February 2026

February 2026

CBAM: Risks and Opportunities 

What exactly is CBAM?

CBAM stands for the Carbon Border Adjustment Mechanism. It’s the EU’s way of making sure that imported carbon-intensive goods face a carbon cost comparable to goods produced inside the EU under the EU Emissions Trading System (EU ETS). The policy goal is to reduce “carbon leakage”—where production (and emissions) shift outside the EU because it’s cheaper to produce in places with weaker climate policies. 

The core idea in one sentence

If a tonne of steel made in the EU must effectively “pay” for CO₂ through the EU ETS, a similar tonne of steel imported into the EU should face a similar CO₂ price, based on the emissions embedded in that imported product. 

How CBAM works in practice

1) Covered sectors and why steel matters

CBAM was launched first for a short list of sectors at high leakage risk: iron and steel, cement, fertilisers, aluminium, hydrogen, and electricity. Steel is central because it is both emissions-intensive and highly traded. 

2) Two-phase rollout: reporting first, payments later

• Transitional phase (1 Oct 2023–31 Dec 2025): importers report embedded emissions but do not pay a CBAM charge yet. 

• Definitive/compliance phase (from 1 Jan 2026): importers must keep reporting and also buy/surrender CBAM certificates that correspond to embedded emissions. 

3) CBAM certificates mirror the EU ETS carbon price

CBAM uses a certificate system. The price of CBAM certificates is designed to mirror the EU ETS allowance price, so imported steel faces a similar carbon-price signal to EU-made steel. 

4) “Actual emissions” and credit for carbon price paid abroad

CBAM is designed around actual embedded emissions (using EU rules and methodologies). And if the producer has already paid a carbon price in the country of origin, that can be deducted to avoid double charging (subject to the EU’s rules). 

5) It phases in as EU free allowances phase out

A crucial detail for the steel market: under the EU ETS, some industries historically received free allowances to reduce leakage risk. CBAM is intended to be introduced progressively as those free allowances decline, so imports and domestic producers are treated more evenly over time. 

What CBAM changes in the EU steel market

CBAM is not “just a tax on imports.” It reshapes incentives across the whole steel value chain: sourcing, pricing, investment, product mix, and trade flows—especially from 2026 onward. 

Below are the main opportunities and threats for the EU steel market.

Opportunities for the EU steel market

1) Stronger protection against high-carbon, low-cost imports

If implemented well, CBAM reduces the price advantage of imported steel produced with more carbon-intensive processes by attaching a carbon cost at the EU border. That can improve the competitive position of EU producers already paying the ETS carbon price. 

Market implication: EU mills may regain pricing power in segments where “cheap + high-carbon” imports previously undercut them.

2) Investment tailwind for “green steel” and low-carbon capacity

CBAM strengthens the business case for:

• EAF (electric arc furnace) expansion

• scrap-based production

• DRI/H₂ pathways (where infrastructure and power economics work)

Because the policy rewards lower embedded emissions (lower CBAM cost for imports, and better relative position for low-carbon domestic output), it can accelerate decarbonisation investment decisions. 

3) A cleaner price signal across supply chains

During the transitional period, importers must collect emissions data, creating pressure for upstream transparency and standardized emissions reporting. 

Market implication: Buyers (automotive, construction, machinery) may increasingly compare steel suppliers on verified embedded emissions, not only price.

4) Trade flow re-optimization toward lower-carbon sources

As the CBAM cost becomes real in 2026+, sourcing can shift toward:

• producers with lower-carbon routes,

• producers in jurisdictions with credible carbon pricing (reducing net CBAM via deductions),

• or EU-based production if the delivered economics converge.

Analysts widely expect disruptive effects on steel trade patterns once payments apply. 

Threats and risks for the EU steel market

1) Administrative complexity and compliance risk

CBAM isn’t simple operationally: importers need emissions data, product mapping, and timely reporting through the EU systems. During transition, reporting is quarterly with strict deadlines set by national authorities and EU guidance. 

Market implication: Smaller importers and downstream firms may face disproportionate compliance burden, which can reduce competition or push consolidation in trading/distribution.

2) Price inflation and demand-side pressure

If CBAM increases the landed cost of imports, part of that cost may flow through into EU steel prices—especially in tight markets or for specific grades. Higher prices can squeeze steel-consuming sectors (fabricators, construction, appliances, machinery), potentially reducing demand or shifting production decisions.

A related concern raised by downstream industry groups is that measures focused on primary steel can raise local input costs while leaving loopholes elsewhere. 

3) “Downstream leakage” via steel-containing goods

A well-known vulnerability: if CBAM covers steel inputs but not enough steel-containing products (components and manufactured goods), imports may shift from “steel” to “things made of steel.” That would still disadvantage EU steel users and could relocate value-added manufacturing.

This has been explicitly debated in public discussion and reporting, and the EU has explored extending CBAM to more downstream products to close loopholes. 

4) Trade retaliation and geopolitical friction

CBAM touches trade policy nerves. Major trading partners have criticized it, and there is ongoing risk of:

• disputes at the WTO,

• countermeasures,

• reduced market access for EU exporters in third markets.

Even if CBAM is designed with WTO compatibility in mind, the political economy remains sensitive. 

5) EU exporters face a competitiveness question outside the EU

CBAM addresses imports into the EU. But EU steelmakers also export. If they pay ETS costs and cannot pass them through in global markets, they may face margin pressure abroad (especially in commoditized segments). The broader EU policy debate has included how to avoid undermining export competitiveness while staying WTO-compliant. 

6) Volatility risk: CBAM cost follows ETS price

Because CBAM certificate pricing mirrors ETS allowances, carbon-price volatility can translate into import-cost volatility, which complicates contracting, hedging, and inventory decisions for both importers and buyers. 

What to watch in 2026–2028 for steel specifically

1. Implementation quality in 2026: smooth execution matters; if not, CBAM could create friction without delivering the intended “level playing field.” 

2. Scope expansion to downstream products: the EU has been exploring closing loopholes by adding more products further down the value chain. 

3. Data quality and verification: default values vs real plant data will strongly affect who “wins” (low-carbon producers benefit most when actual emissions are recognized). 

Bottom line

CBAM is best understood as a carbon-cost equalizer at the EU border: imported steel (and other covered goods) must increasingly reflect a carbon price comparable to EU production under the EU ETS. 

For the EU steel market, the upside is a clearer path to defend against high-carbon imports and to justify investment in low-carbon steelmaking. The downside is real: administrative burden, price pass-through risks for downstream industries, potential loopholes via steel-containing goods, and trade friction.