CBAM for Energy

What is CBAM?

The Carbon Border Adjustment Mechanism (CBAM) is a European Union regulation designed to prevent carbon leakage by imposing a carbon price on imports of certain goods into the EU. Enacted as part of the EU's "Fit for 55" climate package, CBAM ensures that imported products face the same carbon costs as those produced within the EU under the Emissions Trading System (ETS). The mechanism entered its transitional phase in October 2023, with full implementation — including financial obligations — scheduled to begin in January 2026.

CBAM and the Energy Industry

The energy industry sits at the intersection of CBAM's core objectives. While CBAM initially covers six product categories — cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen — electricity is the only finished energy product directly within scope. This means that any company importing electricity into the EU from non-EU countries must report and eventually pay for the embedded carbon emissions associated with that power generation.

For energy companies, CBAM introduces a fundamental shift in how cross-border electricity trade is priced. Consider a power utility that imports electricity from a coal-heavy grid in a neighbouring non-EU country. Under CBAM, that utility must purchase certificates corresponding to the carbon intensity of the imported power — effectively closing the price gap between cleaner EU-produced electricity and cheaper, higher-emission imports. This levels the competitive playing field but also increases costs for companies reliant on carbon-intensive imports.

The regulation also has indirect effects across the broader energy value chain. Producers of hydrogen — increasingly central to the energy transition — fall under CBAM when exporting to the EU. Steel manufacturers supplying components for wind turbines, aluminium producers fabricating solar panel frames, and fertiliser companies that rely heavily on natural gas feedstocks all face CBAM obligations that ripple back through energy procurement decisions. Energy companies supplying industrial customers in these sectors must therefore understand how their carbon footprint influences their clients' CBAM exposure.

Furthermore, CBAM accelerates demand for verified low-carbon energy. Industrial importers subject to the mechanism have a direct financial incentive to source electricity and hydrogen from suppliers who can demonstrate lower embedded emissions. This creates new commercial opportunities for renewable energy producers and clean hydrogen developers, while placing additional pressure on fossil-fuel-dependent generators to decarbonise or risk losing market share.

Key Requirements

Energy companies affected by CBAM must comply with a series of reporting and financial obligations. The following requirements apply during the transitional and full implementation phases:

• Quarterly CBAM reports (transitional phase): Since October 2023, importers of CBAM goods — including electricity — must submit quarterly reports to their national competent authority detailing the volume of imports, the direct and indirect embedded emissions, and any carbon price already paid in the country of origin.
• Embedded emissions calculation: Companies must determine the carbon intensity of imported electricity using one of the accepted methodologies. This includes actual emissions data from the generating installation, or — where actual data is unavailable — default values published by the European Commission, which are typically based on the average emission intensity of the exporting country's grid.
• CBAM certificates (full phase from 2026): Importers must purchase CBAM certificates at a price linked to the weekly average EU ETS allowance price. The number of certificates must correspond to the verified embedded emissions of imported goods. Certificates can be purchased throughout the year but must be surrendered annually.
• Authorised declarant registration: Only registered "authorised CBAM declarants" may import CBAM goods into the EU from 2026 onwards. Energy companies must apply for this status through their national authority before the full phase begins.
• Verification of emissions data: From the full implementation phase, embedded emissions declared by importers must be verified by an accredited verifier, similar to the verification requirements under the EU ETS. Energy companies must establish verification processes with qualified third-party auditors.
• Deduction for carbon prices paid abroad: If a carbon price has already been paid in the country where the electricity was generated (for example, through a national carbon tax or emissions trading scheme), the importer may deduct this amount from the CBAM certificates required. Proper documentation of foreign carbon costs is essential.
• Record-keeping obligations: All data related to CBAM imports, emissions calculations, certificates purchased and surrendered, and foreign carbon price deductions must be retained for a minimum of five years and made available upon request to the competent authority.

