The EU’s Expanding Carbon Border
The European Union is moving to expand its Carbon Border Adjustment Mechanism (CBAM) beyond the basic carbon-intensive materials initially covered by the policy. On September 15, the European Parliament adopted a new position on proposed changes that would expand CBAM’s scope to a wider range of downstream steel and aluminum products as a means of preventing companies from circumventing the mechanism. Under the current structure, companies are able to circumvent the policy by reorganizing their supply chains around CBAM.The move follows the EU Council’s agreement to strengthen CBAM and close potential loopholes. Though this is a significant move toward stricter climate policy, the Parliament’s position is not a final change of EU law. The issue will still need to be negotiated with the Council of the European Union.
This expansion is intended to address a problem created by the initial structure of CBAM. When a product is covered by CBAM, imports of that product are subject to a carbon cost based on the emissions generated during its production, ensuring that imported goods face a carbon cost comparable to that faced by European producers. The mechanism currently only covers basic materials, so companies have incentives to move processing outside the EU and export finished products into the European market. Companies would not necessarily be violating the rules, but currently the policy allows them to reorganize their supply chains around CBAM, moving carbon leakage elsewhere instead of addressing it. This expansion is meant to reduce the incentive to shift carbon-intensive production outside the EU.
Since CBAM applies to imported goods, foreign producers and trading partners are the ones who must adapt to the EU requirements. The effects of adhering to these requirements are felt differently across countries. Large industrial economies may have the resources at hand to develop carbon measuring systems and adapt their production, while least developed countries (LDCs) may face greater costs in measuring and verifying emissions.
The EU created CBAM as part of its effort to reduce greenhouse gas (GHG) emissions and limit the risk of carbon leakage, which occurs when a company moves their production from a country with strict policies, to a country that is more lenient, resulting in an increase in GHG emissions. It was initially proposed in 2019 as part of the European Green Deal and subsequently adopted as part of the Fit for 55 climate package in 2023. This set of laws aims to reduce EU GHGs by at least 55 percent from 1990 levels by 2030. Since CBAM puts a carbon cost on certain goods imported into the EU, it is intended to prevent the EU’s emissions reduction mechanisms from being undermined by shifting carbon-intensive production to countries without equivalent carbon costs. CBAM entered its definitive phase on January 1, 2026.
Currently, CBAM covers several carbon-intensive sectors: cement, fertilizers, electricity and hydrogen, iron and steel, and aluminum. Importers of these products must report the emissions embedded in those goods and surrender CBAM certificates corresponding to those emissions. If an equivalent carbon price has already been paid in the country where the product was manufactured, the corresponding amount can be deducted.
CBAM is closely linked to the EU Emissions Trading System (ETS). Under this system, European producers in covered sectors face a cost for their greenhouse gas emissions. CBAM is designed to apply a comparable cost to covered imports that accounts for the carbon emissions associated with their production. Without this added cost on imports of carbon-intensive materials, production risks shifting to countries with looser climate policies. This could incentivize manufacturing and business, and therefore emissions, to move outside the EU instead of being reduced.
This has the potential to have a larger global impact than just adding an extra cost for importers within the EU. Since exporters can reduce their liability by demonstrating that a carbon price has already been paid elsewhere, the EU’s policy creates an incentive for trading partners to develop systems for carbon pricing and emissions reporting. China, for example, operates its own emissions trading system that was partially modeled on the EU’s system. Analysts at the Center for Strategic and International Studies (CSIS) have argued that CBAM is contributing to greater convergence between European and Chinese carbon governance.
The proposed expansion would address this problem by extending CBAM to certain downstream products that use a significant amount of covered materials, like fasteners, wire, springs, and household materials made from steel and aluminum. The European Commission’s proposal identifies 180 downstream products with high carbon leakage risk and significant steel and/or aluminum content.
The expansion could have its greatest impact on countries with large manufacturing industries that export to the European market. Foreign producers of newly covered downstream goods would face more emission reporting requirements and higher costs when selling into the EU. Companies therefore may have greater incentives to measure the carbon emissions of their products and reduce those emissions during production.
China provides an example of how CBAM can create both political resistance and policy adaptation. China is the EU’s largest source of imports, accounting for 21.3 percent of goods imported into the bloc in 2024. Yet the immediate impact of CBAM on Chinese exports is relatively minimal. According to a June 2026 analysis by CSIS, goods covered by the six existing CBAM categories represent only 0.8 percent of China’s total exports to the EU in 2025. Iron and steel accounted for 92 percent of those affected exports, and aluminum for another 7 percent.
China’s response shows that CBAM can produce two effects at once: diplomatic opposition to perceived EU protectionism and practical pressure for stronger domestic carbon-accounting systems.. Although Chinese officials have criticized CBAM as protectionist and raised concerns about its defiance of international trade rules, the country’s domestic carbon governance has continued to develop. China’s national ETS currently covers the power sector in addition to steel, cement and aluminum. Local governments have even begun developing carbon-accounting systems to help companies measure and certify emissions.
Despite its political opposition to EU policy, China demonstrates how a large industrial economy can respond to CBAM by developing and supporting domestic systems that allow producers to measure and manage their emissions. But this situation may be different for smaller developing economies that have fewer resources to sponsor these kinds of adjustments. Countries such as Turkey and Norway, which are major exporters of steel and aluminum, will also need to determine how the proposed expansion will affect their production and reporting systems. The costs of measuring and verifying emissions may present an additional challenge to accessing the EU market. Acknowledging differences in capacity, the European Parliament has proposed simplified reporting requirements and technological assistance for least developed countries.
The expansion of CBAM is meant to address carbon leakage and circumvention concerns, as companies could previously shift down the supply chain rather than adhere to emission-reducing policies. In extending the mechanism to downstream products, the EU is attempting to ensure that carbon costs faced by European producers are not simply avoided by moving processing outside the bloc.
At the same time, expanding CBAM means expanding the costs and challenges for foreign producers. Companies exporting newly covered products may face new reporting and potential financial requirements, though they also have increased incentive to measure and reduce carbon emissions. But this regulation does not affect all trading partners equally. Industrial economies like China have greater capacity to develop emission tracking systems and more quickly adapt their production to new requirements. However compliance for least developed countries is much more difficult.
The proposed expansion is subject to negotiations between the European Parliament and Council, so the final form has yet to be determined. The EU will need to account for the different costs that the policy creates for its trading partners as it considers how far to extend CBAM. As negotiations continue, the EU will need to balance its environmental goal with the economic burdens placed on countries required to comply with the mechanism.