diff --git a/sdk/identity/azure-identity/CHANGELOG.md b/sdk/identity/azure-identity/CHANGELOG.md
index 58a3acf806e1..756671552282 100644
--- a/sdk/identity/azure-identity/CHANGELOG.md
+++ b/sdk/identity/azure-identity/CHANGELOG.md
@@ -5,6 +5,7 @@
 ### Features Added
 
 - Changed parameter from `instance_discovery` to `disable_instance_discovery` to make it more explicit.
+- Service principal credentials now enable support for [Continuous Access Evaluation (CAE)](https://learn.microsoft.com/azure/active-directory/conditional-access/concept-continuous-access-evaluation-workload). This indicates to Azure Active Directory that your application can handle CAE claims challenges.
 
 ### Breaking Changes
 
diff --git a/sdk/identity/azure-identity/azure/identity/_constants.py b/sdk/identity/azure-identity/azure/identity/_constants.py
index 846a26757ae7..545786cb4211 100644
--- a/sdk/identity/azure-identity/azure/identity/_constants.py
+++ b/sdk/identity/azure-identity/azure/identity/_constants.py
@@ -50,3 +50,5 @@ class EnvironmentVariables:
 
     AZURE_FEDERATED_TOKEN_FILE = "AZURE_FEDERATED_TOKEN_FILE"
     WORKLOAD_IDENTITY_VARS = (AZURE_AUTHORITY_HOST, AZURE_TENANT_ID, AZURE_FEDERATED_TOKEN_FILE)
+
+    AZURE_IDENTITY_DISABLE_CP1 = "AZURE_IDENTITY_DISABLE_CP1"
diff --git a/sdk/identity/azure-identity/azure/identity/_credentials/silent.py b/sdk/identity/azure-identity/azure/identity/_credentials/silent.py
index a61040b40c57..a0a31b9b1f6c 100644
--- a/sdk/identity/azure-identity/azure/identity/_credentials/silent.py
+++ b/sdk/identity/azure-identity/azure/identity/_credentials/silent.py
@@ -18,6 +18,7 @@
 from .._internal.msal_client import MsalClient
 from .._internal.shared_token_cache import NO_TOKEN
 from .._persistent_cache import _load_persistent_cache, TokenCachePersistenceOptions
+from .._constants import EnvironmentVariables
 from .. import AuthenticationRecord
 
 
@@ -85,7 +86,7 @@ def _get_client_application(self, **kwargs: Any):
         )
         if tenant_id not in self._client_applications:
             # CP1 = can handle claims challenges (CAE)
-            capabilities = None if "AZURE_IDENTITY_DISABLE_CP1" in os.environ else ["CP1"]
+            capabilities = None if EnvironmentVariables.AZURE_IDENTITY_DISABLE_CP1 in os.environ else ["CP1"]
             self._client_applications[tenant_id] = PublicClientApplication(
                 client_id=self._auth_record.client_id,
                 authority="https://{}/{}".format(self._auth_record.authority, tenant_id),
diff --git a/sdk/identity/azure-identity/azure/identity/_internal/aad_client_base.py b/sdk/identity/azure-identity/azure/identity/_internal/aad_client_base.py
index f1eb96e605fa..a394b399e5dc 100644
--- a/sdk/identity/azure-identity/azure/identity/_internal/aad_client_base.py
+++ b/sdk/identity/azure-identity/azure/identity/_internal/aad_client_base.py
@@ -5,6 +5,7 @@
 import abc
 import base64
 import json
+import os
 import time
 from uuid import uuid4
 from typing import TYPE_CHECKING, List, Any, Iterable, Optional, Union, Dict
@@ -17,9 +18,11 @@
 from azure.core.pipeline.transport import HttpRequest
 from azure.core.credentials import AccessToken
 from azure.core.exceptions import ClientAuthenticationError
+from .._constants import EnvironmentVariables
 from .utils import get_default_authority, normalize_authority, resolve_tenant
 from .aadclient_certificate import AadClientCertificate
 