Implementation Steps for Energy Companies

Preparing for CBAM compliance requires a structured approach. The following steps provide a practical roadmap for energy companies navigating the regulation:

1. Assess your CBAM exposure. Conduct a thorough review of all electricity and hydrogen imports from non-EU countries. Map your supply chain to identify which flows fall within CBAM scope, including indirect imports through trading intermediaries. Quantify the volumes involved and estimate the associated embedded emissions using available grid emission factors.
2. Establish emissions data collection processes. Contact electricity generators and hydrogen producers in your supply chain to obtain installation-level emissions data. Where direct data is not available, document the use of default values and begin building relationships with suppliers who can provide verified actual emissions figures — this will become critical once default values are phased out or penalised.
3. Register as an authorised CBAM declarant. Apply to your national competent authority for authorised declarant status well in advance of the January 2026 deadline. The application requires detailed information about your company, import activities, and planned compliance processes. Early registration avoids bottlenecks as the deadline approaches.
4. Implement a CBAM compliance management system. Deploy internal systems or software to track imports, calculate embedded emissions, manage certificate purchases, and generate reports. Integrate CBAM data flows with your existing energy trading, procurement, and sustainability reporting systems to avoid duplication and ensure consistency.
5. Engage accredited verifiers. Identify and contract with verification bodies accredited for CBAM emissions verification. Begin the verification process for your emissions data during the transitional phase, even though verification is not yet mandatory — this builds organisational readiness and surfaces data quality issues early.
6. Develop a certificate procurement strategy. Analyse your projected CBAM certificate costs based on current EU ETS price trends and your expected import volumes. Build financial models that account for price volatility and incorporate CBAM costs into energy procurement and trading decisions. Consider whether shifting to lower-carbon supply sources could reduce certificate obligations cost-effectively.
7. Train your teams. Ensure that personnel across energy trading, procurement, sustainability, finance, and legal functions understand CBAM requirements and their respective roles in compliance. Designate a CBAM compliance officer or team responsible for coordinating cross-functional activities.
8. Monitor regulatory developments. CBAM is a evolving regulation. The European Commission is expected to expand product scope, refine calculation methodologies, and adjust default values over time. Subscribe to official communications, participate in industry consultations, and maintain flexibility in your compliance systems to accommodate changes.

Frequently Asked Questions

Does CBAM apply to electricity generated from renewable sources?
CBAM applies to all electricity imported into the EU from non-EU countries, regardless of the generation source. However, if an importer can demonstrate — through purchase agreements, guarantees of origin, or installation-level data — that the imported electricity was generated from zero-emission sources, the embedded emissions declared can be zero, resulting in no certificate obligation. The burden of proof lies with the importer, and documentation must meet the European Commission's verification standards.

How does CBAM interact with existing carbon pricing in the exporting country?
If the country where the electricity was produced has its own carbon pricing mechanism — such as a carbon tax or cap-and-trade system — the importer can deduct the effective carbon price already paid from their CBAM obligation. This prevents double taxation and incentivises non-EU countries to adopt their own carbon pricing. The deduction requires documented proof of payment, and only prices explicitly linked to greenhouse gas emissions qualify.

What are the penalties for non-compliance?
During the transitional phase, failure to submit quarterly reports or submission of incomplete or incorrect reports can result in penalties ranging from 10 to 50 euros per tonne of unreported emissions. From the full implementation phase, failure to surrender sufficient CBAM certificates will incur a penalty of 100 euros per tonne of CO2 equivalent — the same rate as the EU ETS excess emissions penalty — plus the obligation to purchase and surrender the missing certificates. Repeated non-compliance may result in revocation of authorised declarant status.

Will CBAM scope expand to cover natural gas or other energy products?
The European Commission is mandated to review CBAM's product scope before 2030, with the aim of eventually covering all products under the EU ETS. Natural gas, refined petroleum products, and other energy carriers are candidates for future inclusion. Energy companies should monitor these developments closely and begin assessing their exposure to potential scope expansions, even if these products are not currently covered.

Summary

CBAM represents a structural change in how carbon costs are applied to energy imports into the European Union, with direct implications for electricity and hydrogen trade and indirect effects across the entire energy value chain. Energy companies that act now — by mapping their exposure, establishing robust data collection and verification processes, and integrating CBAM into their commercial strategies — will be best positioned to manage compliance costs and capture emerging opportunities in the low-carbon energy market. The transitional phase offers a critical window to prepare; companies that delay risk facing financial penalties, operational disruptions, and competitive disadvantage when full obligations take effect in 2026.