The European Union plans to launch a carbon levy in January, which will be the first large-scale border tax on carbon-intensive goods worldwide. The EU hopes the tax will reduce greenhouse gas (GHG) emissions from heavy industries by encouraging companies to clean up their operations. However, many are concerned that the levy could hinder trade with countries outside of the bloc.
The Proposed Levy
From January 1, 2026, the EU will introduce the Carbon Border Adjustment Mechanism (CBAM) to place a tariff on products, such as steel, fertilizers, cement, aluminum, and hydrogen imported from outside the 27-state bloc. Any company importing products from outside of the EU will need to buy CBAM certificates to cover the GHG emissions associated with the goods, most likely at the same price as the EU Emissions Trading System (ETS) market price.
The European Commission President Ursula von der Leyen stated her intention to launch a carbon border tax “to avoid carbon leakage” and help EU companies “compete on a level playing field,” in her 2019 electoral manifesto. The move is expected to help the EU achieve its aim of reducing emissions by at least 55% by 2030.
Nicolas Endress, the founder and CEO of CBAM software solutions company ClimEase, said, “CBAM is what is making this happen by likely penalizing countries without sturdy systems and rewarding those with EU-aligned ETS frameworks.” He added, “Countries that evolve with the change and build credible carbon pricing will defend their industries, while those that pull away will watch their exporters ultimately face the consequences.”
The French Minister for Economic Affairs, Finance and Recovery, Bruno Le Maire, echoed this sentiment. “The agreement in the Council on the Carbon Border Adjustment Mechanism is a victory for European climate policy. It will give us a tool to speed up the decarbonization of our industry, while protecting it from companies from countries with less ambitious climate goals,” Le Maire said.
The Big Picture – Global Emissions
Global trade contributes between 20% and 30% of the world’s annual carbon emissions, according to the World Trade Organization (WTO). In 2015, around 8 billion metric tons of CO2 were emitted from the production and transport of trade, or around 25% of global emissions. The EU aims to tackle these emissions through its CBAM by encouraging companies to improve reporting frameworks and decarbonize operations.
In 2020, the iron and steel industry contributed around 7% of global GHG emissions, while the aluminum industry accounted for 3% of global emissions. Although these are considered “hard-to-abate” industries, there is potential to decarbonize operations using clean energy sources, as well as through the incorporation of cleantech into operations to improve efficiency.
Encouraging European Companies to Stay
In July, the European Commission announced plans to compensate European industries that sell their products abroad for the carbon emissions costs they pay in Europe. This is aimed at encouraging companies to keep operations in Europe instead of relocating to avoid the levy. The move responds to mounting pressure from aluminum and steel producers.
“We’re doing this specifically for those companies at the risk of losing out because they are exporting,” the EU climate commissioner Wopke Hoekstra told reporters. Hoekstra expects compensation to amount to $82 million in 2026. Meanwhile, the CBAM could generate $2.4 billion in revenue by 2030.
International Response
Several countries, including the U.S., China, India, and Brazil, have raised concerns about the introduction of the CBAM, with some threatening to take retaliatory measures. The Trump administration worries that the new climate rules could undermine the EU-U.S. trade agreement. In July, President Trump and von der Leyen agreed on a tariff ceiling of 15% for most EU goods, which was to commence in August.
In August, the U.S. Energy Secretary Chris Wright said that if the CBAM goes into place without modifications, it could create “huge legal risks” for U.S. companies selling fossil fuels to Europe.
The Cost to U.S. Trade
Despite concerns, a recent analysis suggested that CBAM fees to be paid for US imports would amount to $409 million annually under the CBAM’s current scope in a ‘business-as-usual’ scenario. This figure could rise to $1.4 billion if the CBAM is extended to all four types of products and emissions simulated, which include upstream, downstream, indirect emissions and new sectors.
This is a drop in the water compared to the total revenue earned from the U.S. imports of goods into the EU, which in 2023 totaled $282 billion. Based on this figure, CBAM fees would account for approximately 0.14% of total trade under the current scope or 0.19% under the extended scope.
While the cost to U.S. trade into the EU is expected to be minimal, the EU hopes that the introduction of the CBAM will help encourage a shift in the approach to production and trade on an international scale, to help decarbonize the global economy.
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