Carbon Pricing Convergence and the CBAM Compliance Cliff: What Multinationals Must Fix Before 2027

In October 2024, the U.S. Commodity Futures Trading Commission, the Department of Justice, and the Securities and Exchange Commission brought coordinated enforcement actions against CQC Impact Investors LLC and several former executives for systematically falsifying emissions data across carbon offset projects in sub-Saharan Africa and Southeast Asia. The fraud generated roughly six million voluntary carbon credits that should never have existed. CQC's CEO faces criminal charges including wire fraud, commodities fraud, and securities fraud. The company paid a $1 million fine and was ordered to invalidate the fraudulent offsets. In a separate proceeding, a federal court in California allowed a class action lawsuit against Delta Air Lines to proceed, finding that the airline's claim to be "the world's first carbon-neutral airline" raised viable consumer protection claims under California law, because Delta had relied on voluntary credits whose environmental integrity was contested. These cases are not footnotes. They signal a structural shift: carbon pricing and carbon claims are now enforcement targets across multiple regulators, and the data underpinning those claims is where the liability concentrates.

The scale of the shift is significant. According to the World Bank's State and Trends of Carbon Pricing 2025 report, carbon pricing instruments generated over $100 billion in public revenue in 2024. Eighty carbon pricing instruments are now in operation globally, covering approximately 28% of global greenhouse gas emissions across economies representing nearly two-thirds of world GDP. For any multinational operating across the EU, UK, and Asia-Pacific, the question is no longer whether carbon carries a price, but how many prices your operations are exposed to simultaneously, and whether your internal systems can produce data that holds up under each of them.

The EU CBAM Is No Longer Transitional

The EU's Carbon Border Adjustment Mechanism entered its definitive phase on January 1, 2026. During the transitional period from October 2023 through December 2025, importers submitted quarterly reports on embedded emissions in covered goods, including steel, aluminium, cement, fertilizers, hydrogen, and electricity, but faced no financial liability. That has changed. Under Regulation (EU) 2025/2083, which entered into force on October 20, 2025, importers must now obtain authorized CBAM declarant status, report embedded emissions annually, and purchase CBAM certificates beginning February 1, 2027 to cover 2026 imports. Certificate prices will be pegged to the EU Emissions Trading System allowance price, which averaged roughly $80 per tonne of CO2 equivalent in the first nine months of 2025.

The penalty architecture is substantial. Importers who fail to surrender sufficient certificates face fines of EUR 100 per tonne of embedded emissions, indexed for inflation and harmonized with the EU ETS excess emissions penalty. Importers who exceed the new 50-tonne de minimis threshold without authorized declarant status face penalties of three to five times that standard rate. Annual declarations are now due by September 30 of the year following importation, an extension from the original May 31 deadline that gives more time but does not reduce the underlying data burden. What this means inside the organization is concrete: procurement teams must now treat emissions data from non-EU suppliers as a financial variable, not a sustainability reporting input. Contracts with steel, aluminium, and cement suppliers that do not include verified emissions data clauses will generate default emission values, which are calculated using the highest observed intensity among countries with reliable data for that product type, almost certainly resulting in higher CBAM costs than actual emissions would warrant.

The Commission has also proposed extending CBAM to downstream products containing high proportions of steel and aluminium, with a legislative proposal expected in early 2026. This means that companies importing finished or semi-finished goods, not just raw materials, should expect expanded scope before 2027. Supply chain mapping that stops at the first tier of raw material suppliers will not be sufficient.

The UK Adds a Parallel Border Carbon Mechanism

The United Kingdom confirmed in its 2025 Budget that it will implement its own CBAM on January 1, 2027, covering aluminium, cement, fertilizers, hydrogen, iron, and steel. The UK mechanism differs from the EU's in several material respects. It uses a tax-based structure with sector-specific levy rates adjusted quarterly based on the UK ETS and Carbon Price Support, rather than a certificate system. The registration threshold is GBP 50,000 of annual CBAM goods imports, measured by value rather than the EU's mass-based 50-tonne threshold. The first accounting period covers all of 2027, with returns and payment due by May 31, 2028. From 2028, the UK shifts to quarterly reporting with a two-month payment window. Indirect emissions will not be included until 2029 at the earliest.

At the UK-EU Summit on May 19, 2025, both parties committed to exploring mutual recognition of their ETS systems and potential exemptions to avoid double taxation. The operational significance for multinationals is that companies exporting to both the EU and the UK will need to manage two distinct compliance regimes with different thresholds, calculation methodologies, reporting timelines, and carbon price references. Finance teams cannot assume that EU CBAM compliance satisfies UK obligations or vice versa. Companies should be designing parallel data pipelines now, with an explicit governance structure that assigns ownership of each jurisdiction's requirements to specific roles, not to a generalized "sustainability" function.

