Holding the line on the EU carbon border adjustment mechanism

On 1 January this year, the European Union’s carbon border adjustment mechanism (CBAM) came fully into force, requiring importers to purchase certificates covering the embedded carbon emissions of their imports, including nitrogenous fertilisers. After less than two months, CBAM already faces a major credibility test. 

Farmer discontent with fertiliser prices has caused France, Italy and other countries to push for a suspension of CBAM for fertilisers, citing concerns about farmer competitiveness. The agricultural lobby has amplified these warnings, claiming that CBAM could raise fertiliser prices by 10% to 30%. 

The distress of European farmers is easy to understand. In the 12 months ending January 2026, fertiliser prices were 91% higher than in the 12 months ending January 2021. Nitrogen fertiliser prices have remained elevated even though a spike between January 2021 and April 2022, caused by surging natural gas prices in the wake of Russia’s invasion of Ukraine, has subsided (Figure 1; natural gas is the main feedstock for nitrogen fertilisers).

Figure 1: EU nitrogen fertiliser prices

Source: Bruegel based on European Commission and LSEG. 

But at this critical moment in climate policy, EU policymakers would be unwise to respond to these price fluctuations by exempting fertiliser from CBAM. An exemption would achieve little, if any, price reductions for EU farmers, while it would harm EU fertiliser producers and sell short the enormous promise of CBAM. 

CBAM has the potential to further climate ambition in two important ways. First, it prevents carbon leakage – when consumers and producers respond to higher prices of carbon-intensive goods by shifting to unregulated markets. Second, since CBAM credits foreign carbon prices in the border adjustment, it also can promote emissions reductions abroad: by adopting carbon pricing, foreign governments can convert EU tariff revenue into domestic revenue. There is already suggestive evidence that CBAM is fostering important policy steps in other jurisdictions.

The European Commission in December proposed certain amendments to CBAM, including the possibility of temporarily suspending CBAM coverage for specific goods under “serious and unforeseen circumstances” – suspensions that may be applied retroactively.

However, suspending CBAM for fertilisers would have minimal effects on fertiliser prices and it would cause collateral damage to EU producers and climate policy. Using detailed plant-level production and emissions data to model the impact of a suspension on the European market, and assuming a carbon price of €80 per tonne, we find that a new equilibrium price for European ammonia after the implementation of CBAM would be 4% higher in the short run if EU fertiliser production remains at its current level. This estimate is likely on the high side since ammonia is more carbon-intensive than other nitrogenous fertilisers.

The price in the EU fertiliser market is typically set by domestic producers, not importers. Thus, if EU producers can expand production, which is feasible given that significant unused capacity exists, prices will remain essentially unchanged. One calculation, using data on actual emissions from plant-level data, suggests a CBAM price impact of less than 2% of the current cash price for some exports to the EU. Importantly, these analyses account for the fact that CBAM will drive a shift in who exports to the EU, making the CBAM burden much smaller than that argued by proponents of a CBAM suspension. 

It is also important to weigh the consequences for EU fertiliser producers, who have responded with frustration over this threat to CBAM and the resulting market uncertainty. CBAM is essential to provide a level playing field in the EU market, especially since free carbon allowances under the EU emissions trading system are being phased out. EU producers also face natural gas costs that remain elevated since Russia’s invasion of Ukraine. Further, the mixed signals on CBAM have undermined the push for fertiliser producers to decarbonise. 

Ultimately, the EU should hold the line on CBAM, a tool that has enormous potential to spur ambitious climate policies at home and abroad. Suspending CBAM for fertilisers would undermine the mechanism’s integrity when it has only just begun, sending signals to other industries that political pressure can secure exemptions. Unlike other more effective policy responses, CBAM backsliding would provide only minimal price relief to farmers, while hurting the prospects of EU fertiliser producers.