The expansion of CBAM is expected to encourage non-EU producers to reduce greenhouse gas emissions to remain competitive in the EU market.

The Carbon Border Adjustment Mechanism (CBAM) was adopted by the European Union in 2023 to combat carbon leakage by imposing a carbon price on imports from non-EU countries.

The goal of expanding CBAM is to mitigate the risk of carbon leakage, where EU companies might relocate to non-EU countries with less stringent climate regulations.

Under CBAM, imported goods are required to pay a price equivalent to what would have been paid if produced under the EU's Emissions Trading System (ETS).

Currently, CBAM covers sectors like steel, aluminium, cement, fertilizers, and electricity, but it remains in a pilot phase with no products yet subject to carbon pricing.

The European Commission is evaluating the extension of CBAM to other energy-intensive industries, including flat glass, with recommendations expected by mid-2025.

The Directorate-General for Taxation and Customs Union (TAXUD) is investigating the feasibility of expanding CBAM to include processed products.

Expanding CBAM could reduce circumvention of the mechanism by shifting trade towards processed products that contain significant shares of basic goods already covered by CBAM.

Concerns have been raised by EU decision-makers about the potential negative impacts of CBAM, including increased costs for industries and opportunistic trade flows.

Consumers in the EU may prefer processed products from non-EU producers who are not subject to stringent climate policies and greenhouse gas payments.

EU companies are preparing for the full implementation of CBAM by 2026, focusing on understanding the regulatory framework and its impact on supply chains.

Industries entering the CBAM framework will lose their free CO2 allocations under the ETS, leading to increased costs for EU producers.