Long-anticipated draft provisional benchmarks for the Carbon Border Adjustment Mechanism (CBAM), seen by McCloskey late last week, potentially entail higher-than-expected costs for importers when calculating on default values.
The draft legislation and accompanying annex detail rules, formulae, and provisional benchmark values for the adjustment of CBAM emissions liabilities. Deductions are made in line with what free emissions allowances third country installations would be entitled to if operating under the EU Emissions Trading System (ETS) – the so-called Free Allocations Adjustment (FAA).
While calculating the FAA deductible from CBAM declarations using actual values requires detailed, verified production data, and yet-unseen implementing acts on both embedded emissions calculations and methodology, McCloskey has sourced a spreadsheet detailing provisional country-specific default values at the product level. Using these default values in combination with the drafts should allow importers to calculate their specific worst-case CBAM exposure with much greater certainty.
The Free Allocations Adjustment (FAA)
As detailed in an earlier article, CBAM imposes costs on emissions embedded in imports from third country productions, whereas the EU Emissions Trading System (ETS) manages emissions at the process level. Free allocations under the ETS are awarded on the basis of a domestic installation’s historic production rate, benchmark-adjusted to its top 10% best-performing equivalents within a product sector during a prior reference period.
In order to maintain the equivalence between ETS free allowances and CBAM liabilities for WTO-compliance, these ‘ETS benchmarks’ must be combined or transposed into ‘CBAM benchmarks’ at the product level, ensuring that cost obligations for both systems are operating on common factors as far as possible.
Both the ETS free allocation formula, and CBAM emissions liabilities are also subject to the same ‘CBAM factor,’ which starts at 97.5% from 2026 and reduces at an increasing rate until it hits 0% in 2034 – reducing free allocations to zero and making importers fully liable for embedded emissions.
The draft regulation on FAA calculation details the mechanisms behind this equivalence principle, seeking to maintain consistency not only in terms of cost benchmarking, but also as relates to data quality. Effectively, distinct CBAM benchmarks are to be referenced, depending on whether calculating on actual or default emissions.
Deriving the FAA to be deducted requires calculations as to the ‘specific embedded free allocations’ (SEFA) that a single ton of the import would have received as a result of its production process under the EU ETS. For declarations on actual values, said calculation must also be repeated recursively for each of the import’s constituent precursors in relation to relevant CBAM product-level benchmarks, specific to the processing stage, with the results combined into a total SEFA for the final imported good. For default values, specific all-in ‘default benchmarks’ allow calculation of the FAA in a single stage.
SEFA = CBAM factor x CBAM benchmark x Cross-Sectoral Correction Factor*
CBAM certificates = Total Embedded Emissions – Free Allocation Adjustment – Carbon Price Already Paid
*(The CSCF reduces free allocation across the ETS where demand exceeds supply. CSCF 2021-2025 = 1)
Multiplying the SEFA by the total mass of the imported goods gives the FAA, which is then deducted from the total embedded emissions to derive the number of CBAM certificates that must be surrendered, prior to further deductions for carbon prices already paid (t CO2e).
Total embedded emissions require verification when using actual values, with CBAM goods assumed by default to have been produced in the same year as the reporting period unless sufficiently evidenced otherwise. The draft defines this reporting period as 2026 at the earliest for both product and precursor emissions, meaning even Q1 2026 imports produced in 2025 will be assessed on the basis of physically verified 2026 levels to patch frictions between the transitional and definitive stages.
Provisional CBAM benchmarks, actual and default
The annex to the draft FAA regulation lists the provisional CBAM benchmark values required to make CBAM calculations, which are based on the current 2021-2025 ETS benchmarks. Notably the draft provisional benchmarks have been adjusted to projected revisions to be made to the underlying ETS benchmarks later in 2026, and are thus less likely to change prior to adoption than was previously suspected on benchmark update
timelines.
Due to the flexibility required in adapting ETS benchmarks to CBAM in assessing emissions at the border, there is no single catch-all CBAM benchmark value for a steel product, with relevant steel benchmarks instead divided by data quality, and production route.
