2026 will mark the start of a new era of carbon prices for emission-intense goods in Europe. Free EU emission allowances for producers will be phased out. At the same time, importers have to purchase CBAM certificates. Together, these two instruments will make carbon prices a cost factor in the purchasing of CBAM goods.
(Last update on 19/08/2025)
Carbon as new cost factor
From 2026, carbon will become a visible line item in procurement: buyers of emission-intense goods like steel, aluminium, cement, or ammonia will see carbon prices added to their purchasing costs.
Carbon prices to be paid on the emissions embedded in such goods will increase the carbon costs over time – through the introduction of the Carbon Border Adjustment Mechanism (CBAM).
Carbon prices are not new in Europe. With the EU Emissions Trading System (ETS) there has been a carbon price since 2005. Due to the free allocation of emission allowance, the effective carbon price paid has been close to zero in industry.
Until now, most buyers have paid little attention to the embedded emissions in sourced goods. Only a few first movers with corporate climate targets considered carbon in procurement decisions. Most others focused on quality and costs a purchasing criteria, with high-emission goods typically being cheaper.
The cost gap of greener alternatives can be narrowed through carbon pricing. The EU intends to use it as a primary policy tool to achieve its Green Deal ambitions of cutting emissions by 55% in 2030 compared to 1990 and to become the first carbon-neutral continent by 2050.
The idea of carbon pricing is simple: Add a monetary value to carbon to internalize the hidden costs of emissions. Whereas a fixed carbon tax would offer the most reliable price signal, policy makers have opted for ETS as an alternative instrument. Here the market is let to find the price – with supply fixed by an emissions cap.
Such regulated carbon markets are gaining global traction and are reshaping production costs and trade competitiveness – especially in energy-intensive industries.
How carbon prices impact purchasing costs
Carbon pricing is being tightened in Europe with the reform of the ETS and the introduction of CBAM. Meanwhile, non-EU countries are considering expanding their carbon pricing too.
Phasing out free emission allowances in the ETS
Since 2005, producers of iron, steel, aluminium, other metals, chemicals, cement clinker, lime and materials fall under the ETS. They need to hold an EU allowance (EUA) for each tonne of CO2 they emit in the production process.
Not to give them a disadvantage in global markets, most of these EUA are handed out for free so far. Only if emissions are above production-specific benchmarks, additional EUA need to be purchased. Until now, industrial producers still cover almost all of its emissions with free allowances.
To strengthen the incentives for the ambitious emission cuts needed, the amendment of EU-ETS directive 2003/87 (2023/959) will phase-out these fee EUA – from 2026 to 2034 when all emissions are fully priced.
While buyers sourcing from within the EU will not have to pay these carbon prices, they will most likely find them be added to their purchasing price. At last years’ ETS-prices of EUR 65 per ton of CO2, their bill would increase from 5-30 in 2026 to over EUR 100 in 2034 per tonne of crude steel, depending on its carbon footprint.
Introducing CBAM-certificates for EU-imports
These increasing carbon costs from within the EU, raise the risk of carbon leakage. To avoid production and sourcing be relocated to places without carbon prices, CBAM regulation (2023/956) adds the same carbon price per tonne of embedded emissions in materials from overseas as to home-made goods.
Importers will need to pay these carbon prices through CBAM certificates. They need to be purchased for imported materials after January 1, 2026. With the proposed simplification of the CBAM regulation, the purchase of certificates for the first year will be postponed to February 2027. Costs still start to accumulate in 2026.
The share of emissions to be covered by CBAM certificates is rising each year with a CBAM factor – equivalent to the phase-out of free allowances in the ETS. In 2034, CBAM certificates are fully phased in.
Accordingly, importers will face increasing carbon costs. CO2 IQ simulations reveal some stark differences depending on goods’ carbon footprint. CBAM costs would increase by ca. EUR 10-100 in 2026 to EUR 100-200 in 2034 per tonne of crude steel, when taking last years’ ETS-prices of EUR 65 per ton of CO2.
Expanding carbon pricing in non-EU countries
Carbon pricing is also building up beyond EU borders. The CO2 IQ Carbon Pricing Radar counts 18 non-EU countries with implemented or scheduled ETS or carbon taxes in CBAM sectors – some at sub-national level. Altogether, these countries make over 40% of EU imports of CBAM goods.
Such carbon prices effectively paid outside of the EU can be deducted from the carbon costs in CBAM. For now, most countries hand out emission allowances for free, while their carbon prices remain much lower than in the EU. Consequently, effective carbon price already paid are supposed to be low.
Yet, this could change with CBAM, as non-EU countries to capture carbon revenues at home instead of having them rendered at EU-borders. Brazil, India, and Türkiye are already in preparation to implement carbon pricing schemes in alignment with EU’s CBAM. China is extending its national ETS too.
While such carbon prices paid may lower the CBAM bill for EU buyers, they are likely to be factored into the price charged by non-EU suppliers. So, overall non-EU carbon pricing schemes may alter where carbon prices are paid, but the added carbon costs remain the same.
What are the added carbon costs to CBAM goods
The added carbon cost rise over time with the CBAM factor and depend on 2 variables:
i. The good’s emissions-intensity relative to production-specific benchmarks set by the EU;
ii. Carbon prices in the ETS, which result from supply and demand for EUA on EU carbon markets.
Whereas emission intensities will be monitored and verified annually, EU carbon prices face large intra-annual variation. Daily closing prices for EUA in the secondary market were between EUR 50 and 75 per tonne of CO2 in 2024. In February 2025, they surpassed EUR 80 – still far from heights close to EUR 100 in 2023.
Prices for CBAM certificates will be set weekly based on ETS auction results in the primary market. Mirroring the secondary market, weekly prices have been between EUR 60 and 80 in the first half of 2025.
In the first year, the CBAM amendments plan to fix retrospectively a quarterly price based on the auction results in 2026 as in the UK CBAM. In 2025, they would have been at EUR 73 in the first quarter and EUR 69 in the second quarter.
Over time, with supply of emission allowances being tightened, these prices are projected to rise. Projections vary by model and the assumptions made – and will largely depend on the future design of the EU-ETS. By how much they will rise will also depend on the political will to follow through when social backlash grows.
How companies can manage carbon costs risks
This carbon pricing uncertainty requires buyers of CBAM goods to take action to manage rising costs:
- Assess carbon costs: Even if buyers do not directly pay these carbon prices, they will be added to purchasing prices so that they should be accounted for in product pricing strategies.
- Reduce carbon exposure: Cost engineering and sourcing from greener suppliers can keep carbon costs down and optimize overall purchasing costs.
- Hedge carbon prices: Strategies to purchase CBAM certificates, build price buffers and hedge price fluctuations can mitigate costs risks.
Understanding carbon exposure of supply chains and carbon-proof purchasing decisions can offer a cost advantage and protect product margins.
Sources and further information:
- CO2 IQ: CO2 Price Radar
- CO2 IQ: CBAM Cost Simulator (get in contact HERE)
- EU: Directive Amending Directive 2003/87/EC Establishing a System for Emission Allowance Trading (2023/959)
- EU: Regulation Establishing CBAM (2023/956)
Photo by Mike Erskine on Unsplash