China's ETS Expansion Reshapes the Emissions Data Landscape

In March 2025, China's Ministry of Ecology and Environment officially expanded the national ETS to include the steel, cement, and aluminium smelting sectors. This brought approximately 1,500 additional entities into the system, increasing the total emissions coverage from roughly 40% to over 60% of China's national CO2 output, or around 8 billion tonnes, equivalent to about 15% of global emissions. The expansion followed a public consultation in September 2024 and was approved by the State Council in mid-March 2025. The International Carbon Action Partnership reports that China aims to cover all major emission-intensive industries by 2027 and to introduce an absolute cap-and-trade system with both free and paid allowances by 2030.

The first compliance cycle for these new sectors covers 2024 emissions, with a compliance deadline at the end of 2025. For 2024, each covered entity receives free allowances equal to its verified emissions, a grandfathering approach designed to build familiarity with the system. From 2025, an intensity-based allocation with performance benchmarking introduces a modest surplus-deficit mechanism capped at plus or minus 3%.

For multinationals sourcing from Chinese steel, aluminium, or cement producers, this expansion has a direct CBAM implication. Under the EU's rules, CBAM certificates are reduced by the effective carbon price already paid in the country of origin. China's domestic carbon price has been roughly $11 per tonne of CO2 equivalent, compared to approximately $80 in the EU ETS. That gap means Chinese suppliers participating in the national ETS will generate a deduction, but a small one, leaving the EU importer responsible for the remainder. Companies that assumed their Chinese suppliers were outside any carbon pricing regime now need to determine whether those suppliers are covered entities, what price they actually paid, and whether the documentation meets EU verification standards. This is not a sustainability team exercise. It is a procurement and finance function that requires contractual mechanisms to compel data disclosure.

Where does your organization stand? Gasilov Group's Regulatory Readiness Assessment is a free self-check: 12 questions, instant results showing which regulations apply and where your gaps are.

Voluntary Carbon Markets Under Regulatory Scrutiny

The CQC enforcement action and the Delta litigation represent two distinct but converging vectors of risk for companies that use voluntary carbon credits to support emissions claims. The CFTC's Environmental Fraud Task Force, established in 2023, treats voluntary carbon credits as commodities subject to anti-fraud and anti-manipulation provisions of the Commodity Exchange Act. The CQC case established that misrepresenting emissions reductions to registries and verification bodies to inflate credit issuance constitutes commodities fraud. The CFTC issued final guidance in September 2024 on listing voluntary carbon credit derivative contracts, signaling that it views VCC markets as falling within its enforcement perimeter.

For corporate buyers of voluntary credits, the risk is not limited to the integrity of the credit developer. The Delta lawsuit illustrates a downstream theory of liability: a company that makes public claims based on credits that turn out to be questionable faces potential consumer protection liability, even if the company did not know the credits were problematic. The federal court's October 2025 ruling allowed the plaintiff's claims under California's Consumers Legal Remedies Act to proceed, finding that Delta either knew or should have known that the credit certifications were not accurate. The transferable lesson for any company relying on voluntary offsets to support climate claims is that the standard of care now includes a duty to independently evaluate the quality of purchased credits, not simply to rely on registry certifications.

What this changes operationally is the relationship between marketing review, legal, and sustainability procurement. Any public-facing claim tied to offsets needs a documented chain of diligence that connects the specific credits purchased to verified, additional emissions reductions. Marketing teams cannot treat offset purchases as blanket authorization to claim carbon neutrality. Legal review of climate claims should now include an evaluation of the underlying credit quality, the methodology used, and whether the claim is defensible under the jurisdiction's consumer protection standards. "Defensible" in this context means the claim is supported by third-party verification of credit additionality, permanence, and accurate quantification, and the company can demonstrate it exercised reasonable diligence before making the claim.

The Price Signal Fragmentation Problem

The convergence of EU CBAM, UK CBAM, China's expanded ETS, CORSIA for aviation (now in its first mandatory phase), and prospective maritime carbon pricing under the International Maritime Organization creates a fragmentation challenge that most corporate governance structures are not designed to handle. Each of these instruments uses different emissions boundaries, calculation methodologies, verification requirements, and price references. A multinational steel importer might face the EU ETS price on domestic production, the EU CBAM price on imports, the UK CBAM rate on goods entering the UK, the Chinese ETS price embedded in supplier costs, and CORSIA obligations on the aviation logistics of moving those goods, all for the same tonne of steel.

The OECD's Effective Carbon Rates 2025 report, covering 79 countries representing 82% of global emissions, confirms this pattern: the share of global emissions covered by a carbon tax or ETS reached nearly 27% in 2023, up from 15% in 2018, with the expansion driven almost entirely by new and expanded emissions trading systems. Coverage by carbon taxes has remained flat at roughly 5%. The implication is that the pricing signal is becoming more prevalent but not more uniform. Companies face rising costs on carbon-intensive activities, but those costs vary sharply depending on which jurisdiction prices the emission, which methodology applies, and whether the instrument is intensity-based (like China's current approach) or cap-based (like the EU ETS).

