International trade relations turned upside after US President Donald Trump assumed office in January this year. On 13 February, the White House begrudged what it felt was unfair treatment by its trading partners, both “friend and foe”, and announced that it would “work strenuously to counter non-reciprocal trading arrangements” with its trading partners, by determining an equivalent tariff for each partner. No mention was made of the EU’s Carbon Border Adjustment Mechanism (CBAM) which is currently in its transitional introductory phase, but it was clearly implied.
The CBAM is a newly introduced border tariff on carbon intensive imports into the EU, intended to level the playing field between EU carbon intensive goods and competitor imports, and to also incentivise decarbonisation efforts abroad. It is currently in a transitional reporting phase and is due to come into full operation, with payments becoming due next year.
In January this year, the European People’s Party (EPP), the largest party in the European Parliament and European Commission, suggested putting the CBAM on hold, alongside other sustainability regulations that had been introduced as part of the European Green Deal. In a joint paper from a leadership summit that month, the EPP argued that excessive regulation and bureaucracy had become burdensome for the bloc’s economy, and were causing a lag in productivity. It argued that “the gap between the US and the EU in [gross domestic product] widened from 17% in 2002 to 30% in 2023. The main reason for the worsening situation is lower productivity in the EU, which leads to slower income growth and weaker domestic demand in Europe”. Accordingly, the party suggested putting the CBAM and the EU’s sustainability reporting regulations on hold for two years, and limiting the scope of the CBAM to European importers with more than 1000 employees.
However, many carbon intensive European manufacturers, who had already been preparing for the CBAM to come into full operation next year, were concerned at the prospect of a delay. While they were sceptical about the compliance costs it brought about, many argued that putting the measure on hold would be disastrous as they would lose the trade and competition protection that it afforded their industries, particularly in the steel and aluminium sector.
The cries of the industrial sector were heard. In a Clean Industrial Deal (an Omnibus “simplification package”) put forward on Wednesday this week, the European Commission unveiled a suite of proposed amendments to the CBAM that limited its scope without really introducing any delays to its full operation. In essence, what the deal represents is a change to the timing of when importers’ payment obligations kick in, coupled with a change in scope to raise the threshold so that only larger imports of goods are covered. These concessions are proposed to be offset by the introduction of tougher penalties for non-compliance.
On the delay: when the CBAM comes into full operation next year EU importers will have to purchase CBAM certificates to offset the carbon embedded in the goods they import. The draft still supports the CBAM coming into full operation on 1 January 2026, but proposes that the timing for surrendering CBAM certificates (and thus paying for them), be delayed until 2027. As such, the costs associated with imports with embedded emissions in 2026 still arise, but they will only be incurred in the following year.
Scope amendment: A key proposed change is the introduction of a higher threshold above which the CBAM will apply to importers. At present, all EU importers who import CBAM covered goods worth more than €150 are liable to buy certificates. The Commission proposes to change this to a threshold based on the total volume of carbon intensive goods imported into the EU, set at a level so that small and medium sized companies and individual importers in the EU will not be liable. The EU Commission claims that a mass based threshold set at 50 tonnes per year, “would better translate the climate objective of the CBAM,” and would exempt 90% of importers from the levy. Earlier this month, EU Climate Commissioner Wopke Hoekstra said that 97% of the emissions covered by the carbon border tariff are produced by 20% of the companies under the scheme, and so the same objectives could be achieved by targeting this smaller segment of importers. According to EU data, by introducing a 50 tonne threshold, 99% of embedded emissions would still remain in the scope of the CBAM. In theory this could help African exporters that only export small to medium volumes of CBAM covered goods to individual EU importers.
Higher Penalties: deliberate avoidance tactics such as splitting imports to avoid the threshold will face much tougher penalties under the proposed revision.
There are also a number of proposed changes that are put forward as “simplifications” to ease the reporting and regulatory burden of importers as well as the EU administration. For example, some sub-products have been excluded from the CBAM scope, reporting obligations have been streamlined, and the process for calculating embedded emissions has been changed.
If the EU Commissions calculations are correct, these proposed changes are not really a watering down of the CBAM, because it will still cover most of the emissions the CBAM currently covers. In this sense, while the proposal comes across as a reaction to US trade threats, and some have worried that the EU is now walking away from the CBAM because of Trump, the current proposal doesn’t seem to suggest this (unfortunately the same could not be said for the proposed measures to water down the EU’s sustainability reporting directive). Nor do these proposed amendments create any material delay to its operation, which many African states had hoped for.
However, the proposed revisions may have some important benefits to African exporters. Previously approximately 200 000 EU importers were CBAM liable, now it is only an estimated 18 000. The remaining importers who are exempt by virtue of their low import tonnages can now bring African exports into the bloc without the additional cost and compliance burden of the CBAM levied on them, or passed to African exporters. However, the devil is in the detail. For instance, there are proposed changes to some of the calculation methodologies for determining embedded emissions and the domestic carbon price paid in African countries that are also on the table. These are intended to ease the burden on EU importers and officials but their impact on exporting states still needs to be explored to determine whether the EU is simply passing the burden on elsewhere.
