The European Union’s Carbon Border Adjustment Mechanism (CBAM) will enter its full operational phase on January 1, 2026, marking a major shift in global climate and trade policy. According to David Oxley, Chief Climate and Commodities Economist at Capital Economics, CBAM represents the EU’s attempt to extend its domestic carbon pricing rules to imported emissions — with far-reaching implications for producers, exporters, and governments worldwide.

Capital Economics ran through the key elements of the new regime, what’s changing in 2026, and why it matters in an Explainer on October 15.

1. What is the Carbon Border Adjustment Mechanism (CBAM)?

CBAM is effectively an import tariff on the carbon content of certain goods brought into the EU. As Oxley explains, it brings foreign emissions “under the umbrella of the EU’s domestic Emissions Trading Scheme (ETS),” targeting carbon-intensive goods like steel, aluminium, fertilisers, cement, and electricity.

Its core aim is to reduce carbon leakage — the outsourcing of emissions to countries with laxer climate policies — by ensuring that imported goods face the same carbon costs as those produced within the bloc.

In 2022, the EU “consumed” 27% more CO₂ than it “produced”, highlighting the significance of emissions embodied in imports.

2. Isn’t CBAM already in place?

Yes — but only in a transitional phase. Since October 2023, importers have had to report the carbon footprint of covered goods, but not pay for them.

From January 1, 2026, that changes. Importers will need to purchase and surrender CBAM certificates annually, in line with the emissions linked to their imports. The price of these certificates will mirror the market price of EU carbon permits at the time of purchase.

Importers will be free to buy, sell, or stockpile these certificates, just as EU companies do under the ETS.

3. Will CBAM help EU industry?

CBAM is designed to level the playing field, but Oxley notes the net effect is “not likely to brighten prospects for the EU’s industrial sector.” That’s because CBAM is being introduced alongside a phase-out of free carbon allowances for EU firms — effectively raising costs on both domestic and imported goods.

Despite this, the overall macroeconomic impact on inflation and GDP is expected to be modest, as the policy will be phased in gradually.

4. How could CBAM change trade flows?

Trade patterns could shift, but not dramatically. Exporters most affected by the CBAM may opt to absorb the additional cost by lowering prices, rather than lose market share. That would help preserve existing trade flows, at least in the short term.

Capital Economics has developed a CBAM Exposure Dashboard to assess which economies are most vulnerable.

5. Will CBAM lower global emissions?

In theory, yes. By raising the cost of emissions-intensive imports, CBAM could tilt market preferences toward greener alternatives and encourage foreign producers to decarbonise.

However, Oxley is sceptical about a large global impact, noting it may “mainly apply in the cases of countries already with close links to the EU.” Broader global emissions trends, he argues, will likely be shaped more by renewable energy deployment — particularly in China — than by CBAM.

6. Will CBAM evolve over time?

Almost certainly. The European Commission is already assessing ways to address evasion risks, such as firms relocating parts of their supply chains to countries not subject to CBAM.

If, as expected, EU carbon prices rise sharply later this decade, the cost of CBAM tariffs will also increase, potentially raising the stakes for exporters and policymakers alike.

7. What political risks does CBAM face?

While CBAM reflects the EU’s commitment to climate leadership, Oxley warns that “the pressure on officials to backslide on climate goals will increase over time,” especially as the economic trade-offs become more acute.

With the gradual end of free ETS allowances, the rollout of ETS2 for road transport, and a shrinking pool of carbon permits, public and political resistance to rising carbon costs may grow — complicating efforts to extend CBAM to more sectors.

Bottom line:
The launch of CBAM in 2026 marks a major milestone in EU climate policy, with implications for global trade, supply chains, and emissions strategies. As Oxley notes, while the policy may be “symbolically significant,” its real impact will depend on how markets, firms, and policymakers respond — both inside and outside the EU.