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With just under 6 months until the EU Carbon Border Adjustment Mechanism (CBAM) enters its definitive phase, many businesses remain unprepared for its impending impact. Designed as a cornerstone of the EU’s climate strategy, CBAM seeks to level the playing field between domestic producers which are already subject to the EU Emissions Trading System (EU ETS) and foreign exporters which do not currently face comparable carbon costs.
The mechanism will impose significant new costs on importers of steel, aluminium, cement, and fertilisers in the near-term. If trade flows remain at today’s levels, CBAM liabilities in these sectors could hit €9bn by 2026 and €22bn by 20351.
These added compliance costs could reshape global trade dynamics. By 2035, effective CBAM rates could rival the shock tariffs of Trump’s second term to date. Around 70 percent of CBAM-covered imports could face an effective levy above 10 percent of import value; 15 percent could exceed 50 percent.
Markets are already reacting to CBAM’s ripple effects. Uncertainty around final policy design and implementation decisions is dampening activity on forward markets, as participants struggle to price in future liabilities. “A big part of what we need to understand is exactly which price will apply and how we buy the certificates. Since that seems to not be 100 percent finalised, we won’t be able to properly price contracts for next year,” one European aluminium trader told Fastmarkets.
CBAM will not hit all importers equally. Costs will vary based on both embedded emissions and the CBAM certificate price, itself linked to the volatile EU ETS carbon price. For example, a high-emissions intensity HRC producer under a high-EUA price scenario could face CBAM costs up to 10 times those of a low-emissions intensity producer under a low-price scenario.
While the immediate impact of CBAM is on importers, CBAM’s implications extend throughout the value chain – affecting producers both inside and outside the EU, traders, and downstream sectors such as automotive, construction, and machinery, where input costs and sourcing strategies may need to adjust in response.
The first step to developing a strategic response to CBAM is to understand its impact. Fastmarkets analysis finds that the metals industry, specifically steel, will bear the majority of CBAM associated costs. About 75 percent of total liabilities are expected to fall on iron and steel importers, with aluminium importers representing a further 7 percent.
Annual CBAM certificate costs could hit €22 billion by 2035 – over a quarter of the value of affected goods – if trade flows remain as they are today. This is an upper bound estimate, with changes to trade flows and potential policy circumvention likely to substantially reduce these direct costs. Nonetheless, a cost increase of this magnitude has the potential to narrow profit margins significantly, particularly in sectors with low value-added, thin profit margins or limited ability to pass through costs. For many, the likely outcome will be a combination of upstream sourcing adjustments, efficiency improvements, and cost pass through, with ripple effects across downstream industries – from construction to automotive.
For some products, the cost impact of CBAM could reach over 100 percent of current import value. This is likely to have impacts beyond reconfiguration of trade flows, with the potential for demand destruction as buyers shift to alternative products or simply choose to forgo purchases.
The way in which sectors are affected by CBAM will depend on their current emissions, decarbonisation trends, the European Commission’s emissions benchmarks, and competitive dynamics. Across key sectors:
· Iron & Steel faces the largest absolute costs from CBAM, accounting for approximately 75 percent of all certificates likely required under the mechanism. This is driven by both the high value of imports covered by CBAM – around €55 billion annually – and the sector’s emissions intensity.
· Aluminium is less affected on a relative basis with CBAM costs averaging 9 percent of import value by 2035. This is because of its lower emissions intensity and higher value per tonne of product.
· Cement is likely to face the steepest relative impact. By 2035, CBAM costs could amount to 150 percent of import value, due to a combination of low unit price and high carbon intensity.
At the product level, the effects can be even more severe. For five particularly heavily impacted products, CBAM-related costs could exceed 100 percent of current import values, posing serious challenges for importers and driving up costs for downstream sectors. Demand for CBAM certificates is concentrated in a few product categories. Over 50 percent of all certificate demand in 2035 is likely to come from just six products2.
Certificate demand is also highly geographically concentrated. A handful of countries dominate the EU’s imports of carbon-intensive goods – and as a result, are likely to bear the brunt of CBAM-related compliance. Russia, India, Turkey, China, and Ukraine are projected to account for the majority of CBAM certificate demand by 2030. Together, they represent over 50 percent of total projected CBAM certificates based on emissions embedded in current trade flows.
The concentration of exports among a handful of countries highlights critical issues around supply chain diversification, trade diplomacy, and carbon mitigation strategies. For the most exposed exporters, the CBAM framework may accelerate interest in domestic carbon pricing mechanisms – to mitigate financial liabilities and retain revenue that would otherwise flow to the EU.
