The draft implementing regulation sets out detailed rules for converting third-country carbon prices into reductions in CBAM certificate obligations.

By Joshua Bledsoe, Jean-Philippe Brisson, Michael Dreibelis, Michael D. Green, Gauthier Martin, John-Patrick Sweny, and James Bee

Key Points:

  • The European Commission has opened a four-week consultation following the publication of a draft implementing regulation for CBAM on 13 May 2026.
  • The draft rules explain how the payment of third-country carbon prices can reduce CBAM certificate obligations.
  • The draft rules also set out calculation, evidence, and certification requirements, including for emissions trading systems, carbon taxes, rebates, compensation, and eligible international carbon credits.

On 13 May 2026, the European Commission (Commission) published a draft implementing regulation on how carbon prices paid in third countries can reduce certificate obligations under the EU’s Carbon Border Adjustment Mechanism (CBAM). The draft forms part of the Commission’s wider programme of implementing acts clarifying CBAM’s application and is open for public consultation until 10 June 2026.1 This blog post summarises the background, key proposals, and next steps for stakeholders.

Background

Established by Regulation (EU) 2023/956, CBAM requires authorised declarants to purchase and surrender certificates corresponding to the embedded carbon emissions in imports of certain goods considered by the EU to be carbon-intensive and subject to potential carbon leakage (including cement, iron, steel, fertilisers, and electricity). The price of these certificates seeks to reflect the cost faced by EU producers under the EU Emissions Trading System (EU ETS). CBAM’s aim is to prevent carbon leakage from production shifting to jurisdictions with less stringent climate rules.

CBAM entered its definitive phase on 1 January 2026, after a transitional reporting period from 1 October 2023 to 31 December 2025. From February 2027, declarants will be required to surrender certificates for embedded emissions in goods imported since 1 January 2026, with certificate prices set by reference to the EU ETS. “Embedded emissions” refers to the direct (emissions resulting from the production process) and indirect (emissions occasioned by the use of electricity in production) emissions that are released during the manufacture of goods that fall within CBAM’s scope.

A core element of CBAM is the provision allowing declarants (typically the importers of in-scope goods into the EU) to claim a reduction in the certificates that need to be surrendered in relation to a relevant good, which may apply if a carbon price has already been effectively paid in a third country for the embedded emissions in such relevant good. Until now, however, the methodology, evidence, and certification requirements for claiming that reduction were unspecified, creating uncertainty for declarants and third-country operators.

Scope and Purpose of the Draft Regulation

The draft text provides for several ways to offset certificate obligations and sets out rules for: (i) calculating the effective carbon price paid in a third country for the declared embedded emissions in goods exported to the EU; (ii) converting such carbon price into a certificate reduction; (iii) satisfying evidentiary requirements; (iv) accounting for rebates and compensation; and (v) certifying carbon price reports.

Key Proposals

1. Carbon Price Methodology

    The draft regulation sets out a methodology for attributing the effective carbon price paid on embedded emissions to each good produced by an installation. That figure determines the declarant’s CBAM certificate reduction, so claims must be supported by certified evidence linking the price paid with respect of the specific embedded emissions of the specific imported good, rather than with respect of the emissions of the installation as a whole. Operators must determine the price per tonne under each applicable mechanism, attribute emissions to goods, account for rebates and compensation, and convert the result into euros.

    The draft rules specify that the provisions will apply to carbon pricing mechanisms that take the form of a tax, levy, or fee, which are mandatory in nature, apply to all operators in a relevant sector, and otherwise operate on a non-discriminatory basis. Existing or developing schemes such as the UK ETS, China National ETS, and California Cap-and-Invest Program may therefore fall within scope, although any assessment will depend on the final regulation and the specific design of the scheme.

    To streamline compliance and reduce administrative burdens for third-country operators, the Commission may publish default carbon prices for third countries with carbon pricing rules. Declarants using actual embedded emissions values to calculate the amount of CBAM certificates they must purchase may use those defaults instead of a certified actual carbon price when determining how much they can offset. However, where embedded emissions are based on default emission values, the deduction must also be based on the relevant default carbon price. For indirect emissions, reporting is by default based on default emission values, making the default carbon price route the only available option. For precursors produced outside the installation, actual values require a separately certified carbon price report from the precursor installation; absent that report, the default carbon price must be used.

    A further practical consideration is that the financial benefit of claiming a carbon price deduction may be limited where the effective carbon price in the third country is set materially below the EU ETS price. Since the certificate reduction is calculated by reference to the effective carbon price, a low third-country price will yield only a modest deduction, leaving the importer to cover the substantial remainder through CBAM certificate purchases.

    2. International Carbon Credits

    One of the key features of the original CBAM drafting was a provision meaning that, where a third-country carbon pricing mechanism allows operators to use carbon credits (i.e., credits representing an emission reduction or the removal of greenhouse gas emissions, generated by a mitigation activity not covered by the carbon price mechanism) to meet compliance obligations, the draft regulation will allow declarants to claim a carbon price reduction based on the price effectively paid for those credits.

    Under the contemplated draft rules, the provision has been extended and will permit the use of international carbon credits (which relate to mitigation activities implemented in a country other than the country of production of the goods). In order to apply, these credits must comply with the requirements outlined under Article 6 of the Paris Agreement 2015 and will be subject to specific restrictions. In particular, their use is capped at a maximum of 10% of the reported and confirmed emissions covered by the third-country carbon pricing mechanism; where more than 10% of emissions are covered by such credits, a price of zero is assigned to the excess. This 10% cap is consistent with the EU’s broader climate policy direction: from 2036, high-quality international credits may only be used up to 5% of 1990 EU net emissions towards the 2040 target, with at least 85% of reductions achieved domestically. Critically, this avenue is only available if the third-country carbon pricing scheme itself permits the use of international carbon credits; if it does not, such credits cannot be relied upon to reduce CBAM obligations.

