Starting in 2026, the European Union will introduce taxation under the Carbon Border Adjustment Mechanism (CBAM), an initiative aimed at reducing the carbon emissions associated with imports of products like steel, aluminum, and cement. This mechanism is part of the EU’s efforts to combat climate change and ensure a transition to a green economy. By aligning the carbon price on imports with that set within the EU ETS (European Union Emissions Trading System), CBAM aims to prevent “carbon leakage,” a phenomenon where companies move production to countries with more relaxed emission regulations.
Although this mechanism has been announced for some time, its detailed rules were recently clarified by the European Commission, bringing unpleasant surprises for importing companies. In this article, we will analyze how CBAM will function, why its impact is underestimated, and what the real challenges are for European industry.
How Does CBAM Work? CBAM is designed to mirror the EU ETS, which imposes a price on carbon emissions produced within the European Union. Essentially, the mechanism is based on the fact that, upon importing certain high-emission products, importers will pay a tax equivalent to the carbon price set under the ETS. This tax applies based on the emissions embedded in the imported products and aims to level the environmental cost between European and non-EU producers.
A crucial aspect of CBAM is that the tax will be introduced gradually over nine years, with a theoretically moderate start in 2026. In theory, a gradual increase in the tax was anticipated, from 2.5% in the first year to 100% in the ninth year. This gradual approach led many companies to believe that the initial impact would be negligible and that they would have enough time to adapt.
A Surprising Change Recently, the European Commission published a Q&A document clarifying how CBAM will interact with the free allocation system under the EU ETS. This document revealed an essential technical aspect that had been overlooked: the tax calculation is not solely based on the gradual implementation percentage but also on a benchmarking system that assesses the “normal” emissions for different products.
According to information provided by Gabriel Rozenberg from CBAMBOO., each product subject to CBAM will have a specific benchmark, representing the standard emission level for that product. For example, if the benchmark for steel is set at 1.2 tons of CO2 per ton of steel, and the imported product has emissions of 3 tons per ton, the CBAM tax will apply to the difference of 1.8 tons from the first year. This means that, instead of a negligible 2.5% tax, importers could pay a tax equivalent to 61% of the total embedded emissions.
Economic Consequences for Importers The impact of this regulation could be much more severe than anticipated. Many companies calculated additional costs based on the initially forecasted 2.5% tax, considering that adaptation would be relatively easy. However, the new clarification suggests that actual taxes could be in the tens of percentages from the first year, depending on the difference between actual emissions and established benchmarks.
This means that importers need to urgently reassess their supply plans. Carbon costs could become significant for products imported from countries with lower emission standards, such as China or India. If a benchmark is set at 1.2 tons of CO2 per ton, and the actual emissions of the imported product are 3 tons per ton, the financial impact will be dramatic, increasing costs by up to 61% in the first year.
Challenges for Companies and Adapting to CBAM In light of this new information, European companies must quickly adjust their strategies. First, it is essential to reassess supply chains to identify alternative sources with lower emissions. Additionally, further negotiations with suppliers may be necessary to share the additional costs imposed by CBAM.
In the medium and long term, companies should invest in cleaner technologies and adopt more sustainable production practices to minimize the impact of these taxes. At the same time, there is significant uncertainty regarding the exact benchmarks that will be established, and the lack of these technical details makes planning more difficult.
Political and Economic Implications CBAM is not only an environmental protection mechanism but also a geopolitical tool. Non-EU countries are expected to react, accusing the EU of green protectionism, and trade disputes may increase. At the same time, the EU risks overly burdening importers, affecting their competitiveness in international markets.
Domestically, this mechanism could stimulate investments in green technologies and contribute to the EU’s climate goals. However, the initial costs will be felt primarily by small and medium-sized enterprises, which may have difficulties rapidly adapting to the new requirements.
Conclusion The introduction of CBAM in 2026 will bring significant challenges for European importers, with the impact being much greater than initially estimated. Recent clarifications from the European Commission show that the initial taxes will be applied to a higher percentage of emissions than previously thought, due to the benchmarking system. Companies need to recalibrate their strategies, diversify their supply sources, and invest in greener technologies to cope with the new economic realities.
As we approach the 2026 deadline, it is crucial for all involved parties to be prepared for a significant economic impact that could fundamentally change the way international trade is conducted.
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