A mechanism built with good intentions

The Carbon Border Adjustment Mechanism was introduced by the European Union to level the playing field between EU industries and foreign competitors by putting a carbon price on certain imports. The goal is simple: prevent “carbon leakage”, a scenario where industries shift production to countries with looser climate rules. By aligning carbon costs for imports and domestic products, CBAM supports the EU’s broader climate goals under the Green Deal.

The Burden on European Steelmakers

Among the most affected sectors is the European steel industry. Domestic producers operate under the strict EU Emissions Trading System, which imposes increasing costs on carbon-intensive operations. In contrast, steelmakers from non-EU countries often face no such penalties. This mismatch risks undermining Europe’s efforts to transition to low-carbon steelmaking, especially as green technologies such as hydrogen-based direct reduction and electric arc furnaces require significant investment.

A framework Riddled with Loopholes

Industry stakeholders argue that CBAM, in its current form, fails to fully safeguard EU steelmakers. Loopholes in the system allow importers to sidestep carbon pricing through mechanisms such as resource shuffling or inward processing. These gaps permit foreign producers to manipulate supply chains or reclassify products, avoiding accountability for their actual emissions. The European Steel Association warns that without urgent fixes, CBAM could accelerate deindustrialisation instead of curbing global CO₂ emissions.

Exports at Risk, Investments Jeopardised

A critical flaw lies in CBAM’s treatment of exports. Under current regulations, EU steel producers lose their free ETS allowances when selling outside the EU. Without compensation, these producers face steep costs not borne by rivals in global markets. This disparity discourages exports and weakens the competitiveness of green European steel. EUROFER recommends maintaining free allocation for exports until equivalent carbon pricing systems are adopted globally.

Addressing Indirect Emissions & Product Origin

Another gap is the treatment of indirect emissions, those created during energy production used in steelmaking. CBAM presently overlooks these emissions for certain materials like ferro-alloys. Experts argue for their inclusion, citing the need for consistency. Additionally, the origin of steel should be determined based on where it is “melted and poured,” ensuring traceability and preventing emission outsourcing via partial processing in third countries.

Extending the Scope to Downstream Goods

CBAM currently applies only to raw materials and primary goods, leaving downstream steel-intensive products, like automotive parts and machinery, outside its scope. This limitation creates an incentive for companies to shift carbon-intensive processing stages abroad. Expanding CBAM’s coverage to include complex downstream goods, with simplified emissions tracking systems, would close this loophole and ensure fairer carbon cost allocation.

Calibrating Benchmarks & Default Values

Another concern raised by the industry involves the use of default emissions values. These figures are used to calculate the carbon content of imports when exact data is unavailable. However, the current defaults for stainless steel and other long products may not reflect the most polluting grades, enabling some foreign suppliers to benefit unfairly. EUROFER suggests setting default values based on the most carbon-intensive production routes until more precise data becomes standardised.

A Fair Transition Demands Fair Design

Europe’s steel industry is undergoing a transformative journey toward climate neutrality. However, flawed policy tools could sabotage this progress. By correcting the CBAM’s structural weaknesses, the EU can protect its domestic steel sector from carbon leakage, safeguard climate investments, and promote truly global emissions reduction. Ensuring fair play across borders is not protectionism, it’s a prerequisite for a fair transition.

Key Takeaways

• The EU’s CBAM is designed to price carbon on imports but currently contains loopholes that risk enabling carbon leakage.

• EUROFER urges reforms such as maintaining free ETS allowances for exports and expanding CBAM to downstream steel goods.

• Fixing indirect emissions, product origin rules, and emission default values are essential for a level industrial playing field.