A green and level playing field?

Since 1st January 2026, EU importers of carbon intensive products including iron & steel, cement, aluminium, fertilisers, hydrogen, and electricity now have to factor in the cost of the embedded emissions.

Almost immediately, China's Ministry of Commerce issued a statement condemning the EU's Carbon Border Adjustment Mechanism (CBAM) as “unfair” and “discriminatory,” adding that although China was "willing to cooperate with Europe to jointly tackle global climate change," it would "take all necessary measures to counter unfair trade restrictions.”

Two particular areas of concern have got the Chinese authorities bristling.

First, the Ministry suggests that the EU has assigned excessively high default carbon intensity values on Chinese CBAM-covered products, and together with plans to raise them over the next three years, “constitute unfair and discriminatory treatment”. To recap, default benchmarks determine the carbon cost importers face at the border in the absence of verified emissions data; they are high by design and should act as an incentive for producers to provide real, verified emissions data.  

Second, the statement also signals that authorities are opposed to the EU's plan to extend CBAM to cover some 180 steel and aluminium intensive products, arguing that it “goes beyond the legitimate scope” of addressing climate change. The extension would come into force from the start of 2028 and primarily includes downstream industrial supply chain products, such as base metal mountings, cylinders, and industrial radiators.

While the decision to extend CBAM to certain downstream sectors is couched in the language of preventing carbon leakage, it is an explicit plug to keep internal dissent against CBAM in check. A recent paper estimated that production losses in CBAM covered sectors within the EU could exceed 10%, and in some cases, even reaching the 20-30% range, and primarily occur in Eastern Europe. Notably, it adds that production losses extend to several ‘‘inflation-absorbing’’ downstream sectors, especially those involved with aluminium and steel manufacturing (see Softening the blow).

The paper discussed above attempts to identify those countries and industries most susceptible to gains or losses under CBAM, both within and outside the EU. Despite concerns to the contrary, the analysis suggests widespread fears among the EU's trading partners are probably overstated. The US, China, and Japan may experience slight net gains according to the analysis, while India, Russia, and Turkey are likely to see minor albeit limited negative impacts. The risk for the EU is that in trying to keep the peace internally, it now opens up a new external front in opposition to CBAM.

Breaking boundaries

As I note in my recent article reviewing carbon market developments in 2025, until now EU policymakers have only been concerned with their domestic audiences perception of carbon prices. The launch of CBAM changes all that and means that fluctuations in the EU's carbon price will reverberate across the globe. The EU carbon price is now trading close to €90 per tonne CO2, up from €70 per tonne CO2 just six months ago, but is widely expected to challenge the €100 level once again in the next few months.

The EU's implementing act outlines how the price of CBAM certificates will be determined by the European Commission. For CBAM-covered goods imported during 2026, the price of CBAM certificates will reflect the average auction price of EUAs during the relevant quarter. However, from 2027 onwards the price of a CBAM certificate will - in line with expectations prior to the launch of CBAM - mirror the weekly average EUA auction price.

As countries trading with the EU begin to realise the extent to which they are exposed to the EU's CBAM - and the toll paid to Brussels coffers begins to ring louder - the pressure on other governments to introduce their own carbon pricing schemes will increase. Furthermore, with carbon leakage thought to offset 13% of the domestic emissions reductions associated with carbon pricing, governments will quickly seek to introduce their own border carbon adjustments or BCAs (see Building blocs: As global carbon pricing grows and becomes more fragmented, regional carbon markets offer a solution).

What might it mean for the United States? The prospects for a broad based federal carbon price are very slim and the probability of one being voted through is not expected to improve significantly even if the Democrats win the 2028 presidential election (a 55% implied probability based on betting markets). A recent paper led by researchers at UC Berkeley suggests that even under the worst case climate projections and current mitigation trajectories, the probability that the House of Representatives pass a carbon-pricing bill is only 9 percentage points higher in 2050 than in 2020.

Nevertheless, a BCA is likely to be introduced at some point. The 2025 Clean Competition Act (CCA), introduced by Democratic Senator Whitehouse, makes the case for an intensity-based levy on the emissions from selected imported carbon intensive goods, combined with a domestic intensity-based carbon tax. As proposed the CCA would cover goods across 20 US industries, including petroleum and natural gas extraction, and petrochemical, iron & steel, and aluminium manufacturing. A tax of $60 per tonne of CO2e (€51) would be placed on emissions exceeding a certain carbon intensity threshold, increasing at a real rate of 6% per annum.

The CCA differs significantly from the 2025 Foreign Pollution Fee Act (FPFA) put forward in April 2025 by two Republican senators. As I explained at the time, the FPFA does not have an explicit carbon price, ensuring a level playing field. There are no incentives for both domestic and foreign producers to decarbonise. Furthermore, instead of focusing on carbon emissions, the FPFA proposal is "really a cover for weakening Chinese control over global supply chains deemed to be a threat to the US."

Concrete returns

Certain European industries are expected to benefit from CBAM due to their relative position on the carbon abatement cost curve, coupled with the diversion of imports from more carbon intensive jurisdictions outside of Europe to other destinations.

One such industry is the cement sector where Europe's largest producers are poised for a substantial boost in profitability. Although imports of cement from Turkey and North Africa increased sharply in 2025 as EU buyers sought to take advantage of lower prices (imports rose 48% and 30% respectively during Jan-Sept compared to year earlier levels), demand from these producers is expected to decline as CBAM comes into force.