Deductions and third-country carbon pricing

The deduction mechanism

CBAM is not a tool for double taxation. Article 9 of Regulation 956/2023 provides a deduction mechanism that reduces the number of certificates to surrender when the third-country producer has already paid a carbon price in their country of origin.

This mechanism ensures CBAM's compatibility with WTO rules (non-discrimination principle) and prevents importers from paying twice for the same emissions. It is a critical design feature that distinguishes CBAM from a simple border tax.

Net certificate calculation formula

Net certificates = Embedded emissions x CBAM factor - Third-country carbon deduction - Free allowance adjustment

Two types of deductions are possible:

1. Deduction for carbon price paid in the country of origin (Art. 9)
2. Adjustment for free EU-ETS allowances (Art. 21, progressive phase-in 2026-2034)

Both deductions reduce the number of certificates the declarant must surrender, directly lowering the CBAM cost.

Deduction for carbon price paid (Article 9)

Which instruments are eligible?

Regulation 2025/2620 specifies the carbon pricing instruments eligible for the deduction:

• Emissions trading systems (ETS): national or regional carbon markets (e.g. Chinese national ETS, UK ETS, California cap-and-trade, Korean ETS, New Zealand ETS)
• Carbon taxes: direct fiscal levy on CO2 emissions (e.g. Swedish carbon tax, Canadian federal carbon charge, South African carbon tax)
• Equivalent levies or charges: any financial mechanism linked to greenhouse gas emissions that effectively puts a price on carbon

Not eligible:

• Subsidies for clean production (they do not constitute a "carbon price paid")
• Voluntary mechanisms (voluntary carbon market, voluntary carbon credits)
• Free allowances allocated within a foreign ETS (these reduce the effective price paid)
• Renewable energy certificates or guarantees of origin (these are not carbon pricing instruments)

Calculating the deduction

The deduction amount is calculated as follows:

Deduction (EUR) = Effective carbon price paid (EUR/tCO2) x Emissions covered (tCO2)

The effective price is the price actually paid by the producer, after deducting any free allocation, rebate, or compensation received. The CBAM declarant must provide documentary evidence of the payment in the annual declaration, including:

• Proof of carbon tax payment (tax assessment notice, payment receipt)
• ETS compliance reports showing allowances surrendered and free allocation received
• Currency conversion documentation

Currency conversion: If the carbon price is paid in a currency other than the euro, conversion is made at the ECB exchange rate on the date of payment.

Examples by country of origin

Important nuance: The deduction is based on the effective price -- meaning the price net of any free allowances received. In the Chinese ETS, for example, installations currently receive substantial free allocations, so the effective price paid may be significantly lower than the headline allowance price.

Strategic impact of origin

The origin of goods is a major lever for CBAM cost optimisation. Importing from a country with a robust carbon pricing system significantly reduces the number of certificates to surrender.

Comparative example: Import of 1,000 tonnes of steel (emissions: 2.1 tCO2/t, certificate price: EUR 70/tCO2, CBAM factor 2030: 48.5%)

Simplified calculations for illustrative purposes. Actual amounts depend on the exact carbon price at the date of payment and the free allocation factor.

The difference between the best and worst case is approximately EUR 71,000 for a single 1,000-tonne steel import at 2030 rates. Over a full year of imports, the origin-driven cost differential can be in the millions.

Adjustment for free EU-ETS allowances (Article 21)

Article 21 provides an adjustment to account for EU-ETS allowances allocated free of charge to European producers in the same sector. This adjustment is automatically applied by the Commission and reduces the number of certificates to surrender.

The adjustment factor follows the free allowance phase-out schedule:

In practice: In 2026, an importer surrenders only 2.5% of the certificates corresponding to their emissions. In 2034, they will surrender 100%. The annual increase is not linear -- the most significant jumps occur in 2029 (from 10% to 22.5%) and 2030 (from 22.5% to 48.5%).

Sector-specific benchmark: The free allowance reduction is based on the EU-ETS product benchmarks for each sector. Installations performing better than the benchmark receive more free allowances (though the total is declining). The CBAM adjustment mirrors this sector-level benchmark approach.

The United Kingdom case

The United Kingdom is developing its own carbon border adjustment mechanism (UK CBAM), planned to enter into force in 2027. Negotiations between the EU and the UK focus on a potential mutual recognition:

• The price paid under the UK ETS would be eligible for deduction from the EU CBAM
• The price paid under the EU-ETS would be eligible for deduction from the UK CBAM
• Administrative cooperation on emissions data verification

The UK ETS is already eligible for deduction under the EU CBAM (as it is a qualifying carbon pricing instrument). The mutual recognition would formalise the reverse arrangement and potentially streamline compliance for operators trading in both directions.

UK CBAM design: The UK's proposed mechanism covers a similar range of products with some differences in scope and implementation. Operators trading with both the EU and the UK will need to comply with both systems, making mutual recognition commercially significant.

Optimisation strategies

Lever 1: Choice of origin

Prioritise suppliers located in countries with a high carbon price to maximise the deduction. Analysing rules of origin is essential to determine the correct origin of the goods. Remember that CBAM origin refers to the country where the goods were produced (where emissions occurred), not necessarily the country of export.

Lever 2: Actual emissions vs default values

Using actual emissions from third-country installations (see chapter 4) rather than default values almost always reduces the number of certificates. The savings can be 20-60% depending on the sector and the installation's performance.

Lever 3: Certificate purchase planning

Buying certificates when the EU-ETS price is low reduces the average cost. Certificates can be purchased at any time during the year. Monitoring EU-ETS price trends and market signals allows for tactical purchasing decisions.

Lever 4: Rigorous carbon price documentation

Maintain all evidence of carbon price payments in the country of origin (ETS allowance receipts, carbon tax assessment notices, compliance reports) to substantiate the deduction. Incomplete documentation may result in the competent authority disallowing the deduction.

Additional consideration: supply chain restructuring. For high-volume importers, the CBAM cost differential between origins may justify restructuring supply chains. A manufacturer sourcing steel from Turkey (no carbon price) and the UK (UK ETS, EUR 50-60/tCO2 effective) faces a CBAM cost difference of EUR 50-60 per tonne of embedded CO2. Over large volumes, this can make previously marginal supply sources economically attractive.