CBAM will create winners and losers. While many producers may struggle to manage increased costs, for some, this could create substantial competitive opportunities to capture new markets with low carbon products.
A key feature of CBAM is that it ties cost directly to the embedded emissions intensity of imports. This means that even within a single product category, the CBAM cost burden can vary dramatically depending on the country of origin and the production method used.
CBAM’s design also introduces non-linear effects that amplify the benefits of emissions reductions. For instance, a 10 percent reduction in emissions intensity for hot-rolled steel coil could result in a 30 percent drop in CBAM certificate requirements in 2026. This is due to the way CBAM benchmarking and free allowances are structured.
The variability in emissions intensities of production is particularly pronounced for steel where emissions intensity of export sources varies dramatically. By contrast, cement has comparatively low emissions intensity variation.
This means that the steel sector may see substantial shifts in trade patterns due to CBAM. For hot-rolled steel coil, imports from India could face CBAM certificate costs equivalent to 80 percent of product value by 2030. By contrast, the same product imported from the United States would incur a cost of just 6 percent of its value. Similarly, low emissions intensity producers in the Middle East and Asia Pacific will garner a competitive advantage that may allow them to capture market share.
For EU buyers, this creates a clear incentive to reorient supply chains toward producers with lower emissions footprints. By switching suppliers – even within the same region or material specification – importers can significantly reduce their costs.
This is already starting to occur, with exporters to the EU prioritising low-carbon production methods to maintain market access and competitiveness. Lower emissions steelmakers in MENA, such as the UAE’s Emirates Steel, and scrap heavy producers using electric arc furnaces could sell into Europe with significantly lower, or even no, CBAM-related costs. Leading Asian firms, like South Korea’s Hyundai Steel and POSCO, are retrofitting with electric furnaces and forging supply deals for green steel to meet EU demand. A Hyundai Steel official noted that “with [CBAM] coming into full effect in 2026, we anticipate a significant increase in demand for carbon-reduced steel plates, especially from European automakers”3.
At present, CBAM’s limited downstream sector coverage also incentivises importing downstream products to avoid CBAM liabilities. This could create opportunities for non-EU producers and adversely impact EU producers unless addressed by future policy changes. “Instead of bringing the steel coil, beam, or section from Asia and processing it in the EU,” a mill source said, “we buy the ready-made steel structure without quota, without anti-dumping duty and CBAM. That’s killing our downstream industry.”4
Trade flows are clearly shifting, as supply chains respond to these new incentives, creating clear risks that need to be mitigated.
While the CBAM will enter its liability generating phase in less than 6 months, market participants still face substantial uncertainties. CBAM liabilities for the 2026 reporting period will not be fully known until H2 2027 due to the delayed sale of CBAM certificates and the volatility of EU ETS allowance prices. This market pricing opacity makes it difficult for market participants to price 2026 contracts with confidence and is very likely to affect market liquidity.
In addition, several potential policy changes and implementation decisions could significantly affect the cost burden for steel and aluminium importers.
1. Inclusion of indirect emissions: The potential expansion of CBAM to cover indirect emissions could increase average liabilities for aluminium slab imports from 7 percent of import value to 32 percent of value in 2030. Impacts could be far larger in countries with high grid emissions intensity factors.
2. EUA prices: The CBAM certificate price is tied to the EU ETS carbon price, which will shift materially as EU ETS enters its Phase 2 and the EU’s wider decarbonisation efforts ramp up. Hot-rolled coil steel CBAM costs could vary between 21 percent and 45 percent of import value in 2030 between Fastmarkets low and high EUA price scenarios.
3. Emissions benchmarks: Sensitivity to benchmark emissions intensity choices is also significant, with hot-rolled coil steel costs potentially fluctuating from 28 percent to 37 percent of import value between lax and strict benchmark assumptions.
CBAM is a first-of-its-kind policy, and as such policy iteration and learning is to be expected throughout its development and implementation. However, the sheer number of policy risks facing industry is staggering. This uncertainty is already suppressing forward contract markets and affecting investment decisions.
In addition to the implementation uncertainties of the current policy outlined above, further policy changes are also in the pipeline. The European Commission plans to issue guidance on carbon leakage risks linked to EU exports by the end of June, with a broader CBAM review – including anti-circumvention proposals and scope expansion to downstream products – due by year-end5.