+
 if TYPE_CHECKING:
     from azure.core.pipeline import AsyncPipeline, Pipeline
     from azure.core.pipeline.policies import AsyncHTTPPolicy, HTTPPolicy, SansIOHTTPPolicy
@@ -51,6 +54,8 @@ def __init__(
 
         self._cache = cache or TokenCache()
         self._client_id = client_id
+        # CP1 = can handle claims challenges (CAE)
+        self._capabilities = None if EnvironmentVariables.AZURE_IDENTITY_DISABLE_CP1 in os.environ else ["CP1"]
         self._additionally_allowed_tenants = additionally_allowed_tenants or []
         self._pipeline = self._build_pipeline(**kwargs)
 
@@ -171,6 +176,10 @@ def _get_auth_code_request(
             "redirect_uri": redirect_uri,
             "scope": " ".join(scopes),
         }
+
+        claims = _merge_claims_challenge_and_capabilities(self._capabilities, kwargs.get("claims"))
+        if claims:
+            data["claims"] = claims
         if client_secret:
             data["client_secret"] = client_secret
 
@@ -191,6 +200,10 @@ def _get_jwt_assertion_request(
             "scope": " ".join(scopes),
         }
 
+        claims = _merge_claims_challenge_and_capabilities(self._capabilities, kwargs.get("claims"))
+        if claims:
+            data["claims"] = claims
+
         request = self._post(data, **kwargs)
         return request
 
@@ -233,6 +246,11 @@ def _get_client_secret_request(self, scopes: Iterable[str], secret: str, **kwarg
             "grant_type": "client_credentials",
             "scope": " ".join(scopes),
         }
+
+        claims = _merge_claims_challenge_and_capabilities(self._capabilities, kwargs.get("claims"))
+        if claims:
+            data["claims"] = claims
+
         request = self._post(data, **kwargs)
         return request
 
@@ -250,6 +268,11 @@ def _get_on_behalf_of_request(
             "requested_token_use": "on_behalf_of",
             "scope": " ".join(scopes),
         }
+
+        claims = _merge_claims_challenge_and_capabilities(self._capabilities, kwargs.get("claims"))
+        if claims:
+            data["claims"] = claims
+
         if isinstance(client_credential, AadClientCertificate):
             data["client_assertion"] = self._get_client_certificate_assertion(client_credential)
             data["client_assertion_type"] = JWT_BEARER_ASSERTION
@@ -272,6 +295,11 @@ def _get_refresh_token_request(
             "client_id": self._client_id,
             "client_info": 1,  # request AAD include home_account_id in its response
         }
+
+        claims = _merge_claims_challenge_and_capabilities(self._capabilities, kwargs.get("claims"))
+        if claims:
+            data["claims"] = claims
+
         request = self._post(data, **kwargs)
         return request
 
@@ -289,6 +317,10 @@ def _get_refresh_token_on_behalf_of_request(
             "client_id": self._client_id,
             "client_info": 1,  # request AAD include home_account_id in its response
         }
+        claims = _merge_claims_challenge_and_capabilities(self._capabilities, kwargs.get("claims"))
+        if claims:
+            data["claims"] = claims
+
         if isinstance(client_credential, AadClientCertificate):
             data["client_assertion"] = self._get_client_certificate_assertion(client_credential)
             data["client_assertion_type"] = JWT_BEARER_ASSERTION
@@ -310,6 +342,17 @@ def _post(self, data: Dict, **kwargs: Any) -> HttpRequest:
         return HttpRequest("POST", url, data=data, headers={"Content-Type": "application/x-www-form-urlencoded"})
 
