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IndonesiaWhat if exporting to the European Union (EU) meant paying not only for shipping and customs, but also for the carbon emissions generated during manufacturing? That’s exactly what the CBAM (Carbon Border Adjustment Mechanism) aims to address.
Introduced by the EU, CBAM is a new policy that places a carbon price on certain imported goods, ensuring overseas manufacturers are held to similar environmental standards as businesses within the EU.
So, what exactly is CBAM, and why should Malaysian exporters care? Does it apply to your products? Will it affect your export costs or customs process?
In this guide, we’ll answer these questions by covering everything you need to know about CBAM.
Contents
What Is CBAM (Carbon Border Adjustment Mechanism)?
CBAM (Carbon Border Adjustment Mechanism) is a carbon pricing system introduced by the European Union (EU). Under CBAM, certain imported goods are subject to a carbon cost based on the greenhouse gas emissions generated during their production. It aims to reduce carbon emissions and promote fair competition between EU manufacturers and overseas exporters.
CBAM is designed to prevent carbon leakage, where companies shift production to countries with less stringent environmental regulations to avoid carbon costs. By ensuring imported products face similar carbon pricing as goods produced within the EU, it encourages cleaner manufacturing practices worldwide.
Why Was CBAM Introduced by the EU?
The CBAM was introduced by the EU mainly to tackle climate change and prevent unfair competition caused by different carbon pricing rules across countries. Here are the key reasons why it was introduced:
To Prevent Carbon Leakage
CBAM was introduced to prevent “carbon leakage.” This happens when companies move their production to countries with weaker environmental rules to avoid strict carbon costs in the EU. By applying a carbon cost to imports, CBAM ensures that emissions are not simply shifted outside the EU.
To Support the EU Green Deal and Climate Goals
The EU introduced CBAM as part of its broader Green Deal strategy, which aims to achieve climate neutrality by 2050. It ensures that imported goods also reflect their carbon emissions, helping the EU reduce global emissions rather than only domestic ones.
To Ensure Fair Competition
CBAM was designed to create fair competition between EU-based producers and foreign exporters. Without it, EU companies that pay for carbon emissions would face higher production costs, while non-EU competitors could sell cheaper products without similar environmental charges.
To Encourage Cleaner Global Production
CBAM encourages manufacturers outside the EU to adopt cleaner and more sustainable production methods. Since exporters will need to account for carbon costs when selling to the EU market, they are motivated to reduce their emissions.
To Strengthen the EU Carbon Pricing System
The EU already operates a carbon pricing system known as the EU Emissions Trading System (EU ETS). CBAM extends this system to imported goods, ensuring that carbon costs are applied consistently to both domestic production and imports.
CBAM Products List: What’s Included?
The CBAM applies to a selected group of carbon-intensive products imported into the EU. These products are targeted because their production generates high levels of greenhouse gas emissions and poses a higher risk of carbon leakage.
Iron and Steel
CBAM covers iron and steel products, including raw materials and semi-finished goods used in construction, automotive, and manufacturing industries. These are among the most carbon-intensive industrial materials.
Aluminium
Aluminium products such as sheets, profiles, and semi-finished components are included under CBAM due to the high energy consumption required during smelting and processing.
Cement
Cement, including clinker and related materials, is affected by CBAM because its production involves significant carbon emissions from both fuel use and chemical processes.
Fertilizers
Nitrogen-based fertilizers are included as they generate substantial emissions during production, particularly from ammonia and nitric acid manufacturing.
Electricity
Imported electricity from non-EU countries falls under CBAM to ensure carbon costs are accounted for in cross-border energy trade.
Hydrogen
Hydrogen, especially industrially produced hydrogen, is included due to its growing importance in energy transition and its varying carbon intensity depending on production methods.
How CBAM Works?
1. Check If Product Is Covered
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The first step is to confirm whether your goods fall under CBAM rules. This usually includes carbon-intensive products like iron and steel, aluminium, cement, fertilizers, electricity, and hydrogen. If the product is included, CBAM reporting is required when exporting to the EU.
2. Measure Carbon Emissions From Production
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Next, calculate the embedded carbon emissions during manufacturing of the product. This includes emissions generated during manufacturing, such as fuel usage, industrial processes, and sometimes electricity consumption. Accurate data from suppliers or factories is essential.
3. Collect and Verify Emissions Data
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Once emissions are calculated, importers must gather verified data from producers. The EU requires accurate and standardized reporting, so businesses often need official documentation or third-party verification to ensure compliance.
4. Submit CBAM Reports
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Importers must regularly submit CBAM reports to EU authorities. These reports include product details, shipment quantity, and total emissions. During the transition phase, reporting is usually done quarterly.
5. Buy CBAM Certificates
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Based on the reported emissions, importers are required to purchase CBAM certificates. Each certificate represents a specific amount of carbon emissions, and the price is linked to the EU carbon market.