For corporate treasury and financial planning, this fragmentation creates a forecasting problem. Carbon cost exposure is not a single line item but a portfolio of jurisdiction-specific liabilities, each with different price dynamics, compliance timelines, and volatility profiles. Companies that model carbon costs as a flat internal carbon price will understate exposure in high-price jurisdictions and overstate it in low-price ones. The practical consequence is that financial planning and analysis teams need jurisdiction-specific carbon cost models that feed into procurement decisions, supplier selection, and capital allocation, not a single corporate-wide estimate.

A Decision Framework for Carbon Price Readiness

Given the pace and fragmentation of carbon pricing expansion, multinationals need a structured approach to evaluate and respond to their exposure. The following framework organizes the key decisions by function and sequence, connecting regulatory requirements to the internal capabilities that must be in place.

Map your jurisdictional exposure first. Before investing in data systems or compliance tools, identify every jurisdiction where your operations, imports, or exports trigger a carbon pricing obligation. This includes direct ETS participation, CBAM exposure on imports into the EU and UK, sectoral instruments like CORSIA, and any voluntary commitments that create de facto price exposure. The output should be a matrix that lists each entity or material flow, the applicable instrument, the pricing mechanism, the compliance timeline, and the responsible internal owner. A complete jurisdictional map is one that captures not just where you operate, but where your suppliers produce, where your goods cross borders, and where your claims are published.

Classify your emissions data by its intended use. Data that is acceptable for internal sourcing decisions, such as supplier-reported estimates or industry averages, is not the same as data acceptable for regulatory compliance or public claims. Each carbon pricing instrument specifies its own methodology for calculating embedded emissions, and most now require third-party verification. Under the EU CBAM, importers who cannot provide verified actual emissions will receive default values set at the highest observed intensity among countries with reliable data, which functions as a punitive default. The decision point here is whether your current data architecture can produce emissions figures at the resolution and verification standard that each applicable instrument requires. If the answer is no for any material import flow, the corrective investment in supplier data collection, verification relationships, and systems integration should be scoped and budgeted now, not after the first compliance deadline passes.

Assign financial ownership, not just reporting ownership. Carbon pricing creates a financial liability. In many organizations, sustainability teams collect emissions data, but finance teams manage the P&L and balance sheet impacts. Under CBAM, the cost of certificates flows through procurement and customs. Under an ETS, the cost of allowances hits the operating budget of the covered facility. Voluntary offsets sit in the sustainability budget but generate legal and reputational risk managed by legal and marketing. The decision point is whether carbon cost accountability is assigned to a single function with budget authority and risk management capacity, or distributed across functions without clear ownership. Companies that leave carbon costs in the sustainability silo will find that the financial exposure outgrows the function's authority to manage it.

Pressure-test your claims against the enforcement standard. Any public statement about carbon neutrality, net-zero progress, or emissions reductions that relies on offsets or credits should be reviewed against the standard of care emerging from the CQC and Delta cases. The minimum defensible claim is one where the company can document the specific credits used, the methodology by which those credits were verified, the additionality and permanence of the underlying project, and the internal review process that confirmed the claim before publication. Claims that reference "carbon neutral" operations without this documentation trail are exposed to both regulatory and litigation risk. The decision point is whether your current claims review process includes sustainability procurement, legal, and marketing acting jointly, with a documented sign-off chain. If it does not, the claims should be narrowed or paused until the process is in place.

Build optionality into supplier contracts. As CBAM scope expands to downstream products and new jurisdictions introduce border carbon mechanisms, the emissions intensity of your supply chain becomes a variable cost driver. Supplier contracts should include clauses requiring disclosure of verified emissions data, participation in recognized carbon pricing regimes, and notification of material changes in carbon cost exposure. The decision point is whether your procurement function treats emissions data as a contractual deliverable with the same rigor as quality specifications or delivery timelines. Companies that add these clauses now will have negotiating leverage and data readiness when the next wave of regulatory expansion arrives; companies that wait will be renegotiating under deadline pressure.

What Comes Next

The regulatory trajectory is unambiguous: more jurisdictions will price carbon, more sectors will be covered, and the data requirements will tighten. The EU plans to review CBAM scope to include additional products such as organic chemicals and polymers. Japan's GX-ETS is scheduled to transition from voluntary to mandatory compliance by 2026, with auction mechanisms planned for 2033. The International Maritime Organization plans to launch a sector-specific carbon pricing initiative by 2027. Singapore's carbon tax is set to increase by 80% to S$45 per tonne. Each of these developments adds another layer of compliance obligation, another set of data requirements, and another jurisdiction-specific cost to model.

