Green technologies and innovation: agreements may include provisions on cooperation in developing and deploying clean technologies.
• Monitoring and verification: stronger control and independent verification of emissions data, which are critical to how CBAM works.
• Preventing "carbon leakage": shared responsibility for avoiding the relocation of carbon-intensive production to jurisdictions with less stringent environmental standards.

These environmental provisions are aimed not only at achieving climate goals but also serve as an instrument to ensure the competitiveness of European industry and to encourage global decarbonisation.

What challenges do the EU's trading partners face?

The EU's trading partners face significant challenges in adapting to the new environmental requirements built into FTAs and CBAM. One of the main challenges is the need to collect and report accurate data on the CO₂ emissions embedded in products. For many companies outside the EU, this requires significant investment in monitoring, reporting and verification (MRV) systems. The process remains complex, especially for small and medium-sized enterprises.

A second significant challenge is the financial burden of purchasing CBAM certificates. The certificate price is linked to the price of EU ETS allowances, which can significantly increase the cost of imported products. This puts pressure on companies, forcing them either to invest in decarbonising production or to pass the additional costs on to consumers, especially in carbon-intensive sectors such as steel, cement and fertilisers.

There is also a risk of administrative burden. Some critics already call CBAM a "bureaucratic monster",^[7] although the reforms aim to free 91% of companies from excessive red tape.^[6] For EU importers who are registered CBAM declarants, the obligation still arises: it is measured by the verified embedded emissions of the imported goods. Another aspect is the potential extension of CBAM to new product categories such as machinery, car parts and household appliances.^[9]

What role does international cooperation play in decarbonisation?

International cooperation plays a decisive role in the successful implementation of CBAM and the broader goals of industrial decarbonisation. The EU recognises that unilateral action, while necessary, cannot fully solve the problem of global emissions. Free Trade Agreements (FTAs) are therefore becoming a platform for sharing experience, technologies and best practices in reducing carbon emissions.

The EU actively encourages trading partners to introduce their own carbon pricing systems. If an exporting country has a domestic carbon pricing mechanism that the EU recognises as equivalent to the EU ETS, some or all CBAM liabilities may be reduced. This creates a strong incentive for partner countries to develop and implement effective climate policies.

Creating transparent and mutually recognised reporting and verification mechanisms is key to avoiding trade disputes and ensuring CBAM is fair. Without close cooperation between countries, the risk of "carbon leakage" and fragmentation of the global carbon market will remain significant.

Building carbon requirements into EU trade agreements is a strategic step that is reshaping the global trade architecture. CBAM acts as a catalyst for these changes, forcing the EU's trading partners to adapt to new environmental standards. In the long term, this EU policy may lead to a more sustainable and environmentally responsible global economy in which carbon costs are taken into account at every stage of the production chain.

Sources

• [1] CBAM: Warum der „Zoll auf CO₂" Lieferketten, Einkauf und den EU-Emissionshandel neu ordnet
• [2] DEHSt — CBAM Certificates (definitive regime 2026)
• [3] Konsultation zum CO2-Grenzausgleichsmechanismus (CBAM)
• [4] DEHSt — Carbon border adjustment mechanism (CBAM)
• [5] CBAM-Regelphase: Wie es nach der Zulassung weitergeht — PwC Deutschland
• [6] CBAM-Reform: 91 Prozent der Unternehmen von Bürokratie befreit
• [7] Der neueste EU-Klimaschutz-Versuch schafft ein Bürokratie-Monster
• [8] SAP stellt durchgängige Lösung für berichtspflichtige CBAM-Anmelder vor
• [9] CO2-Grenzausgleich: EU erweitert CBAM auf 180 weitere Produkte