Third-Country Carbon Price Deductions
Avoiding double carbon pricing
One of CBAM's most important design features is its deduction mechanism for carbon prices already paid in the country of production. This avoids a situation where a producer pays a carbon cost in their home country and then faces a full CBAM charge on top. Understanding which carbon prices qualify, how deductions are calculated, and what evidence is required gives importers and their suppliers a direct financial incentive to invest in low-carbon production.
The Principle Behind the Deduction
CBAM is explicitly designed to ensure that imported goods face an equivalent carbon cost to goods produced in the EU, not a punitive additional cost on top of any domestic carbon price. Article 9 of Regulation (EU) 2023/956 provides that the number of CBAM certificates to be surrendered shall be reduced to take account of any carbon price effectively paid in the country of origin for the declared embedded emissions.
This deduction right has a dual purpose: it prevents double taxation on producers already subject to meaningful carbon pricing, and it serves as an incentive for non-EU countries to establish or strengthen their own carbon pricing mechanisms. If a country introduces a domestic carbon price at or above the EU ETS level, its exporters would face no CBAM charge at all.
Analogy: An import tax with a foreign tax credit
Many countries' tax systems allow taxpayers to credit foreign taxes against domestic tax liabilities to prevent double taxation on the same income. CBAM's deduction mechanism works on a similar principle. If a steel producer in Kazakhstan has already paid a carbon price equivalent to €20 per tonne CO₂e under a domestic emissions trading scheme, and the CBAM certificate price is €65 per tonne, the declarant only surrenders certificates worth €45 per tonne. The foreign carbon cost fills part of the CBAM bill.
What Qualifies as a Deductible Carbon Price?
Not all forms of carbon pricing in third countries automatically qualify for CBAM deduction. The Regulation and its implementing acts set specific conditions that a carbon price must meet to be recognised:
- Legal mandate: The carbon price must be imposed by a legally binding instrument in the country of origin (a tax, an ETS, or an equivalent levy)
- Direct payment: The price must be paid directly in respect of the greenhouse gas emissions embedded in the goods, not as a general corporate tax or indirect levy
- No rebates or exemptions: The price actually paid must not have been refunded or otherwise offset by export rebates or equivalent schemes. If a country refunds the carbon cost on exported goods, no deduction is available
- Coverage of the same emissions: The emissions covered by the third-country carbon price must correspond to those declared as embedded under CBAM. A carbon price that covers only stationary combustion but not process emissions, for example, would only partially offset the CBAM liability
How the Deduction Is Calculated
The deduction is calculated on a tonne-of-CO₂e basis. For each tonne of embedded emissions declared, the declarant may subtract the effective carbon price per tonne paid in the country of production, converted to euro using the average exchange rate for the relevant period.
Where the third-country carbon price is denominated in a currency other than euro, the conversion uses the official exchange rate published by the European Central Bank. The effective carbon price is calculated by dividing the total carbon cost paid by the total embedded emissions it covers.
Example: A Korean steel producer under the K-ETS
South Korea operates a national emissions trading system (K-ETS) covering its steel sector. A Korean steel mill producing hot-rolled coil pays 28,000 Korean Won per tonne of CO₂e under the K-ETS. The average EUR/KRW exchange rate for the year gives an effective carbon price of approximately €18.50 per tonne CO₂e.
If the CBAM certificate price for the same period is €60 per tonne CO₂e, the EU importer of this Korean steel may deduct €18.50 per tonne, surrendering certificates worth only €41.50 per tonne CO₂e of embedded emissions.
The importer must document this through verified evidence from the Korean mill, including the amount of K-ETS allowances surrendered and the official K-ETS transaction records for the reporting period.
Evidence Requirements for Claiming the Deduction
Claiming the deduction is not automatic. The authorised declarant bears the burden of proof, and must provide documentary evidence demonstrating that the carbon price was actually paid. The Commission's guidance specifies that acceptable evidence includes:
- Official confirmation from the third-country competent authority confirming the carbon price paid and the emissions it covers
- ETS registry records showing allowance surrender by the installation in question
- Carbon tax payment receipts verified by the competent tax authority of the country of production
- A third-party verification report from an accredited verifier confirming the accuracy of the claimed deduction
The evidence must relate specifically to the goods being imported, not to the producer's operations in aggregate. This requires non-EU producers to maintain detailed, installation-level records of their carbon cost payments, cross-referenced with production output, to support their EU customers' deduction claims.
Countries with Linked or Equivalent Carbon Pricing
Certain third countries that have either linked their ETS to the EU ETS or adopted carbon pricing systems recognised as equivalent are treated differently. Countries that are part of the European Economic Area (Iceland, Liechtenstein, Norway) and Switzerland (which has a linked ETS) are generally treated like EU Member States for CBAM purposes, meaning their producers do not face CBAM charges because they already operate under a carbon price functionally equivalent to the EU ETS.
| Country/Region | Carbon Pricing System | CBAM Treatment |
|---|---|---|
| Norway, Iceland, Liechtenstein | Linked to EU ETS | Exempt from CBAM (equivalent carbon price) |
| Switzerland | CH ETS (linked to EU ETS) | Exempt from CBAM (equivalent carbon price) |
| South Korea | K-ETS (independent system) | Deduction available for K-ETS price paid |
| China | China ETS (power sector primarily) | Partial deduction if applicable to exported goods |
| Most others | No mandatory carbon pricing | No deduction; full CBAM certificate cost applies |
One complexity arises where a third country imposes a carbon price domestically but simultaneously provides export rebates or subsidies that offset the carbon cost for exported goods. In such cases, CBAM Annex III Section 5 specifies that only the net carbon price actually borne by the producer (after any rebates) may be deducted. A carbon price that is fully refunded on export provides no genuine climate incentive and should not reduce the CBAM obligation.
The Commission has flagged this issue as one of the areas under active review, including in the August 2025 call for evidence on the deduction methodology. As more countries adopt carbon pricing in response to CBAM, the rules around qualifying carbon prices are expected to become more detailed and potentially subject to bilateral agreements between the EU and major trading partners.
Key Takeaways
- 1Article 9 of the CBAM Regulation allows declarants to deduct from their certificate surrender obligation any carbon price already paid in the country of production for the same embedded emissions
- 2To qualify, the carbon price must be legally binding, paid directly for the embedded emissions, and not refunded through export rebates or equivalent schemes
- 3Deductions are calculated per tonne CO₂e, with third-country prices converted to euro using ECB exchange rates
- 4Importers must provide documentary evidence: ETS registry records, tax receipts, or verified third-party confirmation
- 5Countries linked to the EU ETS (Norway, Switzerland) are generally exempt from CBAM entirely; other countries with carbon pricing can claim partial deductions