The European Commission is proposing to broaden the regulatory scope of its Carbon Border Adjustment Mechanism (CBAM), as detailed in draft legislation seen by McCloskey 16 December and officially presented 17 December.
The draft regulation covers three primary areas relevant to iron and steel, proposing the extension of the instrument to downstream steel-containing goods; the inclusion of pre-consumer scrap as a CBAM-liable precursor; and the creation of new anti-circumvention protections – all to take effect from 2028.
Commitments to extend the scope of CBAM were written into the Commission’s Steel and Metals Action Plan (SMAP) back in March, with a legislative proposal scheduled for fourth quarter 2025.
The proposals directly relevant to the iron and steel sector should take effect from 2028, in time for CBAM’s third reporting period under its definitive phase.
Implementing acts relating to the technical implementation of CBAM’s existing scope have also been “provisionally published” 17 December, with no changes to calculation values from McCloskey’s latest analysis. All legislation released as part of the Commission’s CBAM package 17 December is available here.
Downstream Extension
Industry representatives such as European steel distribution association Eurometal have been loudly proclaiming the threat presented by CBAM – compounded by other forthcoming restrictions to import accessibility – in facilitating or even incentivizing the displacement of carbon leakage further down the steel value chain.
In the Commission’s accompanying report on the performance of the CBAM regulation to-date, this risk is described as a “dual cost push” for downstream producers, resulting in “higher input prices for both domestically sourced and imported basic goods.”
As noted by the Commission, “risk of carbon leakage is likely to shift from the upstream sectors covered by CBAM to later stages of the value chain that remain exposed,” which would “severely undermine CBAM’s climate effectiveness if left unaddressed.”
The Commission plans to remedy this weakness by extending CBAM’s scope to steel-intensive goods, with liability to CBAM from the listed downstream steel-containing goods or “combined metal products” assessed on the basis of the embedded emissions of their input materials, otherwise known as precursors. This is to ensure mirroring with the defined scope of the EU Emissions Trading System (EU ETS), as well as due to “challenges in data collection along the supply chain of some of the components of these goods,” necessitating practical simplifications.
For some such products – where “verified information of the actual emissions of their input materials (precursors) will be administratively difficult” – default values will be applicable without any mark-up “due to the complexity of the supply chain.”
The Commission has selected products for the downstream extension of CBAM on the basis of carbon leakage risk, on indicators of “trade intensity and cost push.” “Trade intensity” defines the risk of carbon leakage in terms of tradability or substitutability of the good with third country imports, whereas the “cost push” indicator “expresses the carbon cost […] relative to the overall value of a product.”
The range of downstream products selected includes “machinery, hardware and fabrications, vehicle components, domestic appliances and construction equipment.” The Commission says this range represents “about 15% of the CBAM goods already in scope” – or a 53% share of existing coverage in terms of value.
“The vast majority, 94%, of these downstream goods concerned are industrial supply chain products with a high (on average 79%) steel and aluminium content, used in heavy machinery and specialized equipment, such as base metal mountings, cylinders, industrial radiators, or machines for casting,” says the Commission. “A small share, 6%, of the downstream goods concerned are also household goods.
“An EU producer of such downstream products can face increased costs for the steel and aluminium materials used in the production process.”
Beyond the listing of CN codes included in the extension of CBAM’s scope from 2028 – outlined in appendix I to this article – limited detail is provided as to how CBAM liabilities for downstream products will be specifically calculated. McCloskey’s conversations in the past months with those close to the drafting process suggested that the Commission would designate ‘default’ shares for CBAM goods in the constituent make-up of downstream products (e.g designating a refrigerator as containing X% carbon steel), to be adjusted to total the weight of the downstream import, as declared in customs processes.
This approach is alluded to in the Commission’s Q&A, which notes “the proposed list also includes more complicated goods based on multiple CBAM inputs such as washing machines, which consist of around 60% steel, 5% aluminium and 5% cement.”
It is likely that these nuances of extending CBAM to will be clarified as CBAM proceeds through its definitive stage, in the form of subsequent implementing and delegated acts.
Jan-Joost den Brinker of CBAM management and consultancy firm Dubrink, summarized the potential impact of the extension, describing it as “massive”. The Commission’s own CBAM report cites an expected doubling to 40,000 CBAM declarants as a result of the proposed extension to downstream goods, up from the 20,000 anticipated for the 2026 reporting period, post-simplification package.
“We work with the largest EU customs brokers, all providing Dubrink with full goods-code datasets for compliance tracking.
When running a query in our data, comparing this now extended CBAM with its previous scope, the number of importing companies liable to CBAM doubled.
At first, I assumed it was an error on my side – but this number aligns closely with the Commission’s own expectations. This scope expansion is truly massive.”
– Jan-Joost den Brinker, Dubrink
Anti-circumvention – Scrap as a Precursor
Across its communications and legislative proposals, the Commission also holds that pre-consumer scrap should be included in the scope of CBAM – though only as a precursor – due to existing coverage under the EU ETS.
