EU faces rift over carbon border tax revisions

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Deep divisions have emerged over the EU’s world-first carbon border tax as Brussels prepares to review the scheme just months before it enters into force.

The European Commission is due later this year to propose a major review of the carbon border adjustment mechanism (CBAM) — a tax on the emissions produced by imports into the bloc to protect EU industry from being undercut by cheaper, dirtier imports, which is due to come into effect next year.

The review will examine anti-circumvention measures to prevent companies from avoiding the levy, and will also set out proposals on various finished products that could be included within CBAM’s scope.

The original intention of CBAM was to shield the EU’s heavy industries from the risk of production being moved to cheaper regions with less strict climate laws.

Under the EU’s emissions trading system (ETS), companies have to pay around €80 a tonne for carbon emitted. Heavy industries currently receive some free allowances for the carbon they emit, to ensure they remain competitive with the rest of the world.

CBAM will begin phasing in next year, while free ETS allowances will be phased out from 2027. The intention is that all companies will pay for their emissions — via the CBAM in the case of importers, or via the ETS in the case of EU-based companies.

But plans to revise the CBAM scheme have triggered a wave of lobbying from industry groups and EU trading partners, which hold sharply divergent views on its impact and benefits.

In a letter to German Chancellor Friedrich Merz this month, more than 70 companies — including chemical producers BASF and Ineos, and fertiliser group SKW Piesteritz, said they were “increasingly concerned” that the current rules were “jeopardising the economic viability of [the clean transition] — and thus the continued existence of energy-intensive industries and their value chains in the EU”. A separate letter, signed by the chief executives of French energy group TotalEnergies and German conglomerate Siemens on behalf of 46 European companies, urged Merz and French President Emmanuel Macron to maintain free ETS permits for industry “as long as CBAM does not really demonstrate its efficiency”.

The scheme has already had a knock-on effect, encouraging other countries to introduce or strengthen carbon pricing systems (policies that put a price on greenhouse gas emissions). Policymakers and environmentalists say such measures are essential to limit global warming to 1.5C, the target set in the the Paris agreement.

Wopke Hoekstra, the EU’s climate commissioner, acknowledged this in October, saying “the best CBAM is one that doesn’t make any money” because it would mean that “others would have done the exact same thing in terms of decarbonising”.

Countries including Brazil, Turkey and Japan have either introduced or tightened domestic carbon pricing schemes this year, partly to avoid their exporters being heavily hit by the charge as countries with an equivalent carbon price will be exempted.

Companies have also been upgrading production processes to reduce emissions, but many within the EU say they are close to breaking point with little funds left to invest in decarbonisation.

“Our resources are really limited today,” says Petr Cingr, chief executive of chemicals group SKW Piesteritz, adding that the company expects to spend around €500mn on emissions permits until 2030 out of annual revenues of €800mn.

Ulrich Adam, director-general of Orgalim, the European manufacturing association, says the current CBAM design, coupled with the phase-out of free allowances, means manufacturers relying on steel, aluminium and other materials covered by the charge “will no longer be competitive as of 2026 — on either the EU market or on the international markets where they export”.

“There is widespread recognition that CBAM is an incomplete — if not entirely broken — system,” he says.

But Leon de Graaf, acting president of the Business for CBAM coalition, says that what some businesses are advocating for amounts to a “substantial deregulation” of CBAM.

“Now is not the time to pull back from CBAM or the ETS,” de Graaf says. Any delay, he warns, would “destroy” the business case of companies that have invested in low-carbon technologies and undermine the EU’s case when persuading other countries to adopt carbon pricing schemes. “This is exactly the multiplier effect that the EU can be proud of. Stepping back from CBAM would send the wrong signal,” he says.

One of the most controversial aspects of the revision is the proposed extension to products manufactured using materials already covered by CBAM.

Cingr says it would be “impossible” to include more downstream products built with these materials, such as washing machines and cars, “because there is such a wide range of products”.

The Brazilian National Confederacy of Industry said in a paper submitted to the commission that these goods typically require more complex reporting of emissions and including them would lead to “higher costs to collect data, validate information and complete CBAM declarations”.

An EU official says the commission is aware of the challenges but is “reflecting on the right criteria” to define a downstream product, such as its vulnerability to international competition.

“It cannot be a systematic extension to all downstream industries. That would create a bureaucratic ordeal,” the official says.

The commission hopes that targeted amendments to the legislation will prevent further problems once CBAM is in force. As Hoekstra told the FT at an event last month: “I would rather have us be street-smart, change it, make it workable . . . and move on.”

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