EU’s CBAM Impact and Considerations

Using proxy hedges to protect against the costs associated with the EU’s carbon border adjustment mechanism (CBAM) is not expected to have a major impact on prices within the European Union’s emissions trading system (ETS). When CBAM takes effect in 2026, importers of CBAM-covered goods will have to give up mechanism certificates corresponding to the emissions generated during their production. Since the CBAM certificate price is tied to EU ETS prices and these certificates cannot be freely traded on the secondary market, the idea of firms using EU ETS allowances for proxy hedging has been proposed. However, hedging of CBAM certificates would cause a short-term, not structural, demand shift. Purchased permits for proxy hedging aren’t used for compliance, only temporarily leaving the market before a resale.

Moreover, utilities, traditionally major hedgers in the market, are reducing their carbon exposure due to declining thermal power generation, leading to a shift in abatement and hedging needs toward the industry.