As pre-consumer scrap has embedded emissions inherently linked to the production process of its associated steel product, non-inclusion of pre-consumer scrap presents a mis-match or “loop-hole” in comparison to domestic carbon cost obligations. As the ETS records emissions on an installation level, domestic producers must surrender EUAs for said scrap despite its lack of subsequent transformation or consumption, as part of its holistic production.
Inclusion of pre-consumer scrap as a CBAM precursor would force third country producers using scrap in their production processes to include the emissions embedded from the scrap’s original production process in the emissions portfolio for their secondary steel products, inflating the specific embedded emissions for these goods. Post-consumer scrap was considered by the Commission for inclusion, but was ultimately rejected so as not to “disincentivise the circular economy.”
The proposal would extend CBAM liabilities to ferrous scrap precursors under CN code 7204 – with the exception of post-consumer scrap.
Anti-circumvention – Policing Powers
The provisions addressing potential circumventions of CBAM introduce new powers for the European Commission, allowing them to adopt delegated acts applying “conditions to be fulfilled for the use of actual emissions,” where evidence points “towards a high risk of abusive practices.”
‘Abusive practices’ are defined in reference to the use of ‘actual’ emissions for the purpose of “unduly avoiding, wholly or partially, the CBAM financial liability.” The anti-circumvention provisions proposed would grant the Commission authority to limit CBAM declarations for “a combination of goods and origins” to default values, via delegated acts to be adopted three months where a “risk of abusive practices” has been evidenced, “on the basis of any relevant source of information.”
If an importer submits a CBAM declaration relevant to “goods and origins” where a risk of abusive practices has been identified, “evidence demonstrating that the high risk of abusive practices has not materialised” must be included with the CBAM declaration, or else the importer must resort to default calculation values.
Relevant conditions and evidence are to be designed “in a proportionate manner” and “should not place any unnecessary burden on operators and importers.”
Effectively, this would give the Commission the authority to restrict certain CBAM products and origins to default values, with exempting evidence to be submitted by importers alongside the CBAM declaration, compounding importer uncertainties on a seemingly permanent basis.
Further provisions relate to powers of the Commission or competent authorities to request evidence from a CBAM declarant illustrating that imported CBAM goods were indeed produced in the installation and time period as declared by an importer – to address risks of mis-declared emissions – as well as introducing a new definition of circumvention relating to the artificial adjustment of supply chains to benefit from more competitive default emissions values.
The anti-circumvention package also makes mandatory that third country operators register within the CBAM registry if actual emissions values are to be used for importers’ subsequent verifications and declarations, where this was previously voluntary.
As an ultimate policing power, the act would also authorise the Commission to withdraw products or even entire sectors from the scope of CBAM where the instrument is found to be causing “severe harm to the Union internal market due to serious and unforeseen circumstances relating to the impact on the prices of goods”
Export Support – the ‘Temporary Decarbonisation Fund’
As a separate legislative proposal, independent of the act on circumvention and downstream extension, the Commission also holds it necessary to create a “Temporary Decarbonisation Fund,” to mitigate the “remaining risk of carbon leakage” as ETS free allocations are phased out at an increasing rate from 2026 to 2034.
The steel industry has primarily discussed the need for such provisions in reference to potential “export rebates” for their ETS-liable productions, to address domestic producers’ loss in global competitiveness in relation to exporting origins unencumbered by carbon pricing schemes in their own jurisdictions. CBAM aims to rebalance this loss of competitiveness at the border with imported steel, and so does little to aid the export competitiveness of EU producers.
The Fund is intended to support energy-intensive industries in their decarbonisation in the context of sustained carbon leakage pressures, with any financial grants “conditional on decarbonisation investments.”
Financed by member states (corresponding to 25% of respective member state revenues generated from the sale of CBAM certificates from 2027) the Fund will issue temporary financial support to energy-intensive producers over the period 2028-2029, determined on the basis of a 2026-2027 reference period. A single call will be issued for the fund in 2028, with applications to be submitted by 31 March of said year.
Proceeds from the fund will prioritise support for “operators of EU-ETS installations which produce goods exposed to the highest remaining risk of carbon leakage,” taking the carbon leakage list of the ETS (upon which iron and steel products widely feature) as a starting point.
The amount of financial support available will be calculated in reference to phased-out free allocations, adjusted to a relevant operator’s production share, and multiplied by average EUA prices 2026-2027. The Commission will then decide on the disbursement of calculated funds
Domestic producers of the goods in appendix II of this article are eligible for fund proceeds, though member states can petition for the inclusion of non-listed CN codes where carbon leakage risks have not been preliminarily identified by the Commission.
Carbon Price Already Paid
Finally – and among other more administrative provisions – the acts give some additional clarity into how ‘carbon prices already paid’ will operate as a deduction from the total CBAM liability.
The legislation makes provision for verifiers of actual emissions to possibly extend their verification functions to certification of carbon prices already paid, with similar accreditation requirements to be introduced by the Commission as for emissions verifications.
Beyond that, the acts authorise the Commission to pass implementing acts detailing the requirements to claim carbon prices already paid – using either actual or default carbon prices – and suggest that international carbon credits under Article 6 of the Paris Agreement could be recognised for relevant deductions.
