Brussels opens door to limited use of Article 6 credits under CBAM

Companies importing carbon-intensive goods into the EU could use international carbon credits to lower their Carbon Border Adjustment Mechanism costs under draft rules published by the European Commission, provided the credits meet Paris Agreement standards and represent no more than 10% of the emissions from facilities where the goods were produced.

The Commission published the draft implementing regulation on third-country carbon price recognition under CBAM on May 13, with the guidance now open for public consultation until June 10.

The proposal marks a significant development in operationalizing how the EU will recognize third-country carbon pricing under CBAM, providing detailed methodologies for calculating carbon price equivalence while imposing strict quality standards on international credits to maintain environmental integrity.

The move marks a departure from the European Parliament's position in April, when lawmakers stripped provisions recognizing international carbon credits from draft CBAM legislation. Lead negotiator Mohammed Chahim said at the time that "the discussion is premature" and that "concerns around environmental integrity persist," adding that talks about including such credits were "counterproductive."

The EU's CBAM aims to prevent carbon leakage by ensuring imported goods face similar carbon costs to those produced within the EU, potentially affecting trade flows of iron and steel, aluminum, cement, fertilizers, electricity and hydrogen.

The definitive phase of CBAM began Jan. 1, 2026, following a transitional reporting period. The mechanism targets imports of goods from the iron and steel, aluminum, cement, hydrogen, fertilizers and electricity sectors, aiming to prevent carbon leakage where companies relocate production to regions with weaker climate policies.

Limited use of Article 6

The draft regulation specifies that only carbon credits authorized under Articles 6.2 or 6.4 of the Paris Agreement would qualify for CBAM liability reductions.

The Commission said capping international credits at 10% of emissions would encourage producers in third countries to invest in cleaner technologies and pursue domestic emissions cuts rather than relying on offsets.

"This criterion should promote the development of Article 6 credits and provide the quality assurance necessary to ensure the environmental integrity of CBAM," the Commission said, but it noted the use of such international carbon credits for claiming a carbon price under CBAM should be "limited."

These internationally transferred mitigation outcomes must be registered on the UN Framework Convention on Climate Change's Centralized Accounting and Reporting Platform and show no significant outstanding inconsistencies in technical expert reviews, according to the draft regulation.

Article 6 sets the rules for global trade in greenhouse gas emissions reductions. Under Article 6.2, countries can allow cross-border exchanges of credits. Under Article 6.4, also known as the Paris Agreement Crediting Mechanism, an entity can reduce emissions in one country, have the reductions credited, and sell them to another entity in another country.

Where more than 10% of emissions are covered by such credits, a price of zero would be assigned to emissions covered by international credits in excess of this threshold, according to the draft regulation.

By contrast, domestic carbon credits issued under standards chosen by third countries would face no additional qualitative or quantitative criteria beyond evidence of effective payment. This distinction reflects the Commission's view that countries should have flexibility in designing domestic mitigation programs while international credits require harmonized standards.

For international credits specifically, importers would need to provide evidence of registration as internationally transferred mitigation outcomes, confirmation that credit shares do not exceed the 10% threshold, and documentation of purchase quantities, dates and prices.

ETS, carbon taxes

The draft regulation provides separate methodologies for recognizing different types of carbon pricing mechanisms, acknowledging that operators in third countries may use various compliance options, including emissions trading systems and carbon taxes.

For emissions trading systems, importers could claim reductions based on the weighted-average auction price of allowances over the reporting period, as published by authorities responsible for the scheme. Where auction prices are unavailable, the average exchange price on recognized secondary markets would apply. Alternatively, importers could use the average cost price of the operator's compliance units at the point of purchase, provided those units remain in the registry account during the reporting period.

"To ensure an equivalence between the carbon price paid in a third country and the carbon price paid under the EU ETS, only carbon prices paid on specific embedded emissions under a carbon price mechanism in a third country should give rise to a reduction," the Commission said in the draft regulation.

For point-source carbon taxes applied directly to emissions, the applicable carbon tax rate expressed per metric ton of CO2 equivalent would determine the carbon price. The draft regulation includes provisions for reduced tax rates and time-weighted averages when rates change during reporting periods.

Where fuel-based carbon taxes apply to fuels consumed by installations, the draft establishes methodologies for calculating weighted-average carbon tax rates, ensuring the carbon price attributed to embedded emissions reflects actual emissions generated from fuel combustion.

Global carbon pricing

Countries with established carbon pricing mechanisms that allow credit use for compliance could see their exports face lower effective CBAM costs compared with jurisdictions lacking such schemes. This could incentivize third countries to develop Paris Agreement-aligned carbon markets and integrate international credit mechanisms into their domestic compliance frameworks.

Market participants said the proposal represents a pragmatic approach that could accelerate global adoption of carbon pricing.

"It rewards countries and companies that are already decarbonizing via market mechanisms while maintaining high environmental guardrails," said Adam Hearne, CEO at CarbonChain.

The move could drive "increased investment in third-country carbon pricing infrastructure, Article 6 credit supply, and verifier/accreditation services over the next 12–24 months," he said.

Carbon permits in Europe are currently almost eight times more expensive than compliance prices in China, the world's industrial powerhouse.

Platts, part of S&P Global Energy, assessed EU Allowances for December 2026 at Eur75.12/mtCO2e ($87.97/mtCO2e) on May 13. This compares with China's compliance emission allowance, or CEA, which was valued at Yuan 80.06/mtCO2e ($11.69/mtCO2e) on May 8, according to the Shanghai Environment and Energy Exchange.

The EC also recently confirmed the first quarterly price for CBAM certificates at Eur75.36/mtCO2e, reflecting the average closing price of EUAs auctioned during January-March 2026 through the European Energy Exchange.

Singapore was one of the countries that requested that the European Commission allow the use of international carbon credits under CBAM. Under Singapore's International Carbon Credit Framework, companies can use eligible ICCs to offset up to 5% of their taxable emissions per year.

Singapore's eligible ICCs were assessed at S$33/mtCO2e for 2026 obligations on May 13, according to data from Platts. Singapore's carbon tax rate will increase to S$45/mtCO2e in the emissions year 2026 from current levels, according to the country's National Environment Agency, the Ministry of Sustainability and the Environment.