How can Europe make CBAM a decarbonisation success story?

After years of negotiations and preparations, the European Union has introduced its carbon border adjustment mechanism (CBAM). CBAM went live on 1 January 2026, meaning Europe-based importers of certain goods including steel and chemical products must pay for the carbon emissions associated with the production of those commodities.

CBAM puts EU producers – who face a carbon price, via the emissions trading system (ETS) – on equal terms with foreign competitors who do not. Until now, the EU has done this under the ETS by granting billions of euros in free emission allowances, each of which gives companies the right to emit one tonne of carbon dioxide equivalent. Allowances not given for free are auctioned instead. The plan is for CBAM to gradually replace this system, with free allowances scheduled to fall steadily to zero by 2034, when all allowances must be bought at auctions. 

Whether CBAM can be judged a success will depend on whether it ends free allowances. Free allowances have been used to shield fossil-based production while doing little to develop competitive clean industries. CBAM offers a different path. It allows policy to shift from protecting incumbents to supporting new clean industrial processes, without the risk of being undercut by cheaper but more carbon-intensive imports. 

Taking this path requires watertight implementation of CBAM, meaning scrutiny of the Commission’s work finalising the technical details of the instrument will be essential. If successful, CBAM could help shift public funding away from propping up legacy fossil production towards encouraging clean industrial systems that can compete without permanent protection. Most importantly, the EU will review its ETS directive later this year, with the phase-out schedule for free allowances explicitly on the table. For CBAM to be a success, the allowances must go. 

Want to learn more about CBAM? Listen to the latest episode of The Sound of Economics, 'All about CBAM, the cross-border carbon levy' by host Rebecca Christie, Ignacio García Bercero and Ben McWilliams

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