CBAM vs EU ETS: The Differences Explained
The EU Emissions Trading System (EU ETS) prices carbon for domestic European manufacturers. The Carbon Border Adjustment Mechanism (CBAM) prices carbon for non-EU manufacturers exporting to Europe. They are mirror policies designed to prevent carbon leakage.
Side-by-Side Comparison
| Feature | EU ETS | CBAM |
|---|---|---|
| Target Audience | EU-based installations (domestic manufacturers) | Non-EU manufacturers exporting to the EU |
| Mechanism | Cap-and-trade system (market-driven allowance price) | Import tariff (price pegged to weekly average ETS auction price) |
| Free Allowances | Yes, but phasing out between 2026 and 2034 | No, but CBAM certificate requirement mirrors the ETS phase-out schedule |
| Covered Emissions | Direct emissions (Scope 1) | Embedded emissions (Direct + specific Indirect emissions) |
| Verification | Annual verification by national accredited bodies | Verification by ISO 14065 accredited bodies |
How the Two Systems Interact
CBAM was created specifically to replace the free allocation of EU ETS allowances. For over a decade, the EU gave heavy industry free carbon allowances to prevent them from relocating outside Europe (carbon leakage). As the EU accelerates its decarbonisation goals, these free allowances are being phased out entirely by 2034.
To ensure European industry remains competitive as free allowances disappear, CBAM imposes an equivalent carbon price on imports. The percentage of embedded emissions that must be covered by CBAM certificates exactly matches the percentage of free allowances phased out under the EU ETS in any given year.
The Pricing Peg: CBAM certificates are not traded on an open market. Their price is calculated weekly by the European Commission, based on the average price of EU ETS allowances auctioned during the previous week. This ensures importers pay the exact same carbon price as domestic EU producers.