5) How Do CBAM Certificates and Carbon Pricing Work?

What CBAM Certificates Are#

CBAM certificates represent the carbon cost of imported goods. Each certificate corresponds to one tonne of CO₂ equivalent emissions. Importers purchase certificates and surrender them annually to cover the embedded emissions in goods they have imported.

Certificates are not physical documents. They exist as digital entries in the CBAM Registry managed by the European Commission. Each member state’s competent authority administers certificates for importers registered in that state.

Certificates become mandatory from 1 January 2026. The transitional period through December 2025 involves reporting only, with no certificate purchases required.

How Certificate Pricing Works#

Certificate prices mirror EU Emissions Trading System (EU ETS) allowance prices. Each week, the Commission calculates the average closing price of EU ETS allowances sold at auctions. This becomes the CBAM certificate price for that week.

EU ETS prices fluctuate based on market conditions. Supply of allowances, demand from covered installations, energy prices, economic activity, and policy announcements all affect prices. CBAM certificate prices follow these fluctuations.

Recent EU ETS prices have ranged between €60-100 per tonne CO₂. In October 2025, prices are approximately €70-85 per tonne. These levels determine what importers pay for CBAM certificates.

The direct link to EU ETS ensures imported goods face equivalent carbon costs to domestically produced goods. If a German steel mill pays €80 per tonne CO₂ under EU ETS, imported Turkish steel faces the same €80 per tonne through CBAM certificates.

Purchasing Certificates#

Importers purchase certificates from their national competent authority through the CBAM Registry. Purchase is voluntary timing-wise but mandatory quantity-wise. You must hold sufficient certificates to cover your annual obligations when declarations are due.

Quarterly purchase requirements exist. By the end of Q3 of each year, importers must hold certificates covering at least 50% of their expected annual obligation (reduced from 80% under the October 2025 simplification regulation). This ensures certificates are purchased progressively rather than creating year-end liquidity crunches.

Certificates can be purchased at any point during the year at the prevailing weekly price. This allows some price management. If EU ETS prices are temporarily low, purchasing certificates then reduces costs compared to buying when prices spike.

Certificates remain valid indefinitely until surrendered or sold back. Unused certificates from one year can be carried forward to future years or sold back to authorities.

Surrendering Certificates#

Annual CBAM declarations are due by 30 September following each calendar year. Declarations state the quantity and embedded emissions of CBAM goods imported during that year.

When submitting declarations, importers surrender certificates matching the net embedded emissions. Net emissions equal total embedded emissions minus certain deductions (free allocation adjustments and carbon prices paid at origin where applicable).

Surrendered certificates are cancelled. They cannot be reused or transferred to other importers.

If an importer holds insufficient certificates when the declaration is due, they face penalties. Member states establish penalty levels between €10-50 per tonne of emissions not covered by certificates, plus potentially additional administrative penalties.

Selling Back Certificates#

Importers can sell unused certificates back to national competent authorities. The buyback price is set at a percentage of the purchase price. Until mid-2026, the buyback price is 90% of purchase price. After mid-2026, the percentage may be adjusted by the Commission.

Selling back provides flexibility. If you over-purchase certificates during the year (to hedge against price increases or because actual imports were lower than expected), you can recover most of the cost by selling back excess certificates.

Buyback must occur through the Registry. Certificates cannot be traded between importers directly. The system is not a market but an administrative mechanism. Only competent authorities buy and sell certificates.

How Embedded Emissions Determine Certificate Requirements#

Embedded emissions are the greenhouse gas emissions released during production of CBAM goods. They include direct emissions from production processes and indirect emissions from electricity consumed during production.

Higher embedded emissions mean more certificates required. A tonne of steel with 2.0 tonnes CO₂ embedded emissions requires two certificates. A tonne of steel with 1.5 tonnes CO₂ requires 1.5 certificates.

Emissions are calculated using actual production data from suppliers or using default values published by the Commission. Actual data typically results in lower certificate requirements but needs verification. Default values are simpler but deliberately set high to incentivise actual data provision.

Free Allocation Phase-Out#

EU installations in CBAM sectors currently receive some EU ETS allowances free. These free allocations prevent carbon leakage by reducing the carbon cost burden on EU producers competing internationally.

Free allocations phase out between 2026 and 2034. As EU producers receive fewer free allowances and pay more for emissions, imports must face equivalent costs. CBAM obligations increase proportionally as free allocations decrease.

In 2026, 97.5% of benchmarked free allocations remain. CBAM covers only 2.5% of embedded emissions. By 2034, free allocations reach zero and CBAM covers 100% of embedded emissions.

The CBAM factor implements this phase-in. For 2026, the CBAM factor is 0.025 (2.5%). The formula is: certificates required = embedded emissions × CBAM factor. As the factor increases annually, certificate requirements increase even if embedded emissions stay constant.

Carbon Price Deductions#

If carbon pricing was paid in the country where goods were produced, this can reduce CBAM certificate requirements. The goal is avoiding double payment for the same emissions.

Carbon pricing includes carbon taxes on emissions and costs of purchasing emissions trading allowances. It does not include energy taxes, fuel duties, or general environmental levies. The carbon price must be directly linked to production emissions.

The deduction equals the carbon price paid per tonne CO₂ divided by the EU ETS price, multiplied by embedded emissions. If a producer paid €30 per tonne and EU ETS prices are €80 per tonne, the deduction is 0.375 certificates per tonne of embedded emissions.

Documentation is required. Operators must provide evidence of carbon price payments, description of the pricing system, and confirmation that payments relate to production emissions. Verification by accredited verifiers ensures documentation authenticity.

Few third countries currently have carbon pricing systems that the EU recognises for CBAM purposes. Most major exporters to the EU either have no carbon pricing or have systems with excessive free allocations that reduce their effectiveness.

What Certificate Costs Mean for Import Prices#

Certificate costs affect import economics. At €80 per tonne CO₂, steel with 2.0 tonnes embedded emissions incurs €160 per tonne in CBAM costs. Cement with 0.8 tonnes embedded emissions incurs €64 per tonne. Aluminium with 8.0 tonnes embedded emissions incurs €640 per tonne.

These costs compare to product values. Steel might be €800-1,200 per tonne, making CBAM 13-20% of value. Cement might be €80-120 per tonne, making CBAM 50-80% of value. Aluminium might be €2,500-3,000 per tonne, making CBAM 21-26% of value.

Products with high emissions relative to value face greater CBAM impact. Products with low emissions or high value face smaller relative impact.

Suppliers with lower emissions have competitive advantage. If one supplier’s steel has 1.5 tonnes CO₂ and another’s has 2.5 tonnes, the lower-emission supplier saves importers €80 per tonne in certificate costs (at €80 EU ETS price). This creates market incentive for cleaner production.

What This Means for Companies#

Certificate prices are not fixed. They fluctuate with EU ETS market conditions. Companies cannot predict exact CBAM costs months in advance. Budgeting must account for price volatility.

Certificate requirements depend on embedded emissions. Obtaining actual emissions data from suppliers affects how many certificates you need. Higher emissions mean higher costs. Supplier selection matters.

The phase-in means costs increase annually through 2034 even if emissions and ETS prices stay constant. CBAM is not a one-time adjustment but an escalating cost over nine years.

Managing certificate purchases, tracking obligations, and submitting accurate declarations requires systems and processes. Companies need to understand pricing mechanisms, phase-in schedules, and deduction calculations to manage costs effectively.