 
+def _merge_claims_challenge_and_capabilities(capabilities, claims_challenge):
+    # Represent capabilities as {"access_token": {"xms_cc": {"values": capabilities}}}
+    # and then merge/add it into incoming claims
+    if not capabilities:
+        return claims_challenge
+    claims_dict = json.loads(claims_challenge) if claims_challenge else {}
+    for key in ["access_token"]:
+        claims_dict.setdefault(key, {}).update(xms_cc={"values": capabilities})
+    return json.dumps(claims_dict)
+
+
 def _scrub_secrets(response: Dict) -> None:
     for secret in ("access_token", "refresh_token"):
         if secret in response:
diff --git a/sdk/identity/azure-identity/azure/identity/_internal/client_credential_base.py b/sdk/identity/azure-identity/azure/identity/_internal/client_credential_base.py
index 4987a8ba1d81..401b1e50388f 100644
--- a/sdk/identity/azure-identity/azure/identity/_internal/client_credential_base.py
+++ b/sdk/identity/azure-identity/azure/identity/_internal/client_credential_base.py
@@ -20,7 +20,8 @@ class ClientCredentialBase(MsalCredential, GetTokenMixin):
     def _acquire_token_silently(self, *scopes: str, **kwargs: Any) -> Optional[AccessToken]:
         app = self._get_app(**kwargs)
         request_time = int(time.time())
-        result = app.acquire_token_silent_with_error(list(scopes), account=None, **kwargs)
+        result = app.acquire_token_silent_with_error(
+            list(scopes), account=None, claims_challenge=kwargs.pop("claims", None), **kwargs)
         if result and "access_token" in result and "expires_in" in result:
             return AccessToken(result["access_token"], request_time + int(result["expires_in"]))
         return None
@@ -29,7 +30,7 @@ def _acquire_token_silently(self, *scopes: str, **kwargs: Any) -> Optional[Acces
     def _request_token(self, *scopes: str, **kwargs: Any) -> Optional[AccessToken]:
         app = self._get_app(**kwargs)
         request_time = int(time.time())
-        result = app.acquire_token_for_client(list(scopes))
+        result = app.acquire_token_for_client(list(scopes), claims_challenge=kwargs.pop("claims", None))
         if "access_token" not in result:
             message = "Authentication failed: {}".format(result.get("error_description") or result.get("error"))
             raise ClientAuthenticationError(message=message)
diff --git a/sdk/identity/azure-identity/azure/identity/_internal/msal_credentials.py b/sdk/identity/azure-identity/azure/identity/_internal/msal_credentials.py
index 7fb3e9a8aee7..b691d06f71aa 100644
--- a/sdk/identity/azure-identity/azure/identity/_internal/msal_credentials.py
+++ b/sdk/identity/azure-identity/azure/identity/_internal/msal_credentials.py
@@ -71,7 +71,7 @@ def _get_app(self, **kwargs):
         )
         if tenant_id not in self._client_applications:
             # CP1 = can handle claims challenges (CAE)
-            capabilities = None if "AZURE_IDENTITY_DISABLE_CP1" in os.environ else ["CP1"]
+            capabilities = None if EnvironmentVariables.AZURE_IDENTITY_DISABLE_CP1 in os.environ else ["CP1"]
             cls = msal.ConfidentialClientApplication if self._client_credential else msal.PublicClientApplication
             self._client_applications[tenant_id] = cls(
                 client_id=self._client_id,
diff --git a/sdk/identity/azure-identity/tests/helpers.py b/sdk/identity/azure-identity/tests/helpers.py
index cc9fd82f21f6..e7ce29403ca1 100644
--- a/sdk/identity/azure-identity/tests/helpers.py
+++ b/sdk/identity/azure-identity/tests/helpers.py
@@ -199,3 +199,9 @@ def urlsafeb64_decode(s):
 
     padding_needed = 4 - len(s) % 4
     return base64.urlsafe_b64decode(s + b"=" * padding_needed)
+
+
+def get_token_payload_contents(token: str):
+    _, payload, _ = token.split(".")
+    decoded_payload = urlsafeb64_decode(payload).decode()
+    return json.loads(decoded_payload)
diff --git a/sdk/identity/azure-identity/tests/test_aad_client.py b/sdk/identity/azure-identity/tests/test_aad_client.py
index 700d3cae28cc..042643bc3a8e 100644
--- a/sdk/identity/azure-identity/tests/test_aad_client.py
+++ b/sdk/identity/azure-identity/tests/test_aad_client.py
@@ -21,6 +21,16 @@
     from mock import Mock, patch  # type: ignore
 
