The European Union's Carbon Border Adjustment Mechanism (CBAM) is set to be fully implemented by January 1, 2026, and is poised to significantly influence global trade and accelerate the energy transition. The mechanism targets importers of specific energy-intensive goods, including iron, steel, aluminium, fertilizers, cement, electricity, and hydrogen, imposing a carbon tax that reflects the disparity between EU carbon prices and those in exporting nations. This initiative aims to support Europe's industrial decarbonization efforts while preventing carbon leakage, which could undermine these goals.
Amidst economic challenges, including industrial stagnation, the European Commission has revised and simplified the CBAM policy. A key change involves raising the exemption threshold to 50 metric tons (mt), which will exempt approximately 182,000 importers—about 90% of total importers—from CBAM authorization and certificate purchasing obligations. This adjustment aims to alleviate the regulatory burden on small importers while still addressing over 99% of emissions in scope, thereby enhancing the policy's efficiency and environmental effectiveness.
However, larger traders, stockholders, and distributors will still face the new regulations. Additionally, the timeline for purchasing carbon pricing certificates has been adjusted, allowing importers to buy CBAM certificates starting in February 2027 instead of January 1, 2026. While this shift may reduce immediate pressure, the financial exposure remains, as companies will still be responsible for emissions incurred in 2026.
The steel and iron industries are particularly affected by CBAM, drawing scrutiny from both EU and non-EU stakeholders. While some industry groups, like Eurofer, have welcomed the broader scope of CBAM to include downstream products, there is widespread concern about the impact of the regulation on steel consumption and trade. The decline in European steel consumption in 2023 has prompted calls for support beyond trade policies, as stakeholders fear that increased costs could drive buyers to alternative sources.
European steel producers are exploring lower-carbon options from suppliers outside the EU to mitigate CBAM costs. However, the anticipated shift towards domestic steel production has not materialized, with importers emphasizing that their decisions will hinge on the overall cost comparison between imports and European products. Some suppliers express concern that the regulatory push for decarbonization may lead to a diversion of steel exports to markets with less stringent regulations.
In the aluminium sector, the EU faces a significant import deficit, exacerbated by high power prices leading to decreased domestic production capacity. The implementation of CBAM is expected to raise costs for importers, driving up European aluminium premiums and potentially increasing prices for downstream products reliant on primary aluminium. The anticipated premiums for low-carbon aluminium may remain stable, but uncertainties loom regarding the inclusion of indirect emissions in the future.
Critics of CBAM argue that its current design inadequately addresses the environmental impact of aluminium production, particularly the indirect emissions associated with electricity used in smelting. The European Aluminium Association has advocated for excluding indirect emissions until the EU's electricity grid is fully decarbonized, citing competitive disadvantages for European producers.
The regulation's focus on upstream products raises concerns about incentivizing the relocation of industries and increasing imports of finished goods. As the EU prepares for CBAM, many market participants have prioritized adapting to changing tariffs over the slower-moving regulation, leading to potential challenges in readiness by the implementation date.
Overall, the effectiveness of CBAM in reshaping trade flows and costs remains uncertain. While it may encourage lower-carbon production outside the EU, there are questions about whether non-European suppliers will simply redirect their sales to other markets. The EU's economic struggles in recent years have made it a less attractive market for certain commodities, complicating the potential impacts of CBAM.
The mechanism has already prompted other countries to consider their own carbon border adjustments or emissions trading markets, indicating a broader global trend towards carbon regulation. Ultimately, CBAM's success will depend on its ability to balance environmental goals with the realities of global trade dynamics and economic conditions.