What CBAM's New Draft Rules Mean for Carbon Credits and Commodities

The European Commission recently published a draft regulation that would change the relationship between carbon credits, global commodity trade, and decarbonisation finance. 

For the first time, the proposed rules governing CBAM - the EU's carbon border tax on steel, cement, aluminium, fertilizers, hydrogen, and electricity - would formally recognise international carbon credits as evidence of a carbon price paid.

The feedback period runs until 10 June. If finalised, the rules apply retroactively from 1 January 2026.

Sylvera’s initial take is that the rules strike the balance between geopolitical aims and complex technical practicalities,  something that’s challenging when designing a mechanism that has to work across many different carbon pricing systems, with very different structures, histories, and sovereign choices to consider. That said, there are still some issues to resolve, and this article aims to break down those in detail.

What the CBAM draft says

CBAM's underlying logic is: if a producer outside the EU has already paid a carbon price through a compliance system at home, they should not pay twice when their goods enter the EU. The new draft regulation sets out, for the first time, exactly what counts as a carbon price paid, and carbon credits are now explicitly on the list.

Two types of credits are treated differently.

Domestic credits used to comply with obligations within a third country's emissions trading system (ETS) or carbon tax are fully deductible with no additional EU requirements. For example, a Chinese steel producer using CCERs within China's ETS? Fully recognised. If a domestic credit is compliance-grade in your home market, it’s accepted at face value. The absence of any quantitative cap on domestic credits deduction is the standout provision in the draft — though in practice, most domestic systems impose their own limits.

International credits, specifically, Internationally Transferred Mitigation Outcomes (ITMOs) authorised under Article 6.2 or 6.4 of the Paris Agreement, are allowed, but capped at 10% of the reported emissions covered by the producer’s obligations under the home country's carbon price mechanism. Only credits registered on the UNFCCC's Centralised Accounting and Reporting Platform (CARP) or the Article 6.4 Mechanism Registry qualify. Credits purchased entirely outside a compliance system are ineligible.

What it looks like in practice

The instinctive reading of this news is: producers will now buy cheap carbon credits to reduce their CBAM exposure. That’s not how the mechanics work.

Under CBAM, an EU importer surrenders fewer certificates the higher the effective carbon price their supplier has paid. Credits don't reduce CBAM liability directly — they affect it only through their impact on the producer's weighted average carbon price.

Consider a Turkish steel producer operating under Turkey's incoming ETS. Turkey's ETS will allow producers to use domestic carbon credits for a portion of their compliance obligation. If they substitute cheaper domestic carbon credits for part of their allowance obligation, their weighted average carbon price falls below the prevailing allowance price. That lower effective carbon price means their EU importer faces a higher CBAM bill than they would if the Turkish producer had simply bought allowances at market price. Using cheap domestic credits instead of paying the full allowance price doesn't reduce CBAM exposure, it increases it.

This creates a split incentive between the foreign producer and their EU customer. So, that Turkish producer may rationally minimise their domestic compliance cost by buying cheaper credits, which is a purely domestic financial decision. But this directly penalises their EU customer through higher CBAM costs. The EU importer, therefore, has a strong commercial incentive to contractually require the Turkish producer to maximise their effective carbon price, pushing them toward paying for allowance rather than offsetting obligations with cheaper credits.

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The revenue question matters too. Allowance purchases keep revenue within the Turkish treasury. Domestic credit purchases send revenue to a project developer. Either way, the carbon cost ultimately lands on the EU consumer. The difference is where the money goes and who has an interest in ensuring it flows toward genuine decarbonisation.

This is the mechanism through which CBAM will start to reshape procurement relationships across some of the world's most emissions-intensive commodity sectors, and why EU importers need to understand their suppliers' carbon pricing choices in much greater detail than ever before.

The 10% cap

The 10% cap on international credits was expected, but the stated rationale has not gone unchallenged. The Commission's justification, that the limit is needed to ensure that most decarbonisation efforts are pursued domestically, does not fully persuade. 

It’s not obvious what difference the 10% threshold makes to either the EU or to the global Paris Agreement goals. Domestic abatement in a third country is domestic abatement, regardless of whether it is funded by a locally issued credit or an internationally transferred one.

Also worth clarifying: the 10% cap is widely misunderstood. It applies not to CBAM obligations directly, but to the compliance obligations of a third country's domestic carbon pricing system — capping at 10% the share of those domestic obligations that can be met using internationally sourced credits (some domestic systems impose even tighter limits: Singapore's carbon tax, for instance, allows only 5%).

Two unresolved issues

The first concerns quality thresholds for international credits. For CBAM, the draft treats Article 6.2 or 6.4 ITMO status as sufficient quality assurance in itself — no additional integrity requirements are proposed on top of that baseline. For CORSIA, by contrast, the EU has signalled that further quality criteria may be imposed, though this remains to be determined. The asymmetry is notable: if ITMO status is deemed adequate assurance in the CBAM context, the case for layering additional requirements onto CORSIA-eligible credits will need a clear justification. This inconsistency is likely to attract scrutiny during the consultation period and become a pressure point as the rules are finalised.

