Extending CBAM to downstream products risks undermining its credibility as a climate policy tool

European Union officials will soon start discussing the extension of CBAM to downstream products. This would significantly broaden its scope raising concerns about the compliance costs and trade tensions it might create. Officials should bear in mind that CBAM is a critical climate instrument necessary to prevent carbon leakage – not to protect domestic industries. 

The European Commission has proposed extending CBAM to 180 downstream products based on several quantifiable criteria. The most critical of these is a cost-push factor that compares the carbon cost of the steel and aluminium in a product with the sector’s gross added value. On this basis the proposal would include products that have a cost-push factor of 5% or higher. However, this approach may overstate the risk of carbon leakage. For example, with a carbon price of €115/tCO2e, the price of steel increases by about 25%-30%. Yet, for a product such as a dishwasher, where steel accounts for about 10% of the final value, the overall price increase would be only 2.5%-3.0%. This is unlikely to create significant carbon leakage – ie the dishwasher production moving abroad – which is the basis for applying CBAM in the first place. Only a much higher carbon price would create a carbon leakage risk for products where the cost push factor is less than 15%.

Despite this, the Council has now proposed extending CBAM to a list of 332 products, while the ENVI Committee has proposed 277 products. A large share of the products covered by the proposed extensions are either final consumption goods or intermediate products in complex value chains. Importers will have to report emissions data on these products, subject to verification by suppliers across multiple jurisdictions. No similar obligation applies to producers of downstream domestic products. Reporting would therefore impose substantial asymmetrical compliance costs on importers. Under the current proposal, failing to report this data would mean defaulting to relatively high, punitive values. The low threshold for the cost-push factor, the complex emission-reporting requirements and punitive default values risk turning CBAM into a protectionist measure rather than a climate policy tool. 

The initial Commission proposal would result in a significant expansion of the trade impact of CBAM; the Council and the EP proposals would extend the impact even more. FTA partners like Japan, India, South Korea, Turkey and North African countries are most heavily impacted. China, US and ASEAN would also experience a dramatic expansion of CBAM-affected trade coverage (Table 1).  

Table 1: Share of bilateral EU imports covered by CBAM in 2024 vs coverage under Commission, Council and EP proposals

Source: Bruegel based on CEPII BACI trade data. Notes: ASEAN and North Africa data only includes countries with which the EU has or is negotiating a free trade agreement. Intra-EU trade is excluded from the calculations. CBAM coverage is defined at the HS8 level, while trade data are observed at the HS6 level. HS6 products are included if at least one HS8 code is covered, potentially leading to a slight overestimation of the trade effects.

The proposed extension of CBAM to downstream products comes at a particularly sensitive moment for the EU’s trade relations with its free trade partners. These relationships have already been strained by the strengthening of trade protection for the steel industry and the proposed ‘Made in EU’ requirements under the Industry Accelerator Act. Preserving the climate integrity of CBAM is also critical for the EU’s carbon-pricing diplomacy to deepen cooperation on carbon pricing with key emerging economies such as India. There is an additional risk that extending CBAM could become a flash point of conflict with the US if a significant share of its exports to the EU is affected.

Three things can help maintain the climate integrity of CBAM without turning it into a protectionist measure. First, limit the list of downstream products to those for which the carbon price represents a sufficiently significant share of the product’s value. Second, the EU should avoid the proposed punitive default values for importers unable to provide emissions data. Instead, default values could be based on the average emission intensity in the EU for the steel and aluminium embedded in the downstream product. This would be sufficient to eliminate incentives to relocate production abroad, while avoiding penalising importers. Finally, dialogue with India and other developing countries impacted by CBAM should be strengthened, including offering cooperation in developing Monitoring Reporting and Verification systems, finding equitable solutions to the compliance challenges for MSMEs and facilitating investments into the decarbonisation of CBAM-affected sectors.