EU gets tough on carbon border tax on heavy industry, vows to protect domestic producers

The European Union's so-called carbon border tax is set to apply to importers of refrigerators, washing machines, car parts and other products, according to a proposal to widen the scope of the levy released by the European Commission on Wednesday.

Products such as steel, aluminium, cement, and fertilisers will start paying for emissions generated by their production from January 2026, when the tax's operational phase kicks off.

The tax, whose full name is the Carbon Border Adjustment Mechanism (CBAM), is designed to ensure a level playing field for European companies, which are obliged to comply with the bloc's own carbon market, the Emissions Trading System.

The CBAM is a climate strategy to prevent companies from relocating production to countries with looser climate policies, a practice known as "carbon leakage".

"We want to make sure we still have a steel and aluminium industry in the future,” Commissioner Vice President Executive Stéphane Séjourné told a press conference on Wednesday.

At the same time, the EU wants to encourage other countries to keep track of their emissions and put a price on them.

"We’re not asking more from others than what we’re asking from ourselves,” Climate Action Commissioner Wopke Hoekstra told reporters on Wednesday.

The bloc's biggest aluminium and steel importers are Turkey, the United States, the United Kingdom, Switzerland, Mexico and India, according to EU data.

However, Commissioner Hoekstra said the measure would barely affect US exports, noting that "a lot of simplification" had already been conceded to ease transatlantic concerns.

Heavy industry hit with higher costs

The new CBAM rules will increase production costs for heavy industry importers unless they meet EU environmental standards, with the Commission introducing stricter CO2 standardisation for sectors already covered.

The selection of targeted goods was based on an assessment of the risk of carbon leakage of individual products, their climate relevance and technical feasibility, the Commission said.

"We’re putting an end to unfair foreign competition," Hoekstra said. "CBAM will boost Europe’s industry position in industry and around the world."

The EU executive said it will introduce a temporary support scheme for exported products, a response to concerns from European companies wary that the tax increase would make them less competitive. The Commission wants to use 25% of CBAM revenue from 2026 and 2027 to help European heavy industries cope with the energy transition and reduce their emissions.

The inclusion of new products into the bloc's financial mechanisms will increase revenues by 23% and generate around half a billion euros by 2030, Commissioner Hoekstra told reporters on Wednesday. By 2030, the EU estimates that total CBAM revenue will be about €2.1 billion.

"We’re using the money from revenues to address risks,” Hoekstra added.

Andrea Spignoli, policy manager for sustainable markets at the environmental NGO Bellona Europa, welcomed the limited use of CBAM revenues to support EU exporters.

“CBAM revenues must deliver real emissions cuts and be governed by transparent and strict, credible criteria,” recommended Spignoli.

However, Bellona Europa also expressed reservations about the potential use of carbon credits, also known as polluting credits, considering that the practice can "undermine" CBAM goals.

“A steel producer could meet CBAM obligations by continuing carbon-intensive production and buying international credits, instead of developing and complying with domestic carbon pricing measures,” said Amélie Laurent, policy adviser at the NGO.

CBAM and international trade

Some of the world's largest economies have spoken out against CBAM, with China, India, Brazil, Russia and South Africa particularly vocal. They have argued that the scheme amounts to protectionism and suggested it may violate international trade rules.

A Commission official, speaking on the condition of anonymity, dismissed these legal concerns, saying CBAM is "fully compatible" with world trade rules.

“We estimated that these two new pieces of legislation (CBAM review and Temporary Decarbonisation Fund) will come into effect on 1 January 2028,” the Commission official added.

The proposal will now be discussed by the European Parliament and EU governments. The incoming EU Cypriot Presidency will mediate the political talks.