In recent years, the global push for sustainability has been accompanied by a wave of ambitious regulations designed to curb carbon emissions and hold businesses accountable for their environmental impact.
Among these measures, the European Union’s Carbon Border Adjustment Mechanism (CBAM) represents a transformative shift in climate policy, with implications for industries worldwide. The implementation of CBAM is expected to reduce EU imports of targeted goods by varying degrees: aluminium by 4% and fertilisers by up to 26% - Centre for European Reform.
However, CBAM is not the only major regulatory change on the horizon. EU Emissions Trading System 2 (EU ETS2) is set to expand carbon pricing further, creating additional challenges and opportunities for businesses operating within the EU and beyond.
As businesses prepare for these developments, understanding CBAM and EU ETS 2—and their interconnected roles in carbon regulation—is crucial. Here, we break down what these policies mean, the challenges they present and the opportunities they create for organisations ready to embrace the future of carbon accountability.
Understanding CBAM: A regulatory game-changer
CBAM is the European Union’s response to carbon leakage—the risk that production might shift to regions with less stringent climate policies. It is a key pillar of the EU’s ambitious target to achieve climate neutrality by 2050. Essentially, CBAM places a carbon price on certain imported goods, such as cement, steel, aluminium, fertilisers, electricity and hydrogen, aligning their costs with those produced within the EU under the emissions trading system (EU ETS).
CBAM is currently in a transitional phase, during which importers are required to report the embedded emissions in their products without any financial obligation to purchase CBAM certificates. This period is designed to help businesses familiarise themselves with the reporting requirements and build the necessary systems for compliance. While changes to the CBAM framework are being considered as part of the EU’s proposed ‘Omnibus’ package, the mechanism remains a critical component of the EU’s climate strategy. Businesses should not delay in preparing for compliance, as transparent emissions reporting and verification will continue to play a central role in future trade with the EU. Find out more about CBAM.
For exporters to the EU, particularly those in emissions-intensive industries, the implications are profound. Failure to meet CBAM requirements could result in higher costs, trade restrictions and reputational risks. However, those who proactively engage with CBAM’s requirements stand to gain significant advantages.
The role of EU ETS2: Expanding carbon pricing across more sectors
CBAM is closely linked to the EU emissions trading system (EU ETS), which has been in place since 2005. EU ETS currently applies to energy-intensive sectors such as power generation, manufacturing, and aviation, placing a cap on emissions and requiring companies to purchase allowances if they exceed their allocated emissions. Find out more about EU ETS2.
EU ETS2 extends the EU’s carbon pricing system to new sectors, specifically buildings and road transport fuels. However, the obligation to purchase allowances falls on fuel suppliers, not end-users.
Regulated entities under EU ETS2 are companies placing fuel on the market for these sectors, such as:
- Energy suppliers providing fuels for residential and commercial heating
- Fuel distributors supplying petrol, diesel, and other transport fuels
Unlike the original EU ETS, which directly regulates industrial emitters, EU ETS2 places the financial responsibility upstream on fuel suppliers. End consumers, such as construction firms and transport companies, will not be directly regulated but will experience higher fuel costs as suppliers pass down the carbon pricing.
By integrating heating and road transport into carbon pricing, EU ETS2 aims to incentivise fuel suppliers to transition to lower-carbon alternatives, driving emissions reductions across these sectors.
How CBAM and EU ETS2 work together
CBAM and EU ETS2 are both designed to level the playing field and drive decarbonisation:
- CBAM ensures that imported goods are subject to the same carbon pricing as EU-manufactured products, preventing businesses from shifting production to avoid emissions costs
- EU ETS2 expands carbon pricing to additional sectors, ensuring that domestic transport and heating emissions are accounted for in the same way as industrial emissions
- For businesses exporting to the EU, these changes mean higher compliance expectations but also an opportunity to differentiate themselves by demonstrating proactive carbon management
Benefits and challenges of CBAM and EU ETS2 compliance
CBAM and EU ETS2 are not just regulatory hurdles; they are opportunities for businesses to position themselves as sustainability leaders. Companies that take early action will benefit from:
- Enhanced market access: Compliance ensures continued access to the EU market—a critical trading partner for many industries
- Competitive advantage: Companies that proactively manage their carbon footprint will appeal to eco-conscious customers, investors and regulators
- Risk mitigation: Avoiding non-compliance reduces the risk of financial penalties, disrupted supply chains and reputational damage
- Transparency and trust: Independent verification of emissions data builds credibility with stakeholders, helping businesses secure sustainable financing and partnerships
However, compliance with CBAM and EU ETS2 presents significant challenges, particularly for businesses with complex supply chains:
- Emissions data complexity: Tracking, calculating, and verifying emissions across global supply chains is resource-intensive and may require new monitoring systems
- Increased costs: Companies will need to invest in low-carbon technologies, efficiency measures and emissions reporting frameworks to remain competitive
- Regulatory uncertainty: As these mechanisms evolve, businesses must stay informed and adapt to changes in reporting requirements and financial obligations
As companies navigate these challenges, expert guidance and strategic planning will be essential.
CBAM and EU ETS2 mark a new era of carbon accountability, reshaping business operations and trade dynamics across multiple industries. While the challenges of compliance are significant, they are far outweighed by the benefits of demonstrating environmental responsibility and gaining a competitive edge in a decarbonising economy.
At LRQA, we support clients in turning regulatory challenges into opportunities for growth and innovation. As CBAM and EU ETS2 reshape global trade, we provide businesses with the expertise needed to navigate compliance and enhance performance. With our global expertise and local presence, we’re ready to support you at every stage of the journey.
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