Provisional benchmarks in the drafts are available at the product code level for CBAM’s covered goods, and are presented in two columns: the benchmarks in column A are limited to the specific process emissions for the production of the good and are to be mirrored to specific third country production processes when performing recursive actual values calculations, with simplified all-in product-level benchmarks for default values
calculations in column B.
When making CBAM declarations on actual emissions values, detailed information is required on the production processes of third-country producers in order to accurately map their specific production processes and product characteristics to the corresponding ETS benchmarks.
The draft annex dictates the rules on which production-route specific column A benchmark to adopt when using actual values:
- Scrap-EAF: “more than [50%] of mass of the crude steel produced or used is sourced from scrap.”
- DRI-EAF: “more than [50%] of mass of the crude steel produced or used is sourced from DRI.”
- BF-BOF: “more than [50%] of mass of the crude steel produced or used is sourced from a blast furnace or smelting reduction route.”
- “If neither of the three routes above contribute more than [50%] of the final steel, the production route is selected based on the component contributing the highest mass of the steel.“
Provisional CBAM benchmarks, default values
Column B’s ‘default CBAM benchmarks’ are only for use when making declarations on default values, making various assumptions in terms of the goods composition – such as steel alloy content – and are designed to be applicable across different origins. These benchmarks are then further split by process route, with separate benchmarks for scrap to electric-arc furnace (scrap-EAF); natural gas-based direct-reduced iron to EAF (DRI-
EAF); and blast furnace to basic oxygen furnace (BF-BOF) productions.
Yet unreleased draft implementing acts on methodology and embedded emissions calculations will further clarify which of these production route-specific default CBAM benchmarks are to be used – depending on product and precursor origin – to maintain methodological and data consistency between the default benchmarks and default emissions values for each country.
Provisional default values – contained in a separate file – are split by origin; product code; and direct and indirect emissions; and continue to be relatively elevated as a punitive measure to incentivize declarations on actual values. CBAM-liability for the definitive stage is currently limited to direct embedded emissions.
For example – assuming a CBAM certificate price of EUR80 – CBAM costs for an import of Indian-origin BF-BOF hot-rolled coil (HRC) would theoretically be calculated in reference to a default specific embedded emissions value of 4.27t CO2e/t, and a default benchmark value of 1.53t CO2e/t, giving a result of around EUR220/t.
Scrap-EAF Turkish-origin HRC – which has been booked by multiple service centers due to competitive EPDs of around 0.9t CO2e/t – when calculated on default values and benchmarks could see a CBAM liability of around EUR140/t.
Further examples are detailed in the table at the bottom of this article – it is important to remember that the specific production-route default benchmark value to be used is yet to be clarified by the Commission, with default routes for each origin to be set consistent with the methodology used to calculate the default emissions values.
Closing a DRI loophole
The draft regulation and annex make specific reference to natural gas-based DRI, explaining the need for DRI-specific benchmarks both for independent import, and as a precursor in EAF steelmaking.
DRI is currently included in the ETS hot metal benchmark, but was excluded from the benchmark update calculation for 2026-2030 to avoid artificially cutting the ETS benchmark for blast-furnace producers.
As such, if DRI-based steel was allowed to enter the EU on a CBAM benchmark tied to the ETS’ hot metal benchmark, it would receive an FAA in excess of its embedded emissions, negating any CBAM obligation for DRI-based imports and even making them more competitive than scrap-EAF based imports, which have their own underlying ETS benchmark reference.
To avoid this, separate actual and default benchmark values were created for DRI imports, and steel CBAM benchmarks have an intermediary value for DRI-EAF, “ensur[ing] that the reduction of the CBAM certificates to be surrendered stemming from the free allocation adjustment for primary natural gas-based DRI imports is higher than for primary blast furnace steel, but lower than for secondary steel.”
When calculating on actual emissions values, DRI has a provisional process-stage specific CBAM benchmark of 0.5t CO2e/t, and a default benchmark value of 0.723t CO2e/t.
Overall, the Commission’s drafts give a lot more clarity to the trade in terms of the worst-case additional costs when importing steel – and submitting CBAM declarations – on default values. Costs stemming from default value declarations will be very high if default benchmarks and values are implemented in their current form, incentivising either the use of complex actual values calculations, or tactical circumventions.
Benjamin Steven Journalist, Steel