 
+BASE_CLASS_METHODS = [
+    ("_get_auth_code_request", ("code", "redirect_uri")),
+    ("_get_client_secret_request", ("secret", )),
+    ("_get_jwt_assertion_request", ("assertion", )),
+    ("_get_refresh_token_request", ("refresh_token", )),
+    ("_get_on_behalf_of_request", ("client_credential", "user_assertion")),
+    ("_get_refresh_token_on_behalf_of_request", ("client_credential", "refresh_token"))
+]
+
+
 def test_error_reporting():
     error_name = "everything's sideways"
     error_description = "something went wrong"
@@ -316,3 +326,41 @@ def test_multitenant_cache():
     assert client_d.get_cached_access_token([scope]) is None
     with pytest.raises(ClientAuthenticationError, match=message):
         client_d.get_cached_access_token([scope], tenant_id=tenant_a)
+
+
+@pytest.mark.parametrize("method,args", BASE_CLASS_METHODS)
+def test_claims(method, args):
+
+    scopes = ["scope"]
+    claims = '{"access_token": {"essential": "true"}}'
+
+    client = AadClient("tenant_id", "client_id")
+
+    expected_merged_claims = '{"access_token": {"essential": "true", "xms_cc": {"values": ["CP1"]}}}'
+
+    with patch.object(AadClient, "_post") as post_mock:
+        func = getattr(client, method)
+        func(scopes, *args, claims=claims)
+
+        assert post_mock.call_count == 1
+        data, _ = post_mock.call_args
+        assert len(data) == 1
+        assert data[0]["claims"] == expected_merged_claims
+
+
+@pytest.mark.parametrize("method,args", BASE_CLASS_METHODS)
+def test_claims_disable_capabilities(method, args):
+    scopes = ["scope"]
+    claims = '{"access_token": {"essential": "true"}}'
+
+    with patch.dict("os.environ", {"AZURE_IDENTITY_DISABLE_CP1": "true"}):
+        client = AadClient("tenant_id", "client_id")
+
+        with patch.object(AadClient, "_post") as post_mock:
+            func = getattr(client, method)
+            func(scopes, *args, claims=claims)
+
+            assert post_mock.call_count == 1
+            data, _ = post_mock.call_args
+            assert len(data) == 1
+            assert data[0]["claims"] == claims
diff --git a/sdk/identity/azure-identity/tests/test_certificate_credential.py b/sdk/identity/azure-identity/tests/test_certificate_credential.py
index eed94a74206c..40be31528673 100644
--- a/sdk/identity/azure-identity/tests/test_certificate_credential.py
+++ b/sdk/identity/azure-identity/tests/test_certificate_credential.py
@@ -24,6 +24,8 @@
 
 from helpers import (
     build_aad_response,
+    build_id_token,
+    id_token_claims,
     get_discovery_response,
     urlsafeb64_decode,
     mock_response,
@@ -428,3 +430,53 @@ def send(request, **_):
 