The second is more fundamental. CBAM is, by design, a mechanism about the carbon price paid, not about the environmental impact of individual instruments. But the draft's emphasis on credit-level environmental integrity introduces a new logic. And if the EU does care about the impact of individual credits, there is an obvious implication: credits, which individually represent a discrete emission reduction or removal, should receive priority treatment over carbon allowances, which individually have zero environmental impact. The draft does not draw that conclusion.

An open question is whether the accounting rules create an arbitrage opportunity. If benchmark prices are set such that cheaper credits can still be counted at the CBAM allowance price for deduction purposes, companies could in theory, use low-cost credits to offset a higher-value CBAM liability. 

A broadly positive move

The rules are broadly sensible. They recognise that compliance systems do and will vary across countries, reflecting legitimate sovereign choices — and that the use of credits to meet compliance obligations is increasingly common in emerging carbon pricing frameworks. 

Rather than imposing a single rigid template, the draft accommodates that diversity while still maintaining the integrity of CBAM's core purpose. That minimises both market disruption and diplomatic risk, which is no small feat for a mechanism that touches the policies of dozens of countries simultaneously.

It’s also positive in what the draft is trying to do to the systems not yet built.

The question for ITMO demand is different and more conditional. Currently, only a handful of countries — Singapore, and Japan among them — permit the use of international credits for compliance purposes at all, and of those, only Vietnam allows more than 10% of domestic obligations to be met this way — and Vietnam is not heavily exposed to CBAM. 

If countries with developing carbon taxes and ETS frameworks like Turkey’s or Brazil’s stick to their current designs, the draft's impact on Article 6 demand is essentially zero. Any meaningful ITMO demand uplift requires foreign governments to actively change their rules to permit international credits — and to conclude that CBAM recognition makes it worth doing. The real audience is not countries that have already built their frameworks, but those still designing them.

Carbon-Differentiated Commodities: Carbon Price and Carbon Intensity

Running beneath all of this is a structural shift in commodity markets that CBAM is accelerating, which involves two different levers.

The first is about the carbon price. This is what the draft regulation directly addresses: whether a producer has paid a carbon price on the emissions embedded in their goods, and whether that price can be deducted from their CBAM liability. A Turkish steel producer who has paid a high effective carbon price domestically faces a lower CBAM bill than one who has not. The draft extends this to carbon credits used within a compliance system.

The second is about carbon intensity, the actual volume of CO2 embedded in production per tonne of output. A producer who has genuinely decarbonised their process faces lower CBAM exposure from the outset, regardless of domestic carbon pricing, because there are simply fewer embedded emissions to be charged on. These two levers interact but are not the same thing.

The spread in carbon intensity across facilities in CBAM-affected sectors is enormous. For ammonia alone, Sylvera data shows facility-level carbon intensity ranging from 0.25 to 5.5 kgCO2e per kilogram of ammonia, a more than twentyfold difference. The same pattern holds for cement and other commodities. Under CBAM, that spread translates directly into commercial advantage or disadvantage for EU buyers procuring from those facilities.

This is what carbon-differentiated commodities actually means: not a green/grey/blue label, but a continuous curve where every tonne of CO2e improvement carries commercial value. The categories we currently use, green steel, blue hydrogen, and low-carbon cement, obscure the real distribution and create artificial cliff effects. CBAM and compliance ETS schemes already price every kilogram of CO2e, so it’s far more coherent to extend that logic into commodity pricing than to rely on arbitrary thresholds.

For producers, this creates an opportunity. Decarbonising the production process reduces the base CBAM liability. Pairing that with a domestic carbon pricing mechanism, or, where available, high-quality Article 6 credits, reduces it further. Demonstrating both, with certified facility-level data, is what unlocks premium access to EU buyers who are increasingly making procurement decisions based on carbon intensity as well as price.

Quality is a compliance issue, not a just an environmental one

The regulation is explicit that international credits must meet Paris Agreement environmental integrity standards. What it does not fully resolve is how that bar will be defined and enforced in practice, and the CORSIA inconsistency suggests this will be contested.

What is already clear is that not all credits are equivalent. A credit that cannot demonstrate Article 6 registration, fails independent certification, or carries unresolved additionality concerns is not a viable CBAM compliance tool. Pricing data reflects this segmentation: BBB+ rated ARR (afforestation, reforestation, and revegetation) projects in Sylvera's ratings framework now command median prices above $35, while lower-rated equivalents trade below $20.

For companies selecting, documenting, and certifying the credits embedded in their CBAM declarations, quality is not a reputational consideration. It’s a compliance risk.

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How Sylvera can help

Sylvera's Mechanism Eligibility Reporting helps producers understand which compliance and voluntary mechanisms they qualify for, what their carbon intensity looks like under each relevant framework, and what the financial value of their lower-carbon advantage could be — now and as the regulatory landscape evolves. 

Whether you're navigating CBAM, EU ETS, or other emerging mechanisms, we deliver the eligibility picture, the gap analysis, and the commercial case in one defensible engagement.

If you want to understand how the CBAM draft affects your facility, your supply chain, or your credit portfolio, request a demo now.