The European Commission proposed a reform of the EU’s Emissions Trading System (ETS) in mid-July to better align climate and industrial realities, but while suggested changes to the ‘CBAM factor’ would eventually grant discounted liabilities under the instrument, upfront costs remain prohibitive for many steel trade routes.
Proposed changes to the ‘CBAM factor’ – the EU’s ratcheting replacement to free allocation, to address carbon leakage concerns – would reintroduce 15% of phased-out emissions allowances (EUAs) as a buffer, extending the curve of free allocation reductions out to 2038.
Proposed ETS free allocation phase-out rate (CBAM factor)
| Year | Proposed % (July) | Existing % | Increase % | Conditional on decarbonisation investment? |
| 2026 | 97.5 | 97.5 | 0 | No |
| 2027 | 95 | 95 | 0 | No |
| 2028 | 91.5 | 90 | 1.5 | No |
| 2029 | 81 | 77.5 | 3.5 | No |
| 2030 | 59 | 51.5 | 7.5 | No |
| 2031 | 48 | 39 | 9 | Yes |
| 2032 | 37.5 | 26.5 | 11 | Yes |
| 2033 | 27 | 14 | 13 | Yes |
| 2034 | 15 | 0 | 15 | Yes |
| 2035 | 15 | 0 | 15 | Yes |
| 2036 | 15 | 0 | 15 | Yes |
| 2037 | 15 | 0 | 15 | Yes |
| 2038 | 0 | 0 | 0 | Yes |
Source: European Commission July ETS review proposal
Other elements of the Commission’s proposals would adjust ETS mechanisms like the Linear Reduction Factor and Market Stability Reserve, intending to prevent carbon price inflation (and volatility) beyond what domestic industry can handle as it pursues decarbonisation of its processes without overly undermining global competitiveness.
Despite these changes, CAMIRO’s short and long-term forecasts still see EUA prices gradually escalating to break the EUR200 barrier post-2033, with higher prices expected 2026-2027 in line with post-review increases above EUR80.
Beyond EUA price effects, as McCloskey detailed in the lead-up to the July ETS review, CBAM already threatens sky-high costs when using ‘default’ emissions values, especially from recently disruptive origins like Indonesia. Trading sources also fear that the EU’s new and intensified tariff-rate quota regime for steel imports could lessen exporter willingness to properly invest in emissions monitoring, reporting, and verification (MRV) processes necessary to report ‘actual’ emissions values in CBAM declarations as a result of their reduced market access, further compounding cost risks.
This week, the International Institute for Sustainable Development (IISD) released its “State of Border Carbon Adjustments 2026” report, finding that businesses are already being confronted with less evident compliance costs from necessary investments in IT infrastructure, supply chain data collection, and the demands of verification – particularly burdensome on upstream small- and medium-sized enterprises.
IISD also track the development of Border Carbon Adjustments (BCAs) worldwide as jurisdictions seek to reclaim climate revenues within their own borders (via CBAM deductions for ‘carbon prices already paid’), which could then compound these compliance costs significantly as different BCA methodologies and implementations hit globalised supply chains from different angles without supportive interoperability.
The European Commission’s proposed adjustment to free allocation via the CBAM factor is suggested to return phased-out EUAs to ETS supply from 2028, with the inaugural years of the definitive stage remaining unchanged in terms of effective emissions liabilities. That is around the same time as the proposed extension of the EU CBAM to downstream products, which also contains new anti-circumvention provisions seeking to ensure the accuracy and integrity of reporting for emissions embedded in imported goods. The regulation is working its way through the initial stages of the EU’s tripartite legislative process, with variations of the product scope and anti-circumvention provisions suggested by the Commission, and Parliamentary committees.
Generally, these anti-circumvention provisions would target origins engaging in “abusive practices,” specifically emphasising “resource shuffling,” in which exporters designate portions of their production – via specific installations – for export to the EU, purely to minimise CBAM liabilities without engaging in full-scale emissions reductions.
The latest parliamentary amendments propose to apply “country-level default values […] systematically and ex ante to combinations of countries and goods defined as being at high risk of abusive practices,” introducing yet another cost risk for importers beyond their direct control. In identifying groups of origins or goods at risk of circumvention, it is suggested that the Commission considers a wide range of flexible factors, including the mere fact of capacity to circumvent; dubious reporting trends; the decarbonisation reality of relevant installations; and perhaps most controversially, “the existence of EU anti-dumping or anti-subsidy measures in force against the country in the relevant sector.”
As detailed by McCloskey’s Steel Trade Protection Measures Database, the EU currently has over 70 different trade defense instruments (TDIs) in force, or under review across a range of steel and steel-containing goods against different trading partners: China; Egypt; India; Indonesia; Iran; Japan; Malaysia; Russia; South Korea; Taiwan, China; Thailand; Turkey; the US; and Vietnam. The European Commission also committed to taking a more proactive approach to trade defense in last year’s Steel and Metals Action Plan (SMAP), lessening its legal test for investigation to the threat, rather than realisation, of injury to its domestic industries.
These TDIs apply cumulatively with the EU’s new steel TRQs, which have themselves been challenged as noncompliant with World Trade Organisation rules (as has CBAM, as tracked by the IISD report), layering potentially self-reinforcing cost risks for steel importers throughout the EU’s trade – and now climate – framework.
Gerold Lorenz, Managing Director of trading house INTERFER Group, asks on social media whether CBAM is thus increasingly becoming a “trade protection measure,” stating that “trade policy criteria such as existing trade-defence measures have no place in a climate instrument.”
“If verified emissions data can be set aside because of broader country-level trade-policy considerations, CBAM risks moving beyond carbon accounting and becoming a de facto trade protection instrument,” Lorenz writes.
Overall, the Commission’s July policy package, and suggested ETS reform appears to do little to mitigate CBAM costs for importers, despite its headline amendments to the “CBAM factor.” Initial costs under CBAM are still prohibitive in many cases, and the real cost drivers – the risk of having to use default emissions values – remain unchanged, or could even be intensified should anti-circumvention elements mandate their use for specific product groups or origins, or if the EU’s increasingly burdensome trade protection framework disincentivises exporters from sufficiently engaging with Monitoring, Reporting and Verification (MRV) preparations.
Author: Benjamin Steven
