The European Commission announced the release of a series of proposed changes to the Carbon Border Adjustment Mechanism (CBAM), the EU’s carbon tax on imported goods, including expanding the scope of the CBAM to some downstream products, in order to avoid a shift in production away from EU manufacturers to those in countries with weaker climate policies.

Adopted in 2023, and coming into force in 2026 after a 2-year transitional phase, CBAM was established to avoid “carbon leakage,” a situation in which companies move production of emissions intensive goods to countries with less stringent environmental and climate policies. CBAM is aimed at equalizing the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) – the EU’s internal cap and trade carbon pricing mechanism – with that paid for products produced in other countries, with companies that import into the EU required to purchase CBAM certificates in order to make up the difference.

According to the Commission, the proposed changes follow feedback from industry through CBAM’s transitional phase, indicating a need to close loopholes to prevent circumvention and prevent sources of carbon leakage, with CBAM currently targeting basic materials like aluminum, cement, electricity, and steel, raising costs for EU producers and risking the shift in production of downstream products to other countries.

Under the Commission’s new proposal, CBAM would have its scope expanded to include specific steel and aluminum-intensive downstream products. The proposal includes 180 products with a high carbon leakage risk and a high share of steel or aluminum content, such as machinery, hardware and fabrications, vehicle components, domestic appliances and construction equipment.

The Commission said that the selection of goods added to the scope was based on factors including assessed risk of carbon leakage, the products’ climate relevance, and the technical feasibility of including the products in CBAM. The vast majority (94%) of the products added to CBAM are industrial supply chain products with a high steel and aluminum content, while 6% are household goods, such as washing machines.

In addition to the expanded scope, the Commission’s proposed CBAM update also includes a series of other anti-circumvention measures, including enhanced reporting requirements for better traceability of CBAM goods and to address emission intensity misdeclarations, and authority for the Commission to tackle evidence-based abuses circumventing CBAM, including requirements for additional evidence when actual values are unreliable, and defaulting to country-based emissions values in such cases.

The update also includes the introduction of a temporary fund to support EU producers of CBAM goods vulnerable to carbon leakage risk, with producers required to demonstrate their decarbonization efforts to be eligible.

Wopke Hoekstra, Commissioner for Climate, Net Zero and Clean Growth, said:

“Today, we are strengthening CBAM for competitiveness, climate, and independence. These measures protect Europe’s industries, safeguard climate investments, and ensure fair competition while cutting emissions. Building on lessons from the transitional period, this package prepares CBAM for the future at the heart of Europe’s clean and competitive transition. “