The European Commission has published a draft regulation specifying the rules for calculating the free allowance adjustment (FAA) under the CBAM. The document, which will enter into force on January 1, 2026, provides a missing piece of the regulatory puzzle and answers a fundamental question: how can we ensure that imports are not treated more favorably than EU production?
The origin of the problem
The Carbon Border Adjustment Mechanism (CBAM) was created to address the risk of carbon leakage. European producers covered by the EU Emissions Trading System (EU ETS) faced rising CO2-related costs, while their competitors outside the EU were able to produce without the same burden. The CBAM was intended to level the playing field by imposing a carbon tax on imports.
The problem, however, was that EU producers did not pay for their full emissions. A significant portion of ETS allowances were allocated to them free of charge – as a safeguard against loss of competitiveness during the transition period. If importers had to pay for the full emissions embedded in their products, they would be treated more harshly than European producers. This, in turn, could violate WTO non-discrimination principles.
The solution is the Free Allocation Adjustment (FAA) – a mechanism that reduces the number of CBAM certificates to be surrendered by a value corresponding to the free allowances that an EU producer producing a similar product would receive.
Regulatory architecture
The new implementing regulation builds on Regulation (EU) 2023/956 establishing the CBAM and supplements it with detailed calculation rules. The document consists of a normative part and an extensive technical annex containing benchmark tables for all product categories covered by the CBAM.
The Commission has adopted a two-pronged approach. For importers with verified data on actual emissions, process benchmarks (Column A) are available. For the remaining cases – and these will predominate, especially in the initial period – default benchmarks (Column B) have been developed, taking into account typical emission levels for individual production routes.
Mechanics of computation
The heart of the new regulation is the formula for correcting free allowances:
FAA = CBAM_y × CSCF_y × BMg × M
The individual components require explanation. CBAM_y is a factor defining the portion of the CBAM obligation that applies in a given year – according to the phase-in schedule, it increases from 2,5% in 2026 to 100% in 2034. CSCF_y (cross-sectoral correction factor) is a cross-sectoral correction factor, similar to that used in the ETS. BMg denotes the CBAM benchmark for a given product, expressed in tonnes of CO₂e per tonne of the product. M is the mass of the imported product.
The number of certificates to be surrendered is based on the difference between the emissions covered by the CBAM and the FAA correction:
Certificates = CBAM_y × SEE × M − FAA
After substitution and simplification, we obtain an elegant formula:
Certificates = CBAM_y × M × (SEE − BMg)
This formula captures the essence of the system: the importer pays only for the excess of embedded emissions (ESE) over the benchmark (BMg), proportional to the phase-in factor. If a foreign producer emits the same amount as the best European installations, the cost of CBAM is zero.
Implementation schedule
The regulation confirms the gradual introduction of the CBAM, synchronized with the phase-out of free ETS allowances for sectors covered by the mechanism. In 2026, the CBAM factor is only 2,5%, which means symbolic costs for importers. The situation changes radically in subsequent years: 10% in 2028, 48,5% in 2030, and finally 100% in 2034.
This gradient makes profound economic sense. It gives importers and their suppliers time to adapt their supply chains while simultaneously sending a clear price signal encouraging decarbonization. Foreign producers who invest in low-emission technologies will gain a competitive advantage in the European market.
Benchmarks – the devil is in the details
The annex to the regulation contains benchmark tables for over 100 CN codes. These values determine the actual CBAM costs for individual products. Analysis of the tables reveals significant variations depending on the product category and production route.
In the case of cement, the benchmark for grey clinker is 0,666 t CO₂e/t, while for white clinker it is 0,859 t CO₂e/t. The difference is due to the higher firing temperatures required for white clinker production.
The most complex situation concerns steel. The Commission has introduced three separate benchmarks corresponding to the main production routes. For steel from blast furnace (BF/BOF), the hot-rolled flat product benchmark is 1,370 tCO₂e/t. For steel from direct reduction (DRI/EAF), it is 0,481 tCO₂e/t. For steel from scrap (Scrap/EAF), it is just 0,072 tCO₂e/t.
These differences have fundamental consequences. Importing steel from a steel mill using scrap and an electric furnace powered by renewable energy can generate negligible CBAM costs, while steel from a traditional coal-fired blast furnace will prove significantly more expensive.
Aluminum also exhibits a clear dichotomy between primary production (benchmark 1,423 t CO₂e/t) and secondary production from recycling (0,091 t CO₂e/t). This is a 15-fold difference that should stimulate the development of a circular economy.
Practical implications
The regulation forces a shift in thinking about supply chains. Until now, supplier selection was based primarily on price and quality criteria. From 2026, a third dimension will be added: the carbon intensity of production.
For steel importers, this means obtaining information from suppliers about the production route and, ideally, verified data on actual emissions. The difference between the default and actual values can reach several dozen percent, which translates into significant savings for large volumes.
Verification becomes particularly important in the context of the provision that, in the absence of evidence, the highest benchmark for a given CN code is assumed by default. For steel, this means automatic assignment to the BF/BOF route – even if actual production took place in an electric furnace.
Long-term perspective
The regulation provides a mechanism for reviewing and updating the benchmarks. The current values are based on ETS benchmark estimates for the period 2026-2030. Once the final ETS benchmarks are published – which is expected in 2026 – the Commission will update the CBAM values.
A safeguard clause has also been built in: if data indicates that benchmarks are systematically too high or too low, the Commission can adjust them. This safeguards against methodological deficiencies leading to excessive burdens on importers or insufficient protection for EU producers.
Summary
The new implementing regulation completes the CBAM system from a technical perspective. Adjusting free allowances ensures that the mechanism operates in accordance with the principle of equal treatment – importers pay for excess emissions above the benchmark, just as European producers pay for emissions exceeding their free allowances.
For companies importing goods covered by CBAM, it is crucial to understand three elements: their own import profile in terms of CN codes and production routes, the phase-in schedule determining the dynamics of cost growth, and the possibility of optimization by selecting suppliers with lower emission intensity.
Europe's energy transition is entering a phase where market mechanisms are beginning to have a real impact on global supply chains. CBAM is not just a regulatory measure—it's a global price signal.
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