The companies that will manage this well are not the ones with the largest sustainability teams. They are the ones that have integrated carbon pricing into financial planning, procurement, legal review, and board oversight as a cross-functional commercial risk, not a standalone reporting exercise. The gap between those two operating models is where most of the exposure sits.

Close the Gap Between Analysis and Action. If this analysis surfaced questions your team can't yet answer, that's the gap Gasilov Group's Regulatory Carbon Pricing Diagnostic is designed to close. The first step is a 90-minute cross-functional session with your legal, procurement, finance, and sustainability leads to map every carbon pricing instrument that applies to your operations. The output is a prioritized roadmap with specific actions, owners, and deadlines. Contact us to schedule your diagnostic session.

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Written by: Gasilov Group Editorial Team

Reviewed by: Seyfi Gasilov, Partner, Corporate Strategy & Regulatory Governance

Brings more than twenty years guiding organizations through strategic growth, governance challenges, and cross border compliance with a combined legal and operational lens.

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Frequently Asked Questions (FAQ):

How does the EU CBAM interact with carbon prices already paid in the exporting country?

Importers can deduct the effective carbon price paid in the country of origin from their CBAM certificate obligation. Under the amended CBAM regulation, the European Commission will adopt an implementing act in Q1 2026 setting rules for these deductions, including the option to use standardized annual average carbon prices or default carbon prices for countries with recognized carbon pricing mechanisms. The practical challenge is documentation: importers must provide evidence that the carbon price was actually paid by the specific producer, not just that a carbon pricing instrument exists in that country. For Chinese suppliers newly covered by the expanded national ETS, the deduction will likely be small given the current price differential between China's ETS (approximately $11 per tonne) and the EU ETS (approximately $80 per tonne), but it requires verified proof of payment that many supplier relationships are not currently structured to produce.

Can companies use voluntary carbon credits to reduce their CBAM compliance costs?

No. The EU CBAM does not recognize voluntary carbon credits as an offset against the certificate surrender obligation. CBAM certificates must be purchased from the relevant national competent authority at prices reflecting the EU ETS allowance market. The only recognized deduction is for an explicit carbon price paid under a recognized compliance instrument in the country of origin. This distinction is important because companies that have relied on voluntary offsets to manage their carbon narrative will find those offsets carry no value under CBAM. Voluntary credits may still serve a purpose in supporting net-zero strategies or stakeholder communications, but they cannot substitute for the compliance obligation.

What penalties do UK importers face under the new UK CBAM if they fail to register or report?

The UK CBAM penalty regime is modeled on the existing VAT enforcement framework administered by HMRC. Companies importing GBP 50,000 or more of CBAM goods annually must register by January 31, 2028 for the first accounting period. Failure to register, submit returns, or pay the CBAM charge on time will attract penalties aligned with existing tax compliance sanctions, including surcharges, interest, and potential escalation to criminal sanctions for deliberate fraud or evasion. Importantly, the UK approach uses a value-based threshold rather than the EU's mass-based 50-tonne rule, meaning smaller-volume but high-value importers may trigger UK obligations where they would fall below the EU threshold.

How will China's expanded ETS affect the competitiveness of Chinese steel and aluminium exports?

China's expanded ETS currently operates on an intensity-based allocation model that does not impose an absolute emissions cap on the steel, cement, and aluminium sectors. For 2024, covered entities received free allowances equal to their verified emissions, meaning there was no net compliance cost. From 2025, a performance benchmarking mechanism introduces a modest surplus-deficit range capped at plus or minus 3%. This design means that Chinese carbon costs for these sectors will initially be marginal. However, China has signaled that it intends to introduce absolute caps and paid allowances by 2030, with sector coverage expanding to chemicals, petrochemicals, civil aviation, and pulp and paper by 2027. The competitive impact will grow as the Chinese carbon price rises, but the more immediate effect is on data: Chinese producers are now required to monitor, report, and verify their emissions under a national regulatory framework, which should improve the availability and quality of emissions data that EU and UK importers need for CBAM compliance.

What should companies do if they have already made public "carbon neutral" claims based on voluntary offsets?

The enforcement trajectory suggests that companies should conduct an immediate internal review of any public-facing climate claims tied to voluntary offset purchases. The CQC case established that federal regulators view the fraudulent issuance of voluntary credits as commodities fraud, and the Delta litigation demonstrates that downstream purchasers face consumer protection exposure when those claims reach consumers. Companies should evaluate whether the specific credits underlying their claims meet current standards for additionality, permanence, and accurate quantification. Where credits were purchased from developers or registries whose methodologies have been challenged, companies should consider retracting or narrowing the claims, disclosing the limitations, and shifting their public commitments toward verified emissions reductions rather than offset-dependent neutrality claims. This review should involve legal counsel, sustainability procurement, and marketing jointly, with a documented decision trail.