These measures could incorporate a wide range of potential reform such as:
1. Export rebates for European producers: While CBAM imposes carbon costs on imports to level the playing field in the EU market, EU exporters receive no relief for the EU ETS costs they incur. This creates a structural disadvantage for EU-based manufacturers competing in international markets, especially in carbon-intensive sectors like steel and aluminium. Therefore, it is likely that the Commission may propose measures to adjust for these embedded costs, with potential options including the offset of existing CBAM liabilities or the provision of free allowances based on methodologies similar to those used for calculating CBAM import liabilities.
2. Extension in coverage upstream or downstream: The inclusion of upstream inputs (e.g., alumina, bauxite, coking coal) or downstream manufactured products (e.g., fabricated components) within existing CBAM sectors remains under consideration. Expansions would alter supply chain decisions and potentially widen the compliance burden for importers.
3. Rules around the coverage to scrap-based production: While scrap product is currently exempt from CBAM, uncertainty looms large around the evidentiary thresholds for demonstrating scrap use and low embedded emissions. CBAM circumvention risks may ultimately result in scrap being included within CBAM scope, which could have major impacts across metals markets.
4. Use of national average emissions factors: A move to expand the use of country-of-origin average emissions factors – rather than site-specific data – would reduce incentives for product emissions shifting (“resource shuffling”) but could sharply alter liability projections for many producers, as well as weaken the incentive for decarbonisation investments overseas.
Companies making capital decisions on the location of production and investment in low carbon production options face further uncertainties in the long-term. Such decisions will depend on the expansion of CBAM over time, as well as the response of other countries.
CBAM circumvention strategies and how the EU chooses to address these is a major source of risk. Exporters of steel products to Europe might seek to avoid CBAM costs through changing exported product CN codes. “In 2024, 70,000-80,000 tonnes of hollow sections from China entered Spain alone – usually suppliers make small holes in hollow sections and they qualify under different TARIC codes, and therefore avoid safeguard measures. The same can be with CBAM – if it is not expanded downstream,” source in Spain told Fastmarkets.
The CBAM was designed to expand over time, with future CBAM phases potentially extending coverage to sectors such as chemicals, glass, pulp and paper, alongside downstream manufactured goods. This would significantly increase the complexity of CBAM and expose a wider range of importers to compliance obligations.
As the EU imposes carbon costs on imports, non-EU countries may also accelerate their own emissions trading systems to recover carbon revenues within their jurisdictions rather than seeing them taxed at the EU border. This has already been evident in the expansion of carbon pricing in EU periphery countries such as Türkiye and Ukraine. Other countries may seek to respond with punitive measures, such as retaliatory tariffs or trade-distorting subsidies to protect their export competitiveness. The implications of these actions will again shift competitiveness and trade dynamics.
CBAM is no longer a distant policy – it is an imminent and transformative policy already reshaping price structures, supply chains, and competitive dynamics across steel, aluminium, cement, and fertilisers.
The EU’s phased approach means that costs, and impacts on supply chains, will accelerate over time as free EU ETS allowances are removed. While current impacts may seem limited, by 2035, CBAM’s financial impact could rival major historic tariff regimes. This means that business still have an opportunity to take strategic actions to understand their exposure and develop strategies to manage risks and capture competitive opportunities.
For importers and traders, this first requires an understanding of exposure. The overall scale of costs based on forecast CBAM certificate prices, country-level emissions intensities, and product-level benchmarks. However, the risks associated with this exposure will differ based on the management of contracts and price risks. Sawal Bacha, Redshaw Advisors, stated that “CBAM certificate prices are expected to rise to €130 by 2030 and onto nearly €200 by 2035 from the current level around €70, so companies that lock in costs now are likely to gain an advantage in an increasingly uncertain environment.” Companies may also benefit from supply chain diversification, particularly toward low-carbon producers or regions with comparable carbon pricing systems.
For producers and exporters, this requires action to manage the carbon footprint of production. Investing in emissions reductions can not only limit liability, but provide a competitive edge as access to the EU market becomes increasingly carbon dependent. This also means monitoring potential policy changes around indirect emissions, rules around import of scrap, and national average rules, which could reshape compliance risks.
For downstream industries, the first step is quantifying the degree to which costs are expected to be passed through across steel, aluminium, cement and fertilisers inputs to anticipate cost shocks. This means engaging with existing and potential new suppliers early to secure access to low-emission materials and mitigate exposure to carbon-intensive sourcing.
CBAM is more than a policy – it introduces carbon as part of the architecture for global trade. Decisions businesses make now will determine not just compliance, but also competitiveness in a carbon-constrained future.
Fastmarkets provides leading economic analysis to help market participants understand the cost of the EU CBAM, and navigate its impact on trade flows, supply chains and decarbonisation strategies. Discover more now.