The EU’s landmark carbon border tax will come into force on January 1 despite fierce opposition from trading partners and warnings from European industry that it will increase costs and red tape.
The carbon border adjustment mechanism (CBAM), which covers six sectors including steel, cement, aluminium and electricity, is intended to prevent EU companies that have to pay for their emissions being undercut by cheaper, more heavily polluting competition.
The European Commission published earlier this month details of how much importers were likely to have to pay. The levy is linked to the bloc’s own emissions trading system and will be brought in as emission allowances that have supported the bloc’s industry are phased out before 2034.
The decision to push ahead with the scheme marks a major commitment to climate policy from the EU even as it rolls back plans for electric cars. The new tax is also starting to pull other countries in a similar direction despite a US shift away from climate goals.
“Despite all the macroeconomic and geopolitical headwinds that we’ve seen, I think carbon pricing is going strong,” said Marcus Ferdinand, chief analytics officer at consultancy Veyt.
“CBAM is quite unpopular among major exporters to the EU, but it has already proven to be quite effective in pushing reticent countries towards building or expanding carbon pricing efforts,” Ferdinand said. “So it’s a major policy shift for the EU to protect its own industry, while at the same time leveraging the carbon pricing idea to third countries.”
Estimates of how much the levy will raise vary, but most analysts expect it to be more than €10bn per year.
Fastmarkets estimates that the costs will increase to €37bn by 2035, increasing on average by 14 per cent per year from 2026 in a base case scenario for the EU emissions trading system price. The majority of the revenues are due to go into the EU’s own budget.
Andrew Wilson, deputy secretary-general of the International Chamber of Commerce said introduction of the CBAM could be “quite disruptive”.
“Companies still have to do a lot of work to calculate potential cost exposures,” Wilson said. “It will be interesting to see what happens in Q1 and Q2 when this thing starts to bite.”
If importers continue to import and do not register with the scheme, they face penalties up to five times higher than they would under the EU ETS. In December, the commission set out several changes to the original proposal, admitting that it had been “too clunky” in its test phase in 2025.
Among the changes was the inclusion of more downstream products such as car doors and industrial radiators and anti-circumvention measures.
The CBAM, which the commission has argued is a critical decarbonisation tool, has been strongly opposed by countries such as China, India and Brazil, which argue that it is a unilateral trade measure in an environmental disguise.
Those countries succeeded in having the issue raised for the first time at the UN’s COP30 climate conference in November, while Brussels’ rejection of New Delhi’s pleas to be exempted from CBAM has complicated talks on a trade deal between the EU and India.
The inclusion of steel products in the new levy has been a particular bone of contention for China and India.
India’s steel production is responsible for about 12 per cent of the country’s carbon emissions, the highest share of any industrial sector, and more than a third of its 6.4mn metric tonnes of annual exports go to Europe.
Abhyuday Jindal, managing director of Indian steelmaker Jindal Stainless, complained last month about a lack of EU clarity on CBAM, calling it “the most confusing topic there is in the world of trade this time”.
On a call with investors, Jindal said his company could not “commit to any kind of numbers change until that clarity comes”.
China’s metals exporters are also expected to be among the worst hit and Beijing has criticised CBAM as a protectionist policy. But the EU measure has prompted China to expand its own emissions trading system, since the levy will be reduced if a carbon price has already been paid at source.
“CBAM could play a key role to push the domestic agenda forward and help accelerate China’s ETS development,” said Shen Xinyi, who leads the China team for the Centre for Research on Energy and Clean Air think-tank. By 2027, China’s steel sector would probably face a cap on absolute emissions under the country’s expanded domestic ETS, Shen said.
Other countries that have cited CBAM as a reason for the establishment or expansion of their own carbon pricing schemes include Brazil, Mexico, Japan and Colombia. Turkey is also setting up a carbon pricing scheme.
The UK is planning to introduce its own CBAM from January 2027, but it will exclude electricity and use a simpler system for collecting revenues.
UK industry has welcomed CBAM schemes in principle, but warned of high bureaucratic costs for exporters and that the one-year lag behind the EU levy risks dumping of steel and other carbon-intensive products on British markets.
Adam Berman, director of policy and advocacy at industry lobby group Energy UK, said the European levy was “particularly problematic” for the electricity sector because of lack of clarity over how it would be applied.
“In principle, electricity from the UK will not face a CBAM charge on export to EU — due to our level of domestic carbon pricing — but big questions remain about how this practically works, and the process that exporters should be following in just a few days’ time,” he said.
Ukraine has also been pleading with the commission for an exemption given widespread damage to its energy infrastructure, but Brussels has insisted the impact on its war-torn economy will be less than Kyiv fears.
Additional reporting by Edward White and Rachel Millard
