As Europe races toward net zero, the Carbon Border Adjustment Mechanism (CBAM) is set to transform cross-border electricity trading. From January 2026, importers will face carbon costs—raising the stakes for clean energy, market efficiency, and climate cooperation.

 

CBAM is emerging as a pivotal policy tool that could reshape the landscape of cross-border energy trading. From 1 January 2026, it will transition from its current reporting phase to full implementation. Importers will be required to purchase CBAM certificates that reflect the embedded carbon emissions in their goods.

This shift marks a critical moment not only for regulators and policymakers, but also for energy market participants.

 

The core ambition of CBAM is to prevent carbon leakage—where companies relocate production outside the EU to avoid carbon costs—and to encourage global climate action by ensuring imported goods face an equivalent carbon price.

 

While this principle supports fair competition and global climate action, its application to electricity presents complex challenges. The mechanism’s current design risks penalising clean power flows, distorting market signals, and undermining the very decarbonisation it seeks to promote.

 

Understanding CBAM’s impact is essential, as the implications are profound. Its implementation will influence investment decisions, shape trading strategies, and redefine the economics of clean energy. It will also test the resilience of Europe’s integrated power system and its ability to deliver affordable, secure, and sustainable energy. In other words: the stakes are high.

 

How CBAM Works

Under the CBAM framework, importers of carbon-intensive goods—such as steel, cement, aluminium, fertilisers, and electricity—must buy certificates corresponding to the greenhouse gases emitted during production.

For electricity, the carbon content is determined by a country-specific default emissions factor. This factor reflects the fossil fuel intensity of the exporting country’s generation mix, based on an average of the previous five years. Importers may instead use verified actual emissions data, but only if they meet stringent and often impractical criteria.

The logic is straightforward: countries that rely more on fossil fuels should face higher CBAM costs. The reality, however, is more complex—particularly for electricity, where generation mixes are evolving rapidly and cross-border trade occurs dynamically through coupled markets.

 

Why This Matters for Electricity Trading

As currently designed, CBAM’s approach to electricity could unintentionally penalise countries with cleaner power systems.

Take the UK, for example. It has made significant progress in decarbonising its power sector, with renewables now generating around 50% of GB electricity. Yet under CBAM, UK electricity exported to the EU could still be charged using a default emissions factor based on historic fossil generation.

This means low-carbon imports could face similar carbon costs as fossil-based power, discouraging clean electricity flows and potentially increasing overall EU emissions.

In theory, market participants could demonstrate actual emissions—e.g., through power purchase agreements tied to specific renewable installations—but in practice, this is difficult. Electricity is generally traded through implicit market coupling, where the importer cannot be easily identified. As a result, CBAM costs would likely be socialised across all consumers, adding unnecessary costs and complexity.

This also creates a risk of double carbon taxation for electricity that has already faced carbon pricing. It undermines the efficient functioning of integrated European power markets, which are designed to optimise flows based on cost and carbon efficiency. Ultimately, these inefficiencies will lead to higher consumer prices and slower progress toward net zero.

For example, EirGrid recently presented its interpretation of CBAM implementation in Ireland. Their modelling indicated that the impact on the East-West Interconnector alone for tariff year 2023/24 would have resulted in a cost increase for Irish consumers of approximately €86 million. Extending this logic to include the Greenlink Interconnector, CBAM could result in a cost increase of over €192 million in 2026.

 

Recent Developments and the Path Forward

While concerning, there has been positive political momentum in addressing these issues. At the EU–UK Summit in May 2025, both sides agreed to pursue a linkage between their emissions trading systems (ETS)—a step that would render CBAM unnecessary for electricity trade between the EU and UK.

Centrica Energy welcomes this progress. However, until a formal ETS linkage is in place, importers and traders remain in regulatory limbo. Many are investing significant resources to prepare for CBAM compliance that may soon be redundant. A temporary exemption during ETS linkage negotiations would be a pragmatic solution—reducing unnecessary costs while maintaining momentum on cross-border climate cooperation.

 

A Smarter CBAM for Electricity

To ensure CBAM supports—rather than hinders—the energy transition, several refinements are essential:

  • Broaden the emissions baseline: Default emission factors should reflect the average carbon intensity of all generation sources, not just fossil fuels.

  • Enable near-real-time accuracy: Where data allows, emissions factors should reflect the actual carbon content of traded power, which varies hourly.

  • Simplify verification: The process for demonstrating zero-carbon generation must be practical and accessible for market participants.

  • Avoid double taxation: CBAM should credit carbon already priced in exporting countries’ ETS systems, such as the UK ETS.

 

Getting the Details Right

CBAM is an essential part of Europe’s climate policy architecture, but its success depends on getting the details right. For electricity, that means designing a system that recognises real decarbonisation progress, aligns with how power is traded, and avoids creating perverse incentives.

For Centrica Energy, this is more than a regulatory update—it’s a strategic inflection point. As a leading energy trading firm operating across European borders, we are deeply invested in the integrity and efficiency of coupled power markets. The inclusion of electricity in CBAM, without adequate recognition of real-time carbon intensity or existing carbon pricing systems like the UK ETS, threatens to fragment these markets, increase costs for consumers, and slow progress toward climate goals.

If implemented smartly, CBAM can strengthen Europe’s carbon market, deepen cooperation with partners such as the UK, and accelerate the shift to clean, secure energy. As 2026 approaches, now is the time to ensure this critical policy works with—and not against—Europe’s energy transition.