What is carbon leakage?
Carbon leakage occurs when an organization relocates its activities to countries with weaker carbon and sustainability legislation. This is done to take advantage of:
- Cost savings: strict local rules make energy and production costly
- Weaker rules: other countries may not have carbon taxes or stern limits on pollution
- Market competition: organizations move to reduce prices and stay competitive
Carbon leakage can increase an organization’s carbon footprint in two ways: by allowing it to pollute more and by increasing its transportation-related environmental costs.
Relocating to less-regulated countries can also result in inaccurate carbon measurements, skewing carbon emissions mapping and attribution. The risk of carbon leakage may be higher in energy-intensive industries.
The overall problem is that total global pollution does not go down – it only moves location. Local economies also lose jobs and manufacturing prowess.
CBAM addresses carbon leakage
Tools like the EU Carbon Border Adjustment Mechanism (CBAM) are key to addressing carbon leakage. CBAM places a carbon price on imports of products from countries with less ambitious national climate change policies.
Proposed by the European Commission in 2021 as part of the European Green Deal, CBAM entered its definitive phase on January 1, 2026, making it fully operational and financially enforceable.
Does CBAM apply to finished goods?
CBAM currently applies to selected goods in the iron and steel, aluminum, cement, fertilizer, hydrogen and electricity sectors.
However, the scope is evolving. While CBAM does not yet apply to all finished goods, its scope is expected to expand to include more processed and semi-finished products.
Which GHG emissions are covered?
CBAM mirrors the EU Emissions Trading System (ETS) by covering carbon dioxide (CO₂), nitrous oxide (N₂O) in fertilizers and perfluorocarbons (PFCs) from the primary aluminum smelting process. Depending on the product category, direct emissions and, in some cases, indirect emissions from electricity consumption must be reported.
Emissions are calculated and reported using sector-specific methodologies and functional units, defined under CBAM, to ensure consistency and comparability across operators.
How does CBAM work?
Under the definitive CBAM regime, importers must submit annual CBAM declarations covering the embedded emissions of imported goods.
From 2027, importers must purchase and surrender CBAM certificates corresponding to the emissions associated with goods imported during 2026.
The number of certificates required reflects the difference between the carbon price paid by an operator producing the goods outside the EU and the carbon price that would have been paid had those goods been produced under the EU ETS.
What are the penalties?
| Violation | Who it concerns | Penalty |
|---|---|---|
| Failure to surrender adequate certificates | Authorized CBAM declarants | EUR 100 per tonne of CO₂e shortfall |
| Unauthorized importing | Anyone without authorized declarant status | EUR 300-500 per tonne of CO₂e of total embedded emissions |
| Non-reporting during the transitional period (2023-2025)* | All importers during this phase | EUR 10-50 per tonne of CO₂e unreported |
* The transitional period penalty applied to the failure to submit quarterly reports, not to certificate surrenders. Certificate obligations only began when the definitive phase started on January 1, 2026.
Support through accredited CBAM services
Our CBAM services sit within our IMPACT NOW for sustainability portfolio. As an EU CBAM-accredited verifier, we provide independent pre-verification and support services across all affected sectors, helping operators and importers involved in CBAM-affected supply chains to manage exposure and prepare for accredited verification.
We will help you:
- Understand CBAM
- Gain CBAM pre-verification
- Reduce CBAM exposure
Combining more than 30 years of sustainability leadership with our experience as the world’s leading testing, inspection and certification company, we bring proven expertise in GHG and EU ETS verification to every CBAM engagement.
Our independent, third-party track record is delivered through a global network of qualified technical experts operating locally across CBAM-affected markets. We offer extensive experience of EU climate regulations in real operational contexts, with delivery models that support compliance and scale as CBAM obligations evolve.
Discover our CBAM page or contact us now to start or strengthen your compliance journey with a proven partner.
About SGS
SGS is the world’s leading Testing, Inspection and Certification company. We operate a network of over 2,500 laboratories and business facilities across 115 countries, supported by a team of over 100,000 dedicated professionals. With more than 145 years of service excellence, we combine the precision and accuracy that define Swiss companies to help organizations achieve the highest standards of quality, compliance and sustainability.
Our brand promise – when you need to be sure – underscores our commitment to trust, integrity and reliability, enabling businesses to thrive with confidence. We proudly deliver our expert services through the SGS name and a portfolio of trusted specialized brands, including Applied Technical Services, Brightsight, Bluesign and Nutrasource.
SGS is publicly traded on the SIX Swiss Exchange under the ticker symbol SGSN (ISIN CH1256740924, Reuters SGSN.S, Bloomberg SGSN SW).
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