Carbon Border Adjustment Mechanism Puts Fertiliser Costs Under Pressure

(EU) — The European Union’s Carbon Border Adjustment Mechanism (CBAM) is now a real cash-cost for many importers, and for U.S. and New Zealand businesses selling into Europe, it can also become a U.S. tax filing issue for tax year 2026 (returns filed in 2027).

CBAM is not a U.S. tax. It is an EU border charge tied to the carbon emissions embedded in certain imported goods. Still, CBAM payments, compliance costs, and contract pass-through charges can affect your U.S. taxable income, your deductions, and your recordkeeping. Fertilisers are a flashpoint because they are emissions-intensive and sit directly in the farm-input price chain.

Who needs to “file” — and what’s the most critical requirement

You likely have CBAM compliance and U.S. tax reporting tasks for tax year 2026 if you are any of the following:

• An EU importer of record (or indirect customs representative) bringing CBAM-covered goods into the EU.
• A U.S. or NZ exporter of CBAM-covered goods selling to EU customers, where contracts require you to provide emissions data or reimburse CBAM costs.
• A U.S. taxpayer (including green card holders and residents under the Substantial Presence Test) who pays CBAM certificates or related verification fees through a business activity.

The most critical requirement is simple: you need credible emissions documentation in your paperwork chain. If you cannot support embedded-emissions figures, EU rules can force conservative values. Those conservative values can increase certificate needs, which then increases landed costs and the U.S. deduction you must substantiate.

CBAM overview and scope (what changed in 2026)

CBAM is designed to reduce “carbon leakage.” The EU is trying to align the carbon cost of imports with the EU Emissions Trading System (ETS). That way, EU production and imports face a similar carbon price signal.

CBAM applies to specific product groups, including fertilisers, cement, iron and steel, aluminium, electricity, and hydrogen. Fertilisers are uniquely sensitive because small cost changes can feed into food prices, farm margins, and political pressure.

CBAM began as a transition reporting regime, but 2026 is the start of real financial exposure. That means importers move from reporting embedded emissions to also dealing with certificates and cash costs tied to embedded emissions. (The detailed threshold triggers and numeric reference points are best viewed in the accompanying table/tool.)

Eligibility checklist (CBAM exposure + U.S. tax filing touchpoints)

Use this quick checklist for tax year 2026 planning:

For immigrant taxpayers, U.S. residency status drives whether you report worldwide income. IRS Publication 519 explains the Green Card Test and Substantial Presence Test. See Publication 519.

CBAM pricing mechanics and why fertilisers feel it first

CBAM behaves more like a variable charge than a fixed tariff. Importers must obtain certificates priced in relation to the EU ETS carbon price. As the ETS price moves, the certificate cost moves with it.

Embedded emissions are determined using data from the production installation. That generally means the producer must supply emissions information, and the importer must maintain documentation that can be checked. If data is missing or not credible, EU rules can push you toward conservative approaches.

For fertilisers, the practical risk is not theoretical. If you rely on default values, the embedded emissions figure can be higher than the producer’s actual emissions profile. That can increase certificate needs and raise the delivered price to farms and distributors. The numeric ranges and markups commonly discussed in industry briefings are shown in the accompanying reference tool, rather than repeated here.

💡 Tax Tip: If CBAM costs are contractually passed through to you, do not wait until year-end to classify them. Decide early whether they belong in inventory/COGS (common for importers/resellers) or as a current deduction (often for service/verification fees). The classification drives timing and documentation needs.

Market reactions and EU policy responses (fertilisers as the flashpoint)

CBAM’s cost pressure has landed in a politically sensitive sector. Farm groups and some member states have argued that fertiliser inputs are already squeezed by commodity pricing and prior cost shocks. That has translated into calls for temporary relief, exemptions, or transitional measures for fertilisers.

For businesses, policy uncertainty matters almost as much as the carbon price. It can affect:

• Long-term supply contracts and renewal pricing.
• Incoterms and who is the importer of record.
• Whether you invest in verified producer data or rely on defaults.
• Whether you hedge currency and input costs.

Even if an exemption proposal does not pass, the debate itself can change enforcement focus and documentation expectations.

Economic impact assessments: how to read them without overreacting

Studies on CBAM can look contradictory because they measure different things. Many compare private costs (certificate payments and compliance costs) against social benefits (reduced emissions valued at an assumed carbon damage number). Those results depend heavily on assumptions.

A “net loss” conclusion in a study does not mean CBAM will be repealed. It means the specific assumptions used produced that result. If the assumed carbon value, ETS price path, or trade response changes, the sign and size of the result can change.

For fertilisers, the sector may not be the largest contributor to total CBAM costs, yet it can still be economically loud. That is because it connects directly to food prices and rural politics.

