Policy Note: Reforming the EU Carbon Border Adjustment Mechanism (CBAM)
Keywords: comparative disadvantage / regulatory power / embedded carbon / carbon leakage / export adjustment / environmental norms
Statement: Ave Europa publishes its position on the Carbon Border Adjustment Mechanism (CBAM). A necessary economic tool—but poorly calibrated. The current taxation strategy is counterproductive if it leads to an increase in embedded carbon without effectively pushing third countries to align with European standards while increasing production costs for European industry. Without reciprocal frameworks or export adjustments, the mechanism risks becoming an internal burden rather than a driver of international convergence. Tariffs and incentives must be rethought. Environmental norms should be used as a lever for projecting soft power and regulatory influence globally.
Introduction
The Carbon Border Adjustment Mechanism (CBAM), established under Regulation (EU) 2023/956, is a climate policy tool designed to equalize the carbon cost of imported goods with that of domestic production within the EU Emissions Trading System (EU ETS). Developed as part of the “Fit for 55” legislative package, CBAM aims to prevent carbon leakage by ensuring that imported products bear a carbon price equivalent to that paid by EU producers, thereby encouraging third countries to adopt comparable decarbonization policies.
CBAM currently applies to high-emission sectors: steel, cement, fertilizers, electricity, aluminum, and hydrogen. Following a transitional phase starting in 2023, full implementation is scheduled for 2026, coinciding with the gradual phase-out of free emission allowances under the EU ETS.
In May 2025, the European Parliament is considering a reform proposal (COM(2025)0087) aimed at simplifying administrative obligations, particularly for small importers, while maintaining the environmental integrity of the mechanism. Key elements of the reform include a de minimis exemption for imports below 50 tonnes, streamlined reporting and verification procedures, and clarified budgetary responsibilities.
I. Understanding the CBAM Framework
1. Objectives of CBAM
CBAM serves a dual purpose:
- Mitigating global greenhouse gas emissions by preventing the relocation of carbon-intensive production outside the EU.
- Safeguarding the competitiveness of EU industries subject to stringent environmental regulations.
Despite significant reductions in domestic emissions, the EU has observed an increase in emissions embedded in imports, undermining its climate efforts and global commitments to limit temperature rise.
2. Addressing Carbon Leakage
Carbon leakage refers to the risk of industries transferring production to countries with laxer emission constraints, leading to no net reduction in global emissions.
CBAM addresses this by imposing a carbon price on imports equivalent to that borne by EU producers, thereby leveling the playing field and discouraging relocation.
3. Operational Mechanism
CBAM targets sectors with high emission intensities: steel, aluminum, cement, fertilizers, hydrogen, and electricity. Importers are required to purchase CBAM certificates corresponding to the embedded emissions of their goods, with prices aligned to EU ETS allowances.
This system is designed to replace free emission allowances gradually, ensuring a consistent carbon price signal and compliance with World Trade Organization (WTO) rules.
4. Scope and Application
CBAM applies to imports into the EU customs territory, including those from artificial islands and offshore structures associated with Member States. It encompasses goods listed in Annex I of the regulation, identified via the Combined Nomenclature (CN), and excludes countries with carbon pricing systems equivalent or linked to the EU ETS.
5. Phasing Out Free Allowances
The transition from free emission allowances to CBAM will occur progressively, ensuring that domestic products do not receive more favorable treatment than imports. This approach maintains the incentive for decarbonization while aligning with international trade obligations.
6. Impact on Third Countries
CBAM is expected to encourage producers in third countries to adopt cleaner technologies by internalizing the carbon cost in their exports to the EU. The EU commits to supporting low- and middle-income countries, particularly Least Developed Countries (LDCs), in adapting to CBAM requirements through financial and technical assistance.
7. International Cooperation and the Climate Club
The EU advocates for the establishment of a “Climate Club,” an open and voluntary forum for countries with carbon pricing mechanisms, to promote ambitious climate policies and facilitate the harmonization of emission reduction measures globally.
8. Legal Basis
Article 1 of Regulation (EU) 2023/956 formally establishes CBAM as a tool to reduce global greenhouse gas emissions, prevent carbon leakage, and support the objectives of the Paris Agreement. Article 2 extends its application to goods processed under inward processing procedures and those delivered to offshore structures within Member States’ jurisdictions.
