A supplier's carbon price reduces the certificates you surrender, but only after three haircuts, and never below zero.
A carbon price paid in the country of origin reduces the CBAM certificates you surrender by the price effectively paid, net of free allowances and rebates, on the emissions it actually covered, converted to euros and divided by the CBAM certificate price. On an illustrative steel import at 1.90 tCO2e a tonne, a headline origin price of 11.25 euros shrinks to 5.40 euros a tonne of product, 0.072 certificates, which takes the 2026 cost from 42.32 to 36.92 euros a tonne. The tempting shortcut, headline price times embedded emissions, claims 21.375 euros, four times too much.
Worked in full in The CBAM Compliance Handbook by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
The CBAM Regulation lets an authorised declarant claim a reduction in the number of certificates to surrender so that a carbon price already paid in the country of origin for the declared embedded emissions is taken into account. Three conditions do most of the work. The price must have been paid, not merely be in force. Any rebate or other compensation, including free allocation under the origin scheme, comes off it. And the claim needs documentation and certification by an independent person, which in practice means the supplier has to provide it alongside its verified emissions report.
The detailed method, including the exchange rate and how the reduction sits next to the free allocation adjustment, is set in implementing rules. Check the version in force before you declare. The case below shows the arithmetic of the principle, and the three haircuts it implies whatever the final drafting.
| Input | Value |
|---|---|
| Tonnes imported | 10,000 |
| Verified embedded emissions, tCO2e a tonne | 1.90 |
| Of which at installations covered by the origin carbon price | 1.60 |
| Of which in a precursor bought from an uncovered supplier | 0.30 |
| Origin carbon price, local units per tCO2e | 90.0 |
| Average exchange rate, euros per local unit | 0.125 |
| Share of the producer's emissions covered by free allowances in origin | 70% |
| Benchmark, tCO2e a tonne (illustrative) | 1.37 |
| Free allocation retained in the EU, 2026 | 97.5% |
| CBAM certificate price, euros (illustrative) | 75.00 |
The benchmark and certificate price are the same illustrative values used in how the CBAM free allocation adjustment is calculated, so the two cases reconcile. The origin scheme is fictional.
Effective price per tCO2e = origin price × exchange rate × (1 − free allocation share − rebates)
Carbon price paid per tonne of product = covered emissions per tonne × effective price
Certificates deducted per tonne = carbon price paid per tonne ÷ CBAM certificate price, capped at the certificates due
Excel: =MIN(Covered*Price*FX*(1-Free)/CBAMPrice, SEE-Bench*Retained)
Step 1, convert. 90.0 local units at 0.125 is 11.25 euros per tCO2e. This is the headline, and the figure most suppliers quote.
Step 2, take off free allocation. The producer receives free allowances for 70 per cent of its emissions, so it pays on 30 per cent: 11.25 × 30% = 3.375 euros per tCO2e emitted. A rebate, a tax credit or a compensation payment linked to the carbon price would come off in the same way.
Step 3, apply it only to the emissions it covered. The origin scheme covers the steel plant, 1.60 tCO2e a tonne. The 0.30 embedded in a precursor from an uncovered supplier carried no price. 1.60 × 3.375 = 5.40 euros per tonne of steel.
Step 4, convert to certificates. 5.40 ÷ 75.00 = 0.072 certificates a tonne, 720 on the year's 10,000 tonnes, worth 54,000 euros.
Step 5, net against what is due. After the EU free allocation adjustment, 2026 imports owe 1.90 − 1.37 × 97.5% = 0.56425 certificates a tonne, 42.32 euros. Less the deduction: 0.49225 certificates, 36.92 euros. For the year, 5,642.5 certificates and 423,187 euros fall to 4,922.5 certificates and 369,187 euros.
