EU Moves to Strengthen Carbon Border Adjustment Mechanism

The European Commission has publicly announced proposals to enhance the Carbon Border Adjustment Mechanism (CBAM). The objective is to close existing loopholes, prevent potential circumventions, and more effectively address carbon leakage. In response to industry requests, the Commission has indicated that, beginning on January 1, 2028, the CBAM will extend beyond basic materials such as steel and aluminum to include a range of downstream products that are intensive in steel and aluminum, including machinery, appliances, and specific automotive components. As stated by Wopke Hoekstra, the EU Climate Commissioner, “We’re not asking anything more, but also not asking anything less” for those products entering the European Union, highlighting the intent to ensure that these goods bear carbon costs comparable to those imposed on EU producers under the ETS.

Alongside this, the Commission is fortifying anti-circumvention measures in light of insights gained during the transitional phase of CBAM. Stricter measures will be implemented to discourage attempts to avoid the levy through enhanced traceability of emissions data, increased reporting requirements, and the ability to apply default emissions values in cases of suspected under-reporting. Additionally, through mechanisms such as carbon pricing equivalency and the potential for negotiated trade facilitation measures, the proposals afford greater flexibility to trustworthy international partners. Industry representatives assert that, focusing on “products that face the highest risk of carbon leakage,” the emphasis on downstream products is essential for ensuring that emissions reductions are achieved rather than merely displaced outside the EU.

Similarly, the Commission has proposed a temporary decarbonization support fund for EU manufacturers of CBAM-regulated goods that remain vulnerable to carbon leakage, to ease competitive concerns. A portion of CBAM revenues would finance this program and would provide partial reimbursement of EU-ETS carbon costs for eligible producers, contingent upon verified investments in decarbonization. In addition to these initiatives, a recently published CBAM review report reveals early evidence that the mechanism is influencing climate policy beyond the EU, with several trading partners beginning to establish or enhance their own carbon pricing frameworks.