II. The May 2025 Reform Proposal and Its Implications
1. Context of the Reform
In February 2025, the European Commission proposed amendments to Regulation (EU) 2023/956, focusing on administrative simplification and reduced burdens for small importers. This proposal, under the rapporteurship of Antonio Decaro (S&D), seeks to fine-tune the CBAM framework without altering its fundamental objectives.
2. Easing Obligations for Small Importers
A central feature of the reform is the introduction of a de minimis exemption for imports below 50 tonnes per product and per company annually. This measure would exempt approximately 90% of importers, primarily SMEs and individuals, from CBAM obligations, while still covering 99% of embedded emissions. Additional simplifications include streamlined authorization processes for declarants, simplified emission calculation methods, and clarified financial management responsibilities.
3. Budgetary Implications
The reform is projected to result in a modest reduction in CBAM revenues, estimated at €20–21 million annually from 2030, representing about 1% of total expected revenues. While the Parliament considers this acceptable given the compliance cost savings for businesses, concerns have been raised regarding the lack of corresponding reductions in administrative resource allocations and the clarity of budgetary lines within the Multiannual Financial Framework (MFF).
4. Ongoing Structural Criticisms
Despite the proposed simplifications, structural criticisms of CBAM persist:
- The mechanism imposes additional costs on EU importers, particularly those reliant on imported raw materials.
- The absence of an export adjustment mechanism may disadvantage EU exporters in global markets.
- Energy-intensive sectors face a dual burden of EU ETS costs on domestic production and CBAM costs on imported inputs.
These concerns highlight the need for a more comprehensive approach to ensure CBAM’s effectiveness without compromising EU industrial competitiveness.
III. Political Group Amendments and Strategic Positions
1. Acknowledgment of Competitive Disadvantages
Several political groups have expressed concerns about the competitive disadvantages CBAM may impose on EU industries:
- ECR – Jadwiga Wiśniewska emphasizes the need for effective CBAM implementation and closing regulatory loopholes that allow rule circumvention, thereby protecting EU producers from unfair competition.
- ECR – Marion Maréchal advocates maintaining current levels of free emission allowances and indirect cost compensation under the EU ETS for exporters, to prevent unfair competition due to the absence of CBAM adjustments on exports.
2. Sector-Specific Exemption Requests
Targeted exemptions have been proposed for certain sectors. Thus, S&D – Antonio Decaro suggests excluding electricity entirely produced within the Exclusive Economic Zone (EEZ) of an EEA Member State and directly imported into the EU, to prevent inconsistent application of CBAM. Decaro also proposes including coking coal, identified as a strategic raw material in Regulation (EU) 2024/1252, within CBAM’s scope, to ensure fair competition for EU producers and align with the EU’s industrial and climate objectives.
3. Broader Structural Adjustments
PfE – Filip Turek presents a comprehensive critique of CBAM. He calls for the introduction of an export adjustment mechanism to compensate for EU ETS costs and protect exporters from potential retaliatory measures by trade partners. Turek argues for halting the phase-out of free allowances under the EU ETS if fair competition conditions are not ensured. He proposes that CBAM revenues remain at the national level to support industries most affected by EU environmental policies.
Conclusion: Balancing Ambition with Practicality
The CBAM embodies the EU’s commitment to climate leadership by internalizing the carbon cost of imports and promoting global decarbonization. However, its current design may inadvertently increase production costs for EU industries, particularly those dependent on imported raw materials, thereby exacerbating competitive disadvantages.
To enhance CBAM’s effectiveness and fairness, structural adjustments are necessary:
- Establishing a stable revenue stream for the EU budget.
- Encouraging decarbonization among EU industries without imposing disproportionate burdens.
- Fostering international alignment with EU environmental standards through cooperative mechanisms.
Ultimately, CBAM should serve as a strategic instrument that not only advances environmental objectives but also reinforces the EU’s influence through regulatory leadership, promoting global convergence towards sustainable production practices.
The issue at stake is not only budgetary or environmental. It is strategic: to affirm the Union’s influence through normative power, to connect economies through regulatory harmonisation, and to transform the CBAM into a lever of European upward convergence with a structuring impact on the global stage.