6. Customs Review And Final Adjustment
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CBAM vs Traditional Taxes: What’s the Real Difference?
CBAM is often compared with traditional import taxes, but they work in very different ways. The table below highlights the key differences between the two:
| Feature | CBAM (Carbon Border Adjustment Mechanism) | Traditional Tax (Import Duty / VAT / Tariffs) |
| Purpose | Reduce carbon emissions and prevent carbon leakage | Generate government revenue and regulate trade |
| Basis of Charge | Based on greenhouse gas emissions of products | Based on product value, category, or fixed tariff rates |
| Environmental Link | Directly linked to carbon footprint | No environmental consideration |
| Products Affected | Selected carbon-intensive goods | Broad range of imported goods |
| Calculation Method | Emissions-based pricing (CBAM certificates) | Fixed percentage or duty rate |
How CBAM Impacts Malaysian E-Commerce Businesses?
Stricter Compliance Requirements
E-commerce businesses exporting to the EU may need to provide emissions data and product-level carbon information from suppliers to meet CBAM rules.
Increased Operational Costs
Additional costs may arise from carbon reporting, supplier verification, and supply chain adjustments, which can impact overall business expenses.
Pressure on Profit Margins
Higher compliance and production costs may reduce profit margins if businesses are unable to pass costs on to EU customers.
Shift in Product and Supplier Choices
Businesses may need to choose lower-carbon suppliers or adjust product sourcing strategies to remain competitive under CBAM regulations.
Greater Risk for Businesses
Failure to meet CBAM requirements may result in shipment delays, higher compliance costs, or even loss of access to certain EU buyers.
How Malaysian E-Commerce Businesses Can Reduce CBAM Costs?
Work with Low-Carbon Suppliers
Choose suppliers that use energy-efficient processes or renewable energy. Lower production emissions can directly reduce the related costs.
Improve Emissions Data Tracking
Use proper systems to collect and manage carbon emissions data across your supply chain. Accurate data helps avoid errors, penalties, and unnecessary costs.
Strengthen Supplier Collaboration
Work closely with suppliers to ensure they can provide verified emissions reports and improve transparency in production processes.
Optimize Supply Chain Efficiency
Reduce unnecessary production steps, transportation distance, and inefficiencies to lower overall carbon footprint and logistics costs.
The Future of CBAM and Its Impact on Global Trade
CBAM is expected to become more important in the future. It will change how countries trade by making carbon emissions a key part of business decisions.
Increased Pressure on Supply Chain Transparency
Global suppliers will face stronger requirements to track and disclose carbon emissions at every stage of production. Businesses will need standardized carbon accounting systems, making supply chain transparency a key competitive factor in international trade.
Competitive Advantage for Low-Carbon Producers
Countries and companies with cleaner production methods will gain a stronger advantage in global markets. High-carbon producers may face higher costs and reduced competitiveness unless they invest in energy efficiency, renewable energy, and cleaner technologies.
Acceleration of Green Transformation in Global Trade
CBAM will push industries worldwide toward greener production methods. This includes increased investment in renewable energy, low-emission manufacturing, and sustainable supply chain practices, fundamentally reshaping how goods are produced and traded globally.
Stricter Global Trade Compliance Standards
International trade will require more detailed carbon reporting, verification, and documentation. Carbon emissions data will become a standard part of trade compliance, alongside traditional customs duties and tariffs.
Restructuring of Global Supply Chains
Businesses may shift production to regions with lower carbon intensity or move toward localized manufacturing closer to key markets. This shift will change global supply chain strategies, where carbon emissions become as important as cost, labour, and logistics.
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FAQs
1. What is the concept of CBAM?
The CBAM (Carbon Border Adjustment Mechanism) is an EU policy that puts a carbon price on imported goods based on the emissions produced during their manufacturing. Its main goal is to reduce global carbon emissions and prevent companies from shifting production to countries with weaker climate rules (carbon leakage).
2. Who pays the CBAM tax?
The importer in the European Union (EU) pays the CBAM cost. They must buy CBAM certificates based on the carbon emissions of the imported goods. The cost is indirectly passed back along the supply chain, affecting exporters.
3. Which sectors does CBAM apply to?
CBAM currently applies to carbon-intensive sectors such as iron and steel, aluminium, cement, fertilizers, electricity, and hydrogen, as these industries produce high levels of greenhouse gas emissions during production.
4. What is the difference between CBAM and ETS?
CBAM and ETS are both climate policies but work differently:
- ETS (Emissions Trading System) applies to EU-based companies, requiring them to buy carbon allowances for emissions they produce.
- CBAM (Carbon Border Adjustment Mechanism) applies to imported goods, ensuring foreign producers face similar carbon costs as EU companies.
