THE CARBON BORDER ADJUSTMENT MECHANISM (CBAM): A NEW INSTRUMENT FOR SUSTAINABILITY
The Carbon Border Adjustment Mechanism (CBAM) is a European Union instrument designed to ensure that the price of carbon emissions embedded in imported goods is equivalent to that of products manufactured within the EU. This mechanism aims to prevent “carbon leakage”, whereby companies move production to countries with less stringent environmental regulations, causing an overall increase in global emissions.
How does it work?
The CBAM came into force in a transitional phase on 1 October 2023, during which importers must report quarterly the greenhouse gas emissions incorporated in imported goods, without immediate financial obligations. This transitional phase will last until 31 December 2025. As of 1 January 2026, CBAM will be fully operational, requiring importers to purchase CBAM certificates to cover the emissions incorporated in their products. Therefore, when CBAM will become fully operational in 2026, importers of products subject to the mechanism will have to purchase CBAM certificates to offset carbon emissions embedded in goods they bring into the EU.
These certificates work in a similar way to the EU’s emissions trading scheme (ETS), where European companies have to pay for their CO emissions. The Emission Trading System (ETS) is the EU’s main instrument for reducing CO emissions in the energy and industrial sectors. It works with a cap-and-trade system, imposing an upper limit on emissions and allowing companies to buy and sell carbon credits to cover emissions that exceed the cap.
Over time, the cap on emissions is reduced, increasing the cost of allowances and encouraging companies to invest in more sustainable technologies. The ETS covers sectors such as heavy industry, energy production and air transport, and will be extended from 2027 to cover building heating and road transport (ETS 2).
CBAM is an extension of the ETS to imports, with the aim of preventing non-EU producers from gaining a competitive advantage by producing in countries with weaker environmental regulations and then exporting to the Union without additional emission-related costs.
In addition, the price of CBAM certificates will be calculated on the basis of the average weekly price of emission allowances under the EU ETS. In practice, the more emissions are incorporated into an imported product, the more CBAM certificates the importer will have to buy before it can be placed on the European market.
Sectors involved and economic impacts
Currently, CBAM applies to high carbon intensity sectors such as iron and steel, cement, fertilisers, aluminum, electricity and hydrogen. The aim is to encourage cleaner industrial production in non-EU countries, while ensuring that EU climate objectives are not undermined by cheaper but more polluting imports.
The European Commission recently proposed to exempt over 80% of EU companies from the new CBAM mechanism, focusing only on major importers responsible for most emissions. This move aims to reduce compliance costs for businesses, in line with the EU’s objective of reducing red tape and increasing productivity.
Impact on the real estate sector
CBAM is a significant step in the EU’s climate policy, seeking to balance industrial competitiveness with the need to reduce global carbon emissions.
However, CBAM will have a major impact on the real estate sector because it will increase the cost of essential building materials such as steel and cement, which are among the most polluting. This means that new building development will become more expensive, pushing the market to find alternative solutions.
One of the main consequences will be a greater interest in re-using existing structures. Building foundations and frames are the parts that require the most carbon intensive materials, so demolishing and rebuilding from scratch will be less and less cost effective. On the contrary, renovations and requalifications of existing buildings will become a much more advantageous option because they reduce the need for new materials subject to CBAM.
Real estate companies that adapt to this change will have a competitive advantage. Those who will be able to rethink the spaces making the best use of the structures already present, without having to resort too much to new materials, will be in a strong position compared to those who continue to focus only on new constructions.
In summary, CBAM will make the cost of carbon embedded in buildings a key element in real estate development decisions. The future of the sector will be increasingly oriented towards re-use and sustainability, not only for environmental reasons but also for economic reasons.
In addition, as the price of carbon-intensive materials will rise, real estate and construction companies will be pushed to try to use more sustainable, lower carbon-intensive materials such as engineered wood, recycled bricks or low-emission cement, which will become increasingly cheaper options than traditional materials subject to carbon taxation.
This change will lead to a shift in construction practices, favouring more environmentally friendly and innovative solutions. Ultimately, CBAM and ETS will not only penalise polluting materials but make it economically advantageous to choose more sustainable materials, accelerating the transition towards low-carbon buildings.
The introduction of CBAM marks an important step forward in the EU’s strategy to reduce global emissions, directly affecting international trade and the real estate sector. However, there are still many unknowns: how will non-EU countries react to this measure? Will companies be able to adapt quickly to new cost and sustainability dynamics?
As the market prepares for this transition, it will be crucial to see how CBAM will evolve and what its real consequences will be on industry, the environment and the global economy. The future will depend on the ability of companies to innovate and find solutions that make sustainability not only an obligation but also a growth opportunity.
Sources: https://www.deloitte.com/nl/en.html , https://commission.europa.eu/index_en