    Commentary on the draft has therefore suggested that international carbon credits may have limited practical value in reducing CBAM obligations. The 10% cap and zero-price excess treatment constrain the financial upside, while the Centralized Accounting and Reporting Platform registration and authorisation may be complex and costly to coordinate.

    3. Treatment of Rebates and Compensation

    Any rebate or compensation that reduces the obligation to pay for embedded emissions that are otherwise subject to the third-country carbon price mechanism must be deducted from the effective carbon price. This includes free allowances, emissions below a baseline under a baseline-and-credit system, emissions exempted from a carbon price, reduced tax rates, and refunds or any modification of a parameter that lowers the obligation to pay the carbon price. In practice, this means that the effective carbon price used to calculate the CBAM certificate reduction reflects only what the third-country operator genuinely paid, not the headline rate. Since the certificate reduction is calculated by reference to this effective carbon price, any rebate that lowers it directly reduces the number of certificates that can be deducted from the importer’s surrender obligation, meaning the importer must purchase and surrender more CBAM certificates to cover the difference.

    The draft rules treat revenues generated by a carbon price mechanism and reinvested as decarbonisation subsidies differently. They are not treated as compensation and not taken into account to establish the carbon price effectively paid, provided the subsidy scheme is generally available to all installations subject to the carbon pricing mechanism, the authority’s decision is public, and the subsidies are directed at reducing emissions at the beneficiary installation. This approach reflects the proposed EU decarbonisation fund, which is expected to channel 25% of CBAM revenues to EU domestic producers as carbon leakage support by reinvesting carbon pricing proceeds in decarbonisation rather than treating them as a reduction in cost.

    4. Evidence and Certification Requirements

    To ensure that the carbon price effectively paid under a third-country carbon emissions scheme can be verified, operators must prepare a carbon price report using a standard electronic template in English that sets out the calculation steps and supporting evidence. The report must be certified by a suitably qualified independent person accredited by a national accreditation body for the specific scope of certifying the carbon price effectively paid.

    The operator must also present to the independent person the operator’s verified emissions report (prepared under Implementing Regulation (EU) 2025/2547) and the corresponding verification report, as these form the basis against which the carbon price data are assessed. The Commission views carbon price certification as inextricably linked to embedded emissions verification: it reviews both the scope of emissions covered under the carbon pricing mechanism and their attribution to CBAM goods, making it comparable to the verification exercise itself. Operators may therefore rely on the same independent person for both exercises, which the Commission considers will streamline application procedures and simplify the design of the CBAM registry.

    The operator is required to maintain and provide supporting evidence tailored to the type of carbon pricing mechanism, including, for emissions trading systems, official records of compliance units surrendered and the weighted average auctioning price; for carbon taxes, legislation prescribing the applicable rate and official records of tax paid; and for rebates, official correspondence with the granting authority confirming the amount and basis of any compensation received.

    The certification report must give a satisfactory or unsatisfactory opinion. An unsatisfactory opinion applies where material misstatements remain uncorrected, evidence is insufficient, or reasonable assurance cannot be given. A misstatement is material if it exceeds 5% of the effective carbon price per tonne for a good.

    Notably, the draft CBAM rules require reasonable assurance from the outset. This approach contrasts with the separate CSRD assurance regime, under which only limited assurance is required. From 1 January 2027, certification reports must be issued via the CBAM registry. Accreditation is valid for five years and subject to annual surveillance, and competent authorities must recognise certification reports issued by independent persons accredited by peer-evaluated national accreditation bodies.

    5. Conversion and Certificate Reduction Formula

    The draft regulation prescribes a formula for converting the effective carbon price into a corresponding reduction in CBAM certificates, benchmarked against the yearly CBAM certificate reference price. The underlying provisions (including rules on foreign currency conversion and the calculation methodology) are highly technical, and businesses should analyse them in detail in conjunction with their financial and compliance teams to understand the full impact on their CBAM obligations.

    Conclusion and Next Steps

    This draft implementing regulation completes the core technical framework for CBAM compliance, alongside the implementing regulations on embedded emissions, verification, the registry, and certificate pricing adopted in late 2025. The draft is currently subject to public consultation, with the feedback period closing on 10 June 2026. Companies importing CBAM goods and their advisers should review the proposals carefully and consider submitting feedback before that deadline.

    Looking ahead, businesses should monitor the following:

    • Finalisation and adoption of the regulation following consultation, with the rules directly applicable in all Member States
    • Publication of default carbon prices for third countries, which could simplify the deduction process, particularly for precursors and indirect emissions
    • Operationalisation of the accreditation framework, including peer evaluation of national accreditation bodies
    • From 1 January 2027, mandatory issuance of certification reports via the CBAM registry
    • Which non-EU carbon pricing mechanisms will be eligible to reduce the CBAM obligations
    • Continued evolution of the broader CBAM framework, including the phase-out of free allowances for EU producers under the EU ETS

    This blog post was prepared with the assistance of Samantha Banfield and James Thompson at Latham & Watkins.

    Latham & Watkins will continue to monitor developments relating to the European sustainability regulatory landscape.