The Carbon Border Adjustment Mechanism (CBAM) is a policy designed to place a carbon price on imports into the EU, ensuring that non-EU producers face equivalent costs to those under the EU Emissions Trading System (EU ETS). This levels the playing field by preventing carbon leakage, where production shifts to countries with laxer climate regulations. As of 2026, CBAM applies to six initial sectors: iron and steel, cement, aluminium, fertilisers, electricity, and hydrogen, with potential expansions to downstream products in future years.

For Malaysian manufacturers, this means embedded greenhouse gas emissions in exported goods must be calculated, reported, and financially accounted for upon EU entry. EU importers (or their authorised declarants) submit annual declarations by 31 May each year, covering direct (Scope 1) and, where relevant, indirect (Scope 2) emissions from production installations. These declarations require third-party verification, and importers must surrender CBAM certificates equivalent to the emissions value, minus any carbon price already paid in the country of origin (such as Malaysia) and adjusted for EU free allocations.

CBAM certificates are purchased through the EU’s CBAM Registry at prices aligned with EU ETS auction averages, currently around €80-90 per tonne of carbon dioxide equivalent (tCO₂e). Non-compliance triggers penalties, including import bans or fines up to €100 per tCO₂e. Malaysian exporters should note that even indirect shipments via traders place data provision obligations upstream, as EU buyers demand verifiable records to meet their liabilities. Early preparation is essential, given the phase-out of transitional flexibilities.