Compliance milestones and administrative requirements (what to do, step by step)

CBAM compliance is an EU obligation, but it creates immediate U.S. tax recordkeeping needs. Here is the step-by-step process most affected businesses should follow for 2026:

1. Confirm your role in the supply chain. Determine whether you are the EU importer, an indirect customs representative, or a supplier with contractual CBAM obligations.
2. Confirm product classification and scope. Ensure your fertiliser products are correctly classified for customs purposes. Misclassification risk is an enforcement trigger.
3. Register for Authorised CBAM Declarant status if required. If you exceed relevant triggers and import into the EU, authorization may be required through the EU’s module process.
4. Build an emissions data workflow. Obtain installation-level emissions data from producers. Set expectations in supplier contracts. Keep version-controlled records.
5. Arrange verification and documentation retention. Expect that documentation must be consistent across commercial invoices, customs entries, and emissions reports.
6. Decide how CBAM costs will be billed and paid. Align invoicing with your accounting method and your U.S. tax reporting approach.
7. Plan for the longer phase-in path. CBAM is intended to align with changes in ETS free allowances over time. Contracting decisions made in 2026 can echo for years.

📅 Deadline Alert: If you are required to become an Authorised CBAM Declarant, the application deadline referenced in current guidance is March 31, 2026. Missing authorization can disrupt EU customs clearance and deliveries.

How CBAM shows up on U.S. tax returns (tax year 2026, filed in 2027)

CBAM is generally not treated as a creditable “income tax” for U.S. foreign tax credit purposes. In most cases, it is a business cost. Where it lands on your U.S. return depends on how you operate:

• Sole proprietors: Report business activity on Schedule C (Form 1040). CBAM-related third-party service costs may be expenses. Import charges may affect COGS and inventory.
• Partnerships: Report on Form 1065, with allocations to partners on Schedule K-1.
• C corporations: Report on Form 1120.
• S corporations: Report on Form 1120-S.

Inventory importers often must consider capitalization rules under IRC §263A (UNICAP). That can require certain import-related costs to be included in inventory and recovered through COGS when goods are sold. Classification is fact-specific, especially for fertilisers sold quickly on thin margins.

For immigrants and visa holders: if you are a U.S. tax resident in 2026, you generally report worldwide income, including profit from EU-linked sales. See IRS international taxpayers guidance.

Filing deadlines and extensions (U.S. returns and common international add-ons)

Here are the dates most readers will use for tax year 2026 (returns filed in 2027):

If you hold non-U.S. financial accounts to pay EU suppliers or customs-related charges, you may also have foreign reporting. FBAR (FinCEN 114) is filed separately from the IRS, but it often overlaps with tax prep records.

⚠️ Warning: Do not assume CBAM payments qualify for the U.S. foreign tax credit. Misclassifying them can create amended returns, penalties, and messy basis and inventory corrections.

Documents you’ll need (CBAM + U.S. tax substantiation)

Build a single file set for 2026 that supports both EU compliance and U.S. deductions:

• EU customs entry documentation showing importer of record and classification.
• CBAM-related invoices, certificate purchase records, and payment confirmations.
• Producer installation emissions statements and supporting calculations.
• Verification reports and auditor/assurance invoices.
• Supply contracts showing Incoterms, carbon-cost pass-through terms, and pricing adjustments.
• Sales invoices to EU customers and any CBAM surcharge credits or rebates.
• Inventory records (quantities, landed cost build-ups, and costing method).
• Bank statements for accounts used to pay EU customs, suppliers, or verifiers.
• Internal memos describing your cost treatment (expense vs inventory capitalization).

Geopolitical context that affects your compliance plan (U.S., NZ, and beyond)

CBAM is also shaping global trade behavior. Parallel regimes can increase paperwork, especially for multinational supply chains that touch the EU and the UK. When multiple jurisdictions demand embedded-emissions reporting, suppliers face “one product, many reports.”

CBAM also includes the concept of recognizing carbon prices paid in the country of origin. If the EU recognizes those charges, they can reduce effective CBAM exposure. For U.S. and NZ exporters, that means contract terms should address who bears the cost of carbon pricing programs, and how evidence is provided.

Recent developments to monitor in 2026 operations

Methodology updates can change embedded-emissions numbers, even when the factory does not change. Compliance teams should track EU methodology consultations and guidance because a small definitional change can change certificates owed.

Anti-circumvention rules matter for fertilisers and intermediates. Authorities generally look for rerouting, minor processing to change classification, or misstatements about origin and production. If your supply chain uses distributors or toll processors, tighten controls and keep consistent paperwork.

Exemption discussions for fertilisers may continue. Do not build your 2026 pricing solely on the assumption of relief. Instead, plan scenarios in contracts: one with current obligations, and one with partial relief.

IRS resources and when to get professional help

For U.S. tax filing mechanics, start with IRS forms and instructions at forms and publications. For immigrant and residency rules, rely on Publication 519. For cross-border issues, see the IRS international taxpayers portal.

Action items for tax year 2026 (filed in 2027):

• Confirm whether CBAM costs are yours under Incoterms and contract clauses.
• Build a documented emissions data chain for fertilisers and other in-scope goods.
• Decide early whether CBAM costs are inventory/COGS or current deductions.
• Calendar U.S. filing deadlines for your entity type, and retain supporting records.

⚠️ Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or financial advice. Tax situations vary based on individual circumstances. Consult a qualified tax professional or CPA for guidance specific to your situation.