The EU's Carbon Border Adjustment Mechanism (CBAM), after a 2023–2025 transitional period (reporting obligations only, no certificate purchases required), entered full implementation in January 2026. The six covered sectors are steel, aluminum, fertilizers, cement, hydrogen, and electricity. Exporters are obligated to purchase CBAM certificates through EU importers, with pricing linked to EU Emissions Trading System (EU ETS) market prices. Japanese exports to the EU most directly affected include steel products, aluminum products, and certain chemicals.
CBAM's Design — How the System and Pricing Logic Work
CBAM is designed to correct the unfairness whereby EU manufacturers bear carbon costs through the EU ETS while imported non-EU products escape that obligation. EU ETS requires manufacturers to purchase emissions allowances, embedding decarbonization costs into production costs. CBAM applies an equivalent carbon cost to imports from outside the EU, preventing carbon leakage — the phenomenon where production shifts from countries with strict carbon regulation to those with looser rules.
The cost calculation formula: CBAM certificate purchase cost = Embedded emissions of imported goods (tCO2) × EU ETS carbon price (EUR/tCO2)
The EU ETS carbon price has been trading in the range of €60–90 per tCO2 in 2024. For 1,000 tons of exported steel products with embedded emissions of 1.8 tCO2 per ton of product, the certificate purchase cost reaches 1,800 tCO2 × €70 = €126,000 (approximately ¥20 million).
The risk of default values: Where a company cannot declare its own calculated emissions, the EU applies default values. These defaults are set based on the top 10% highest-emitting companies in each sector, and in most cases are significantly higher than a company's actual emissions. Performing self-calculated emissions assessments can materially reduce certificate purchase costs.
Covered Sectors and the Impact on Japanese Exports
Among the six covered products, the largest by value for Japanese exports to the EU are steel products (special steels for automotive parts and industrial machinery) and aluminum products (extruded materials, castings, etc.). Direct exports of fertilizers, cement, and hydrogen from Japan to the EU are limited, but the impact via European local production facilities operated by Japanese companies requires separate investigation.
An important caveat: CBAM coverage is defined narrowly by HS code, and not all "steel products" fall within scope. For example, certain processed steel products may be excluded. The first practical step is to match each company's export items against HS codes to accurately identify what falls within scope.
Three Practical Steps for CBAM Compliance
Establish embedded emissions calculation infrastructure
Calculations of direct emissions (Scope 1) and indirect emissions (Scope 2) per ton of product are required. Compliance with the EU methodology defined in Regulation (EU) 2023/1773 is mandatory, and the granularity of factory energy data determines calculation accuracy. Since product-level (by item number and grade) emissions calculations are required, designing how to allocate energy by production process is technically the most challenging aspect.
Establish data coordination with EU importers
CBAM declarations are filed by EU importers, but emissions data provision is the responsibility of the Japanese manufacturer. Agreeing in writing on the data format required, submission timing, and division of responsibilities helps prevent disputes. Since EU importers require Japanese manufacturer emissions data to file CBAM declarations, it is recommended to embed data provision terms into annual trade agreements.
Model the gap from default values
If self-calculated values are lower than EU default values (based on the top 10% highest-emitting companies per sector), certificate purchase costs can be reduced. The larger the gap, the higher the ROI of CBAM compliance investment, so the first step is to compare self-calculated values against the applicable defaults. Actual emissions vary significantly by production process — blast furnace, electric arc furnace, etc. — so the gap from defaults differs considerably by company.
The Reality for Small and Mid-Size Exporters
The most difficult aspect of CBAM compliance for smaller exporters with low EU export ratios and no dedicated compliance staff is information loss risk. Where transactions with EU importers go through major trading companies or export agents, CBAM requirements may be incomplete when transmitted through intermediaries.
Map all EU-bound shipments
Confirm whether covered products are being exported to the EU, directly or indirectly. Even when transacting through a trading company, the product may be subject to CBAM if the final destination is the EU, requiring tracing back through the trade flow. Aggregate annual export volumes by HS classification and destination to model projected CBAM certificate purchase costs.
Build factory-level energy data
CBAM calculations require the combination of factory-level electricity and fuel consumption data with production volumes. Where this information is not currently available, the starting point will be installing electricity and gas meters. It may be possible to minimize new metering investment by checking whether data already compiled for mandatory energy efficiency reporting (Act on the Rational Use of Energy) can be repurposed for CBAM calculations.
Leverage industry association resources
Industry groups such as the Japan Iron and Steel Federation and the Japan Chemical Industry Association have published CBAM compliance guidelines. It is more efficient to use industry-common calculation formats than to develop proprietary methodologies independently. Associations are also engaged in collective negotiations to reflect Japanese industry views on EU regulations, and participation reduces information acquisition costs.
Modeling Cost Impacts After 2026
Many forecasting organizations anticipate EU ETS carbon prices rising to approximately €100–150 per tCO2 by 2030. At this level, the impact on steel export costs would be 1.5 to 2 times the current burden. Whether carbon costs can be passed through to product prices depends on market competitiveness; where they cannot, EU export profitability is directly affected.
Since decarbonization investment — electric arc furnace conversion, renewable energy switching, energy-efficiency equipment — directly reduces self-reported emissions and therefore CBAM costs, incorporating CBAM compliance cost savings into ROI calculations for decarbonization investments can improve the economic case for such investments.
CBAM will create a significant divergence in burden after 2026 between companies that completed reporting obligations during the transitional period and those that deferred action. Whether a company can demonstrate self-calculated embedded emissions below EU default values directly affects annual certificate purchase costs. Companies that delayed action face the dual challenge of building compliance infrastructure while carrying the cost disadvantage of having default values applied.