     token = credential.get_token("scope", tenant_id="un" + expected_tenant)
     assert token.token == expected_token
+
+
+def test_client_capabilities():
+    """The credential should configure MSAL for capability CP1 unless AZURE_IDENTITY_DISABLE_CP1 is set"""
+
+    transport = Mock(send=Mock(side_effect=Exception("this test mocks MSAL, so no request should be sent")))
+
+    credential = CertificateCredential("tenant-id", "client-id", PEM_CERT_PATH, transport=transport)
+    with patch("msal.ConfidentialClientApplication") as ConfidentialClientApplication:
+        credential._get_app()
+
+    assert ConfidentialClientApplication.call_count == 1
+    _, kwargs = ConfidentialClientApplication.call_args
+    assert kwargs["client_capabilities"] == ["CP1"]
+
+    credential = CertificateCredential("tenant-id", "client-id", PEM_CERT_PATH, transport=transport)
+    with patch.dict("os.environ", {"AZURE_IDENTITY_DISABLE_CP1": "true"}):
+        with patch("msal.ConfidentialClientApplication") as ConfidentialClientApplication:
+            credential._get_app()
+
+    assert ConfidentialClientApplication.call_count == 1
+    _, kwargs = ConfidentialClientApplication.call_args
+    assert kwargs["client_capabilities"] is None
+
+
+def test_claims_challenge():
+    """get_token should pass any claims challenge to MSAL token acquisition APIs"""
+
+    msal_acquire_token_result = dict(
+        build_aad_response(access_token="**", id_token=build_id_token()),
+        id_token_claims=id_token_claims("issuer", "subject", "audience", upn="upn"),
+    )
+    expected_claims = '{"access_token": {"essential": "true"}}'
+
+    transport = Mock(send=Mock(side_effect=Exception("this test mocks MSAL, so no request should be sent")))
+    credential = CertificateCredential("tenant-id", "client-id", PEM_CERT_PATH, transport=transport)
+    with patch.object(CertificateCredential, "_get_app") as get_mock_app:
+        msal_app = get_mock_app()
+        msal_app.acquire_token_silent_with_error.return_value = None
+        msal_app.acquire_token_for_client.return_value = msal_acquire_token_result
+
+        credential.get_token("scope", claims=expected_claims)
+
+        assert msal_app.acquire_token_silent_with_error.call_count == 1
+        args, kwargs = msal_app.acquire_token_silent_with_error.call_args
+        assert kwargs["claims_challenge"] == expected_claims
+
+        assert msal_app.acquire_token_for_client.call_count == 1
+        args, kwargs = msal_app.acquire_token_for_client.call_args
+        assert kwargs["claims_challenge"] == expected_claims
diff --git a/sdk/identity/azure-identity/tests/test_client_secret_credential.py b/sdk/identity/azure-identity/tests/test_client_secret_credential.py
index 598d0011865d..91f0c1c419dd 100644
--- a/sdk/identity/azure-identity/tests/test_client_secret_credential.py
+++ b/sdk/identity/azure-identity/tests/test_client_secret_credential.py
@@ -12,7 +12,15 @@
 import pytest
 from six.moves.urllib_parse import urlparse
 
-from helpers import build_aad_response, get_discovery_response, mock_response, msal_validating_transport, Request
+from helpers import (
+    build_aad_response,
+    build_id_token,
+    get_discovery_response,
+    id_token_claims,
+    mock_response,
+    msal_validating_transport,
+    Request
+)
 
 try:
     from unittest.mock import Mock, patch
@@ -274,3 +282,53 @@ def send(request, **_):
     with patch.dict("os.environ", {EnvironmentVariables.AZURE_IDENTITY_DISABLE_MULTITENANTAUTH: "true"}):
         token = credential.get_token("scope", tenant_id="un" + expected_tenant)
         assert token.token == expected_token
+
+
+def test_client_capabilities():
+    """The credential should configure MSAL for capability CP1 unless AZURE_IDENTITY_DISABLE_CP1 is set"""
+
+    transport = Mock(send=Mock(side_effect=Exception("this test mocks MSAL, so no request should be sent")))
+
+    credential = ClientSecretCredential("tenant-id", "client-id", "client-secret", transport=transport)
+    with patch("msal.ConfidentialClientApplication") as ConfidentialClientApplication:
+        credential._get_app()
+
+    assert ConfidentialClientApplication.call_count == 1
+    _, kwargs = ConfidentialClientApplication.call_args
+    assert kwargs["client_capabilities"] == ["CP1"]
+
+    credential = ClientSecretCredential("tenant-id", "client-id", "client-secret", transport=transport)
+    with patch.dict("os.environ", {"AZURE_IDENTITY_DISABLE_CP1": "true"}):
+        with patch("msal.ConfidentialClientApplication") as ConfidentialClientApplication:
+            credential._get_app()
+
+    assert ConfidentialClientApplication.call_count == 1
+    _, kwargs = ConfidentialClientApplication.call_args
+    assert kwargs["client_capabilities"] is None
+
+
+def test_claims_challenge():
+    """get_token should pass any claims challenge to MSAL token acquisition APIs"""
+
+    msal_acquire_token_result = dict(
+        build_aad_response(access_token="**", id_token=build_id_token()),
+        id_token_claims=id_token_claims("issuer", "subject", "audience", upn="upn"),
+    )
+    expected_claims = '{"access_token": {"essential": "true"}}'
+
+    transport = Mock(send=Mock(side_effect=Exception("this test mocks MSAL, so no request should be sent")))
+    credential = ClientSecretCredential("tenant-id", "client-id", "client-secret", transport=transport)
+    with patch.object(ClientSecretCredential, "_get_app") as get_mock_app:
+        msal_app = get_mock_app()
+        msal_app.acquire_token_silent_with_error.return_value = None
+        msal_app.acquire_token_for_client.return_value = msal_acquire_token_result
+
+        credential.get_token("scope", claims=expected_claims)
+
+        assert msal_app.acquire_token_silent_with_error.call_count == 1
+        args, kwargs = msal_app.acquire_token_silent_with_error.call_args
+        assert kwargs["claims_challenge"] == expected_claims
+
+        assert msal_app.acquire_token_for_client.call_count == 1
+        args, kwargs = msal_app.acquire_token_for_client.call_args
+        assert kwargs["claims_challenge"] == expected_claims
diff --git a/sdk/identity/azure-identity/tests/test_live.py b/sdk/identity/azure-identity/tests/test_live.py
index 5b2e0a2061b6..5d7d0ef57588 100644
--- a/sdk/identity/azure-identity/tests/test_live.py
+++ b/sdk/identity/azure-identity/tests/test_live.py
@@ -13,6 +13,8 @@
 )
 from azure.identity._constants import DEVELOPER_SIGN_ON_CLIENT_ID
 
