What is the Carbon Border Adjustment Mechanism (CBAM)?

The Carbon Border Adjustment Mechanism (CBAM) — established by Regulation (EU) 2023/956 — is the European Union's landmark policy instrument designed to prevent carbon leakage: the risk that EU climate ambitions are undermined when production shifts to countries with less stringent carbon regulations.

In practical terms, CBAM places a carbon price on imports of certain carbon-intensive goods entering the EU. This price mirrors the cost that EU producers already pay under the EU Emissions Trading System (EU ETS), creating a level playing field between domestic producers and importers.

The Problem CBAM Solves

The EU has committed to reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels, and to achieving climate neutrality by 2050. The EU ETS — the world's largest carbon market — is the primary mechanism for achieving this. Under the ETS, EU manufacturers must purchase allowances for every tonne of CO2 they emit.

Without a border adjustment, this creates an economic incentive for EU companies to relocate production to countries without carbon pricing, or for EU consumers to switch to cheaper, carbon-intensive imports. CBAM closes this loophole by ensuring that imported goods face the same carbon cost as domestically produced goods.

How CBAM Works

CBAM operates through a certificate system. EU importers of covered goods must:

1. Register as an Authorised CBAM Declarant with their national competent authority
2. Report the embedded emissions in imported goods on an annual basis
3. Purchase CBAM certificates corresponding to the carbon price that would have been paid under the EU ETS
4. Surrender those certificates by 30 September each year for the previous calendar year's imports

The price of CBAM certificates is calculated weekly as the average auction price of EU ETS allowances in EUR/tonne CO2.

The Five CBAM Sectors

CBAM currently covers five sectors under Annex I of Regulation (EU) 2023/956:

Key CBAM Dates

The Default Emission Values Trap

If an exporter cannot provide verified actual embedded emission data, the EU importer must use default emission values set by the European Commission. These defaults are deliberately set higher than typical actual emissions — and from 2026, a 10% markup penalty applies, rising to 30% by 2028.

This means exporters who invest in measuring and verifying their actual emissions will pay significantly less in CBAM costs than those who rely on defaults. The CBAM Registry's embedded carbon calculator helps South African exporters understand this cost differential.

South Africa's CBAM Exposure

South Africa is one of the most exposed non-EU economies to CBAM, given its significant exports of carbon-intensive goods to the EU. Key exposure areas include:

• Steel: South Africa exports ferrochrome, pig iron, and hot-rolled coil to EU markets
• Aluminium: The Hillside, Bayside, and Mozal smelters produce primary aluminium for export
• Fertilisers: Sasol's fertiliser operations have significant EU export exposure
• Cement: PPC, AfriSam, and Lafarge SA have EU construction project exposure

The South African Institute of International Affairs (SAIIA) estimates that CBAM could cost South African exporters hundreds of millions of rands annually if they fail to adapt.

What South African Exporters Must Do

1. Identify which of your products fall under CBAM's scope using the Combined Nomenclature (CN) codes
2. Calculate your embedded emissions — either actual (preferred) or using EU default values
3. Engage your EU importers to ensure they are registered as Authorised CBAM Declarants
4. Invest in emissions measurement and verification to avoid the default value penalty
5. Register your company in the CBAM Registry to demonstrate compliance readiness

References

• Regulation (EU) 2023/956 — EUR-Lex
• European Commission CBAM Portal
• SAIIA — Impact of CBAM on African Economies
• Wesgro EU CBAM Factsheet for SA Exporters