The deduction is a fixed amount per tonne as long as the origin price and free allocation do not change. The CBAM bill grows as EU free allocation is phased out, so the deduction matters less each year.
| Year | EU free allocation retained | Due before deduction | Due after deduction | Share saved |
|---|---|---|---|---|
| 2026 | 97.5% | 42.32 | 36.92 | 12.8% |
| 2027 | 95.0% | 44.89 | 39.49 | 12.0% |
| 2028 | 90.0% | 50.02 | 44.62 | 10.8% |
| 2030 | 51.5% | 89.58 | 84.18 | 6.0% |
| 2034 | 0.0% | 142.50 | 137.10 | 3.8% |
The full schedule of EU free allocation and what it does to the gross bill is in how much CBAM will cost per tonne of steel from 2026 to 2034.
The deduction cannot take the certificates below zero, and an excess is not refunded or carried forward. That cap binds early, because 2026 liabilities are small.
| Effective origin price, euros per tCO2e | Paid per tonne | Net 2026 | Net 2030 | Net 2034 | Unused in 2026 |
|---|---|---|---|---|---|
| 3.375 (case: 70% free) | 5.40 | 36.92 | 84.18 | 137.10 | 0.00 |
| 7.875 (30% free) | 12.60 | 29.72 | 76.98 | 129.90 | 0.00 |
| 11.25 (no free allocation) | 18.00 | 24.32 | 71.58 | 124.50 | 0.00 |
| 30.00 | 48.00 | 0.00 | 41.58 | 94.50 | 5.68 |
| 60.00 | 96.00 | 0.00 | 0.00 | 46.50 | 53.68 |
In 2026 any effective price above 26.45 euros per tCO2e covered is partly wasted on this product. A supplier from a mature carbon market gains its full advantage only as EU free allocation falls away, which is worth knowing before a price clause gives it credit for the whole headline. The exchange rate matters at the margin: at 0.115 instead of 0.125 euros per local unit, the deduction falls from 5.40 to 4.97 euros a tonne.
Multiplying the headline origin price by all the embedded emissions: 1.90 × 11.25 = 21.375 euros a tonne, 0.285 certificates. That ignores the free allowances the producer received and the precursor its scheme never priced, and claims 15.975 euros a tonne too much, 2,130 certificates and 159,750 euros on the year. The claim reduces the certificates surrendered, so an overstated deduction is an under-surrender, the exposure the penalty regime targets. Each haircut on its own still leaves a gap: applying the free allocation but not the coverage gives 6.4125 euros; applying the coverage but not the free allocation gives 18.00.
Ask the supplier for three numbers, not one: the price per tonne of CO2e actually paid, the share of its emissions covered by free allowances or rebates, and which installations in the production chain the scheme covers. The verified emissions report gives the fourth, the split of embedded emissions by installation.
The CBAM Compliance Handbook covers declarant status, embedded emissions, certificates and supplier data, and the free workbook for this case builds the certificate obligation and its cash profile. For the price clause that passes the net cost to a customer, see how to calculate a CBAM surcharge per tonne.
Yes, if it is a carbon price effectively paid on the embedded emissions of the goods and the declarant can document it with evidence certified by an independent person. Free allowances and rebates reduce what counts. On the illustrative steel case, a headline 11.25 euros per tonne of CO2e becomes 5.40 euros per tonne of product, 0.072 certificates at 75.00 euros.
Yes. It can reduce the certificates due to zero but not below, and nothing is refunded. In 2026 the illustrative steel import owes 42.32 euros a tonne after the free allocation adjustment, so a supplier paying an effective 60.00 euros on 1.60 tCO2e, 96.00 euros a tonne, wastes 53.68 euros of it.
An annual average rate, set by the implementing rules, not the spot rate on the day of the declaration. Check the method in force before declaring. On the illustrative case, a rate of 0.115 instead of 0.125 euros per local unit moves the deduction from 5.40 to 4.97 euros a tonne, about 8 per cent.
This article is one calculation from The CBAM Compliance Handbook. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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