+from helpers import get_token_payload_contents
+
 ARM_SCOPE = "https://management.azure.com/.default"
 
 
@@ -21,6 +23,7 @@ def get_token(credential):
     assert token
     assert token.token
     assert token.expires_on
+    return token
 
 
 @pytest.mark.parametrize("certificate_fixture", ("live_pem_certificate", "live_pfx_certificate"))
@@ -42,7 +45,9 @@ def test_certificate_credential(certificate_fixture, request):
     credential = CertificateCredential(
         tenant_id, client_id, certificate_data=cert["cert_with_password_bytes"], password=cert["password"]
     )
-    get_token(credential)
+    token = get_token(credential)
+    parsed_payload = get_token_payload_contents(token.token)
+    assert "xms_cc" in parsed_payload and "CP1" in parsed_payload["xms_cc"]
 
 
 def test_client_secret_credential(live_service_principal):
@@ -51,7 +56,9 @@ def test_client_secret_credential(live_service_principal):
         live_service_principal["client_id"],
         live_service_principal["client_secret"],
     )
-    get_token(credential)
+    token = get_token(credential)
+    parsed_payload = get_token_payload_contents(token.token)
+    assert "xms_cc" in parsed_payload and "CP1" in parsed_payload["xms_cc"]
 
 
 def test_default_credential(live_service_principal):
diff --git a/sdk/identity/azure-identity/tests/test_live_async.py b/sdk/identity/azure-identity/tests/test_live_async.py
index f96896ec90d2..7a5fafaf84bd 100644
--- a/sdk/identity/azure-identity/tests/test_live_async.py
+++ b/sdk/identity/azure-identity/tests/test_live_async.py
@@ -6,6 +6,8 @@
 
 from azure.identity.aio import DefaultAzureCredential, CertificateCredential, ClientSecretCredential
 
+from helpers import get_token_payload_contents
+
 ARM_SCOPE = "https://management.azure.com/.default"
 
 
@@ -14,6 +16,7 @@ async def get_token(credential):
     assert token
     assert token.token
     assert token.expires_on
+    return token
 
 
 @pytest.mark.asyncio
@@ -36,7 +39,10 @@ async def test_certificate_credential(certificate_fixture, request):
     credential = CertificateCredential(
         tenant_id, client_id, certificate_data=cert["cert_with_password_bytes"], password=cert["password"]
     )
-    await get_token(credential)
+    token = await get_token(credential)
+    parsed_payload = get_token_payload_contents(token.token)
+    assert "xms_cc" in parsed_payload and "CP1" in parsed_payload["xms_cc"]
+
 
 
 @pytest.mark.asyncio
@@ -46,7 +52,10 @@ async def test_client_secret_credential(live_service_principal):
         live_service_principal["client_id"],
         live_service_principal["client_secret"],
     )
-    await get_token(credential)
+    token = await get_token(credential)
+    parsed_payload = get_token_payload_contents(token.token)
+    assert "xms_cc" in parsed_payload and "CP1" in parsed_payload["xms_cc"]
+
 
 
 @pytest.mark.asyncio