Why your CBAM bill is smaller than the headline suggests: the free allocation adjustment

A common early misunderstanding about the Carbon Border Adjustment Mechanism is to take the certificate price, multiply it by a product's embedded emissions, and treat the result as the cost. The real liability in 2026 is considerably lower than that, because of a deliberate adjustment built into the design. Understanding it is the difference between an alarming spreadsheet and an accurate one.

Why an adjustment exists

EU producers in the covered sectors still receive free emissions allowances under the EU Emissions Trading System. CBAM is being phased in as those free allowances are phased out, so that imported goods and domestic goods face an equivalent carbon cost rather than a doubled one. While EU producers continue to receive free allocation, importers receive a matching reduction in the certificates they must surrender.

The CBAM factor

That reduction is governed by what the rules call the CBAM factor, which expresses the proportion of free allocation still applying. In 2026 the figure is 97.5 per cent. It is then withdrawn on a rising schedule, falling to 95 per cent in 2027 and accelerating through the decade, until it reaches zero in 2034. At that point free allocation has gone entirely and importers face the full embedded-emissions liability.

The mechanics are set out in Implementing Regulation (EU) 2025/2620, through the Specific Embedded Free Allocation, or SEFA, methodology. In practice you surrender certificates only for emissions above the adjusted benchmark for your product, which is why the 2026 net cost is a small fraction of the gross figure. The important planning point is the direction of travel. A modest cost line this year becomes a material one well before 2034.

Default values carry a penalty

There is a second reason to engage your suppliers early. Where verified actual emissions data is not available, the calculation falls back on default values, and those defaults carry a deliberate mark-up: 10 per cent above the calculated default in 2026, 20 per cent in 2027 and 30 per cent from 2028, with fertilisers on a flat 1 per cent. Accurate primary data from suppliers is therefore usually the cheaper route, often substantially so. Building that data flow is the core of our CBAM-enabled stage.

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