Author: Buse Akdağ

When talking about the European Union's Carbon Border Adjustment Mechanism (CBAM, EU CBAM), what most people think of is quite simple: a tax on carbon-intensive imports. However, the EU's approach to this mechanism from the transition period to the final stage shows that the real story is much more complex than this simplification. The CBAM is far from being a static, bureaucratic tool that is designed once on paper and forgotten; on the contrary, it is a dynamic policy tool that continuously updates itself, listens to stakeholder feedback, and develops reflexes against emerging avoidance strategies. This analysis, prepared based on the EU's official documents for the final period dated December 17, 2025, aims to reveal developments supporting the adaptive structure of the CBAM.

Expanding Scope Towards the Supply Chain

The initial scope of the CBAM focused on basic raw materials such as steel, aluminum, and cement. However, this situation brought along the risk of evading an important issue known as "downstream carbon leakage." This concept expresses the potential for companies to avoid regulation by importing final products made from these materials instead of directly importing basic goods subject to the CBAM tax. For example, a company might try to circumvent the CBAM obligation by importing car parts or metal furniture made from taxable steel instead of importing the taxable steel itself.

As the EU transitions to the final period, it recognized the risk of carbon leakage and took action to maintain the effectiveness of the mechanism, proposing a significant expansion of the CBAM scope towards downstream products on December 17, 2025. This proposal, presented in line with the Commission's European Steel and Metal Action Plan, aims to include approximately 180 additional products such as machine parts containing steel and aluminum, motor vehicle parts, metal furniture, and certain devices. This expansion will come into effect on January 1, 2028, and is aimed at capturing a wide range of products from construction materials to household appliances within the CBAM boundaries. Thus, it will clearly demonstrate that the CBAM is not just a static tax focused on raw materials but a dynamic policy tool that accounts for complex supply chains and continuously adapts to emerging avoidance risks.

Measure Regarding Scrap Shortage

However, the EU's adaptation effort is not limited to the scope of products; it also targets a critical gap in the regulation's calculation methodology. The initial methodology of the CBAM was problematic as it accepted scrap used in metal production as "zero-emission," especially creating an unwarranted incentive for the use of "pre-consumption scrap" (scrap generated during the production process that has never reached the consumer). Importers might have turned to using more scrap in their production to artificially lower the carbon footprint of their products and unfairly reduce their CBAM obligations. This "scrap shortage" posed a significant risk of carbon leakage threatening the environmental integrity of the mechanism.

In response to this critical gap, the EU took significant steps. As clearly stated in the Commission proposal dated December 17, 2025, pre-consumption scraps in the iron, steel, and aluminum production processes will now be considered a "precursor." This change means that the embedded emissions contained in pre-consumption scraps will no longer be considered zero and will be included in CBAM calculations. The Commission's proposal aims to prevent companies from showing zero emissions solely through scrap usage by pricing the emissions of pre-consumption scrap. Post-consumption scraps will continue to be assumed as zero emissions as an exception.

Methodological Transformation in Electricity Emissions

Methodological sensitivity forms the basis for the effectiveness of the CBAM not only for raw material inputs but also for the energy used in production. At this point, the initial strict rules regarding electricity imports have also entered a similar transformation process. The initial rules of the CBAM only took into account the portion of electricity generated from fossil fuels in the country of origin when calculating assumed emission values. This methodology completely disregards renewable energy sources, artificially inflating the carbon content of electricity coming from countries with a clean energy-based grid. This situation carried the potential to create a punitive effect rather than promote clean energy investments in third countries.

To address this issue and make the mechanism more aligned with global green transition goals, the EU changed its methodology. With the new approach, when calculating the emission factor for imported electricity, the average electricity produced from all sources, including non-fossil sources, in the country will now be taken into account. This significant change strongly encourages electricity producers in third countries to decarbonize their grids and invest in renewable energy. However, the changes do not stop there. The Commission's proposal also introduces flexibilities that facilitate the use of real embedded emission values by recognizing renewable source-based special agreements (PPAs - Power Purchase Agreements) for imported electricity. As a result, the efforts of countries supplying their grids with clean energy will become visible within the CBAM, creating a promoting effect for green energy investments in third countries. Thus, the CBAM is transforming into a fairer policy tool that supports the global green energy transition.

Transformation in Data Quality

The fundamental driving force behind the ability to confidently make the policy adjustments mentioned in the previous sections is the revolution in data collection and quality, which is one of the largest successes achieved by the CBAM during its transition period. Like any new system, the CBAM faced challenges in data reporting processes at the beginning of the transition period. Simple mistakes, such as declarants in different Member States using either a point or a comma as a decimal separator or incorrectly choosing between kilograms and tons as the declaration unit, led to significant inconsistencies in data quality.

However, despite these initial challenges, the Commission's review report on the transition period demonstrates with concrete data that the system has matured at a surprising speed. While only 11% of importers reported real emission data at the end of the fourth quarter of 2023 when the CBAM began, by the end of 2025, 95% of large importers (those with shipments over 1,000 tons) were able to declare their embedded emissions with real data. When small-scale importers are included, a similarly dramatic increase is observed; the initial rate of 25% rose to 93%. This impressive increase not only shows how quickly the system has gotten on track but also proves that the EU now has high-quality, real-world data capable of identifying and correcting issues such as "scrap shortage."

Furthermore, with the CBAM Simplification Package accepted in 2025, small importers importing less than 50 tons of products will be exempt from reporting obligations, thus reducing the administrative burden; as a result, the reporting scope has been optimized to cover 99% of emissions. This data maturity is a crucial element that enables the mechanism to make more nuanced policy adjustments.

