BlogCarbon Border Adjustment Mechanism (CBAM)

Which direction will CBAM take?

Written by

Ulf Narloch

Published on

3. February 2025

On January 29, the Commission published its Competitiveness Compass. The strategic roadmap presents measures for the new term until the end of 2029. Two CBAM measures are in there: the review of a CBAM extension as well as a CBAM simplification. At the same time, a CBAM suspension was called for by the EPP.

A compass for competitiveness

On January 29, the EU Commission presented its Competitiveness Compass. The aim is to strengthen the European economy in global competition.

The Carbon Border Adjustment Mechanism (CBAM) also has a competitive dimension. It is intended to prevent companies from relocating to countries without carbon pricing, while the EU tightens its emissions trading system (ETS).

The compass is based on the Draghi Report, which was presented on September 7, 2024. In it, the former President of the ECB describes the current challenges facing the EU as well as recommendations for a new direction.

Many of these had already been included in Ursula von der Leyen’s political guidelines for the new Commission. Taking office in December, the new Commission reaffirmed its commitment for the climate targets of the Green Deal. The Compass is now the new Commission’s first strategic initiative.

It specifies 3 core areas for action, including decarbonization and competitiveness. These are based on 5 horizontal “enablers”, such as regulatory simplifications. Concrete measures are now to be developed by the European Commission in the legislative period up to 2029.

The roadmap for decarbonization and competitiveness involves the Clean Industrial Deal. Its aim is to strengthen the EU as a production location for climate technologies and energy-intensive industries.

An omnibus package is planned for simplification. Reporting obligation from the Taxonomy Regulation, the Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD) are to be bundled.

Possible CBAM changes

The compass also outlines 2 explicit CBAM measures:

  1. CBAM review on a possible extension;
  2. CBAM simplification for smaller companies.

Most recently, also a CBAM suspension has been called for in a position paper by the European People’s Party (EPP).

CBAM extension

The EU Compass aims to avoid CBAM circumvention and unintended consequences for value chains. The phase out of free emission allowances in the ETS puts EU producers at a cost disadvantage.

CBAM compensates for this disadvantage by leveling the playing field for imports. To reinforce its effectiveness, an extension in 2 directions is to be examined:

  1. To downstream goods: An extension is being discussed to products made from already covered CBAM products, such as iron and steel, and aluminum. According to the CBAM Regulation, the Commission should have submitted a report with proposals by the end of 2024.
  2. To additional sectors: Already before the introduction of CBAM, additional sectors were proposed by the Commission. In particular, organic chemical products and polymers are to be assessed by the end of 2025 in accordance with the CBAM Regulation.

Both extensions can reduce the risk of carbon leakage and thus production relocations. They would, however, increase implementation complexity.

CBAM simplification

Calls for simplification have been growing louder. It could involve a simplification of the rules themselves or an exemption of companies from these rules.

One of the biggest challenges for EU companies is the collection of actual emission values from the producers of CBAM goods. The O3CI portal was launched as a solution.

If actual emission values are not available, national default values will be applicable from 2026. Although markups will be added, the additional cost for smaller importers may be limited.

The majority of companies affected by CBAM imports relatively small quantities. And these companies often have similar CBAM administrative burdens as large importers. Accordingly, the greatest potential for simplification lies in the exemption of these companies. There are three options here:

  1. Goods value threshold: Shipments of CBAM goods under EUR 150 are currently exempt. The DIHK already called for an increase to EUR 5,000. The UK CBAM, for example, has a threshold of GBP 50,000 per year.
  2. Emission threshold: Alternatively, a limit could be set for the embedded emissions of imported goods, below which importers are exempt. The DGEC in France, for example, has defined a limit of 100 tCO2 above which it checks quarterly reports.
  3. Company size threshold: In addition, all small and medium-sized companies (SMEs) could also be exempt from CBAM. The EPP calls for application to be limited to companies with more than 1,000 employees.

The EU Competitiveness Compass outlines a CBAM simplifications for small market players. An expanded definition of SMEs should also lead to thousands of companies benefiting from these simplifications.

CBAM suspension

In January, the EPP retreat called for the CSRD, CSDDD and CBAM to be put on hold for 2 years to ease the burden on affected companies. The EPP is the strongest force in the European Parliament.

The regulation on the introduction of CBAM (2023/956) has already been in force since May 16, 2023. Unlike the CSRD and CSDDD, its implementation is not to be put into national regulation, but governed by the Commission.

Currently, CBAM is in a transitional period with reporting obligations until the end of 2025. However, the majority of the CBAM rules, such as the purchase of CBAM certificates, will only apply from January 1, 2026. A suspension would require two changes:

  1. Postponing the application of the final rules: Most recently, a comparable postponement was agreed for the EU Deforestation Regulation in the EU trilogue between Council, Parliament and Commission;
  2. Adaptation of the ETS Directive (2003/87): The amendments (2023/959) established a CBAM factor for the phase-out of free emission allowances and the phase-in of CBAM from 2026.

The EPP left it unclear how a suspension would work: a delay of the entire phase-in by 2 years or the start with the planned CBAM factor in 2028.

As this change also affects the ETS, it would also have an impact on the achievability of the legally prescribed EU climate targets. There is already an gap in policy measures to reduce EU emissions by 55% by 2030. A relaxation of the ETS would widen this gap.

The EPP demand is also not aligned with some of the policy plans by CDU/CSU, the largest party in the EPP. In their program for the federal elections in Germany, they set carbon pricing as a lead instrument for achieving Germany’s climate targets.

Conflicting policy goals

These different directions reveal an impossible trinity of competitiveness, decarbonization and deregulation. It is up to the political decision-makers to find a balance between these conflicting goals – at both European and national levels.

Key pieces to watch out from the Commission in the next few months are:

  • February 2025: Omnibus and CBAM simplifications and new SME definition as well as Clean Industrial Deal;
  • End of 2025: CBAM review, including a possible CBAM extension.

While the forthcoming acts on CBAM will detail the implementation rules, these pieces determine which companies have to take on CBAM obligations at all. New companies could be added, while companies already subject to reporting could become exempted. Flexibility is key to manage this regulatory uncertainty.


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Photo by Mick Haupt on Unsplash