Depending on the emission value and import volumes, CBAM could lead to considerable additional costs as early as 2026. Companies will then have to purchase CBAM certificates for the emissions of imported CBAM goods. Even if calculation details from the European Commission are still to follow, robust cost calculations are already possible.
Gradual ramp-up of CBAM levies
With the Carbon Border Adjustment Mechanism (CBAM), the EU is introducing the world’s first CO2-based levy on imports of CO2-intensive goods. CBAM costs will become effective as early as 2026.
Companies would then have to purchase CBAM certificates for the ’embedded’ emissions in imported CBAM goods. This would have resulted in additional costs of EUR 15 billion for EU imports in 2023 – in a fully developed CBAM system.
However, the CBAM levies will be gradually phased-in via a CBAM factor until 2034. Only then will the full CBAM costs take effect.
This ramp-up is taking place in line with the phase-out of free EU emission allowances (EUAs) in the Emissions Trading System (ETS). In the ETS, which has been in existence since 2005, a large proportion of EUAs are still allocated for free.
The ETS reform aims to reduce the free EUA allocations each year. To this end, a CBAM factor will be added to their calculation.
In 2026, it will be 97.5%. This corresponds to a reduction of free EUA by 2.5%. The factor will then be cut each year: from 95% in 2027 to 51.5% in 2030 to 14% in 2033. From 2034, it will no longer apply, meaning that no more EUAs will be allocated free of charge. The CBAM levies will then take full effect.
Calculation of the required CBAM certificates
It is widely assumed that the CBAM factor alone determines the proportion of emissions for which CBAM certificates are to be purchased. However, a goods-specific benchmark as well as the production-specific emission value also come into play. Furthermore, CO2 prices already paid in the country of origin can be deducted.
Based on global average emission values, in 2026 CBAM certificates would be needed for about 8% of emissions from crude steel. For unwrought aluminum, 24% of the emissions, and for ammonia, even 44% of emissions would need to be covered by CBAM certificates – already in 2026.
These variations result from the difference between the ETS benchmarks and the global average emission values for the goods in question. The greater the difference, the more CBAM certificates are required.
Goods-specific benchmarks
The goods-specific benchmarks represent reference values for emissions per production unit. In the ETS, this value is based on the emissions intensity of the 10% most efficient installation for the production of the covered goods.
The Commission is working on defining these benchmarks for CBAM. These are to be based on the ETS benchmarks. However, as these are not available for all commodity codes covered by CBAM, additional values are to be set.
These should also take into account production data if the emission intensities for a commodity code differ depending on the production process. Overall, this results in a long list of necessary benchmarks for CBAM.
Production-specific emission values
The calculation of the required CBAM certificates is then based on the production-specific emission values. These emission values must be determined by the producers of the goods using the defined CBAM methods.
If this emission data cannot be determined after January 1, 2026, default values are to be used to calculate the required allowances. These are then no longer be set at a global level, but on a country-specific basis.
Depending on the country of origin, this can result in significantly higher charges. In addition, a proportional surcharge will be applied to incentivize the use of actual data. Both the country-specific default values and surcharges are to be announced next year.
Possible costs for the CBAM certificates
The actual costs for the CBAM certificates are linked to ETS prices, which determine the prices for CBAM certificates. They are calculated on a weekly basis using the closing prices of the EUA in the ETS auctions of the previous week.
The required CBAM certificates could result in high additional costs as early as 2026. If the average ETS prices in 2023 and country-specific averages for the emission values are used, there can be large cost differences depending on where the CBAM goods originate from.
Overall, prices for CBAM certificates will be subject to the same fluctuations as ETS prices. From their low point in February 2024 at around EUR 50/tCO2e, they had risen by 50% within 3 months.
This price uncertainty is highly relevant in the import business of CBAM goods. Usually, there are several months between the purchase decision and the release of the goods for free circulation in the EU. Only then CBAM levies apply.
As a result, the final CBAM costs are difficult to predict at the time of purchase, so that fluctuations in CBAM prices in the future – such as exchange rate fluctuations – may need to be hedged.
CBAM cost calculation
Companies should start calculating the possible additional CBAM costs now to avoid unpleasant surprises:
- Calculation models to forecast the required CBAM certificates and costs should be set up to understand the cost drivers and cost impacts;
- Actual emission data of the imported CBAM goods are to be established in cooperation with suppliers as a calculation base;
- CBAM costs should be factored into purchasing decisions, as the cost advantages of existing suppliers may shift as early as 2026;
- CBAM scenario analyses should inform medium and long-term financial planning to account for uncertainties (especially with regard to ETS prices);
- Solutions to hedge price fluctuations of CBAM certificates should be explored, e.g. by hedging CBAM costs via the ETS;
- Further regulations on the calculation and administration of CBAM certificates should be watched so that preparatory measures can be taken at an early stage.
A delegated regulation on the sale and repurchase of CBAM certificates is to be published this year. Implementing regulations on the adjustment of free allocations and CO2 prices already paid in the country of origin are to follow next year.
However, companies should not wait until then. Robust cost calculations are already possible now. Depending on the cost implications, strategic and operational adjustments to purchasing and supply chain management may be necessary even before the CBAM levies begin in 2026.
Sources and further information:
- European Commission: Carbon Border Adjustment Mechanism
- European Commission: CBAM – Questions and Answers
- EU: Regulation establishing a CBAM (2023/956)
Photo by Pim de Boer on Unsplash