Funding for the Green Transition of Industry from Tax

The adaptability of the CBAM is not limited to technical regulations; it also extends to the strategic use of the revenue generated by the mechanism. This vision is concretized by a new regulatory proposal put forward by the Commission: "Temporary Decarbonisation Fund". This fund demonstrates that the CBAM is not just a tax mechanism but also plays a constructive role in industrial transformation.

With this fund proposal included in the Commission's package dated December 17, 2025, it is planned to allocate 25% of the CBAM certificate revenues obtained in the 2026-2027 period to the Temporary Decarbonisation Fund. Targeted financial support is aimed at accelerating the transition of energy-intensive industries at risk of carbon leakage towards climate-neutral production processes. However, this support is not without conditions; benefiting from the funds will be conditioned on companies making concrete decarbonization investments. Although the remaining 75% will be transferred to the EU budget and its own resources, it is anticipated that the share remaining in the hands of member countries will be used as national co-financing. This approach demonstrates that the CBAM aims to create a fair competitive environment in global trade while financing the green transition of industry within the EU, thus ensuring a just transition.

Global Reflections: The Domino Effect of the CBAM

These developments clearly demonstrate that the Carbon Border Adjustment Mechanism is much more than a simple border tax known to the public. However, the mechanism's real impact is beginning to be felt on a global scale, transcending EU borders.

Leverage Effect on Global Policies

Since the EU first announced the CBAM in 2021, major economies such as China, India, and Brazil have accelerated the development of their own carbon pricing systems while expressing their criticisms. For instance, while China is continuing its efforts to expand its national carbon market, India has begun to outline its carbon market plans. EU officials see the policy changes in these countries as an indication of the CBAM's success; assessments such as "They have changed their behaviors, that alone is a success for the CBAM" are proof of this. The CBAM functions as a leverage that shapes climate policies not only within EU borders but also globally, transforming into a kind of "climate diplomacy" tool that utilizes its power to influence the climate policies of other countries.

Fair Transition and Cooperation

Of course, during the process, some countries have characterized the CBAM as an "unfair penalty" on their economies and expressed concerns, while the EU is making diplomatic efforts to soften these criticisms and ensure a fair transition. The European Commission notes that the impact of the regulation on the poorest countries will remain negligible, and their modeling forecasts less than a 0.01% impact on the total GDP of the least developed countries by 2035 due to the CBAM. Nevertheless, the EU aims to promote the green transition of developing countries through international climate finance and technical support mechanisms. For example, steps are being taken to support clean technology investments in third countries and provide technical assistance for establishing carbon pricing mechanisms through EU funds and programs.

Concrete Reflections of CBAM in Turkey

Turkey, one of the countries where the CBAM will be felt most concretely, is among the countries that export the most carbon-intensive goods to the EU due to geographical proximity and customs union relations. In sectors such as steel, cement, aluminum, fertilizer, and electricity, Turkey has long been a critical supplier to the EU market. For example, in 2024, approximately 40% of the cement and clinker imported by the EU came from Turkey. This situation means serious compliance pressure for Turkey with the implementation of the CBAM.

Turkey's Climate Law and Strategic Steps with National ETS

Indeed, Turkey has begun to take significant steps to align with the EU's new carbon wall. On July 2, 2025, it enacted its first Climate Law, establishing a legal basis for the creation of a national emission trading system (ETS). This law enables Turkey to implement carbon pricing in line with its net zero target for 2053; it also solidifies the establishment of institutions for carbon market management and financing mechanisms. The planned ETS is designed to be similar to the EU ETS in terms of sector coverage and operation, with a pilot implementation expected in 2026-2027. Thus, Turkish producers will have the opportunity to deduct the carbon price they pay from the CBAM cost while exporting to the EU; as per CBAM rules, if there is a carbon tax paid in the country of origin, it is allowed to be offset during import.

Additionally, Turkey's Climate Law grants authority to the Ministry of Trade to introduce Turkey's own border carbon regulation for imports when necessary, preparing to not only defend itself but also to implement similar tools to protect its industry.

Short and Long-Term Challenges of Competition and Compliance

The short-term difficulty of the CBAM for countries like Turkey is that carbon costs will affect the competitiveness of their export products. Especially in sectors like cement and iron-steel, selling to the EU will incur additional costs based on their carbon content. According to market analyses, as Turkish cement becomes more expensive in the EU market due to CBAM costs, it is likely that exporters will have to either lower prices or seek alternative markets. Similarly, the Turkish iron-steel sector must shift away from carbon-intensive production and invest in clean technology; otherwise, the requirement to purchase CBAM certificates for every ton of steel sent to the EU by 2026 could be a competitive burden internationally. Although the cost of this transformation is high, it may also accelerate the transition of Turkish industry to low-carbon production in the medium to long term.

A Living Policy

These developments and global reflections clearly show that the Carbon Border Adjustment Mechanism is a much more complex and dynamic tool than a simple border tax read in the headlines. The CBAM is a dynamic climate policy tool that continuously evolves, renews itself in response to emerging challenges and avoidance attempts, expands its scope, and has the potential to fundamentally reshape global supply chains.

With the actions that the EU will take by the end of 2025, the mechanism has gained a clearer structure: definite rules will be established to come into effect in 2026, scope expansion is planned for 2028, and issues such as indirect emissions or the inclusion of new sectors are already on the agenda.  By learning from their experiences and continually tightening the system based on real-world data, they are moving ahead with a process of creating a framework that closes off escape routes one by one and forces the industry into "real" decarbonization. Considering that the most effective approach in climate policy is to learn through practice and continuously improve the system, it can be said that starting decarbonization in the industry without delay and sustaining the transition iteratively and seamlessly will pave the way for similar successes.

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