Will It Change Anything?
CBAM or the Carbon Border Adjustment Mechanism goes live in 12 days time starting on the 1st January 2026. What this means in laymen's terms is that there will be a price adjustment at the EU border on goods that have used greenhouse gasses to produce their goods. The carbon emissions have a direct impact on the price of that item which will raise the cost of that item. The cost of the carbon emissions will be matched against whatever production method was used and then should price wise realign with items produced in the EU.
This was introduced as items produced in the EU paying a carbon tax were facing a disadvantage against products being imported outside the EU that had no carbon tax. In theory depending on what methods were used for manufacturing what was once the cheapest item may now be the more expensive item.
Carbon leakage is another term being thrown around that CBAM is tracking and that is when an item is made in one country and is then moved to another and finally exported to the EU those carbon emissions cannot be hidden. We saw the Chinese move products to Vietnam then export to the US to try and avoid the US tariffs.
The only way around countries paying the CBAM taxes is to introduce their own carbon tracking tax at the same carbon rates as the EU. The Chinese will most likely have their products subsidized by the Chinese government so there is no change to the Chinese exports. This is how they get around the system and why they have taken over manufacturing globally. The Chinese cars are being subsidized and why most legacy car manufacturers are struggling to compete. This is done for a short time period like 5 or 10 years where they destroy their competitors leaving them to dominate the markets. Prices eventually rise back up and consumers pay more due to no competition.
CBAM has been live in a reporting phase between 2023 and 2025 and now we move into the next stage being 2026-2027. From January the 1st 2026 importers importing goods with carbon emissions embedded in production have to purchase carbon certificates covering the carbon being imported. These certificates are available from the various national authorities. The certificates value is determined by the carbon auction price controlled by the EU's Emissions Trading System (ETS). Importers are not just going to be buying per shipment and will buy in carbon certificates in bulk. The certificates bought in 2026 will expire on 20th September 2027 where importers will have to provide proof they had certificates covering their carbon imported goods.
The first items that will face the extra carbon taxes are fertilizer, hydrogen, electricity, cement, iron and steel, aluminum plus items like screws and bolts.
What is interesting to see is the EU has a current carbon market price of €85 to €86 per tonne of CO2 equivalent (CO2e). The global carbon emission average cost is between $5 to $19 per tonne. South Africa has an average carbon price of around $13 per tonne. A country like China has a carbon emission cost at $9.40 per tonne which is well below the EU rates. India another country adding to golbal carbon emissions has a carbon tax rate of between $10 and $15 per tonne.
The carbon rates are expected to rise to over $100 per tonne which for some industries trying to compete will be crippling. Chinese dumping their cheap steel in Europe will come to an end as the extra taxes will already add another $80 per tonne. Again this could be side stepped if the Chinese government pays the difference subsidizing those industries.
How this is going to impact world trade it is too early to say and will this help the EU manufacturing industries? I suspect to some degree it will, but how will other governments play the game because this is now a game of trying to beat the system. If governments charge the equivalent of the EU carbon rate ,but do not collect the taxes how will the EU know? This is open for corruption by other countries outside the EU and would be controlled by those countries. If this happens which it feasibly could then the EU manufacturers will be worse off.