Jan 5, 2026
The EU's Carbon Border Tax is now in effect, and trade partners are unhappy.
On Thursday, January 1st, the EU's carbon border adjustment mechanism began operating, aimed at enhancing the competitiveness of European manufacturers against non-EU firms in regions with looser emissions regulations. China was the first to announce potential retaliation, and it likely won't be the only one.
The carbon border adjustment mechanism, or CBAM, was created to address the unintended consequences of the world's strictest emission reduction standards for industries, which have led to high production costs that make European products less competitive. This issue is particularly acute for European producers of goods like steel and cement, where China stands as the main competitor due to its lack of stringent emissions requirements, resulting in significantly lower prices.
In essence, to enhance the competitiveness of European steel, cement, and electricity producers, the EU implemented measures to ensure that cheaper imports aren't as economically attractive. This has displeased nations like China and India, which may take actions that could hinder European business competitiveness.
Upon the CBAM's implementation, China's Ministry of Commerce labeled the legislation as "unfair" and "discriminatory," according to a Bloomberg report, stating, “We will resolutely take all necessary measures to respond to any unfair trade restrictions.”
An expert on carbon markets mentioned to the Financial Times that while CBAM is not favored by major exporters to the EU, it has already encouraged hesitant countries to advance their carbon pricing initiatives. This represents a significant policy shift for the EU aimed at safeguarding its own industries while promoting carbon pricing concepts to other nations.
China, which has its own carbon market established since 2021—the largest in terms of emissions volume—sees the issue not as promoting carbon markets but as a threat to its competitiveness. The country is apprehensive about the impact the CBAM will have on its market position.
Simply put, the carbon border adjustment mechanism assigns a cost to the carbon dioxide emissions produced during the manufacture of goods like cement and steel. This cost is determined by calculating emissions from industries in countries exporting to the EU. The mechanism includes default emission values for specific goods and emission benchmarks, although the application of these benchmarks remains unclear, with some asserting it may inadvertently favor China.
Concerns were raised at the end of last year, as Politico reported, with industry executives indicating that the default emission values for certain exporting countries were unrealistically low. For instance, some analyses suggested that steel production in China may emit less carbon than that in the EU.
An industry representative told Politico that inconsistencies in default values and benchmarks could undermine incentives for cleaner production, allowing high-emission imports to enter the EU with inadequate carbon costs. This might result in a CBAM that is less effective and potentially counterproductive.
At the same time, Indian steel imports are likely to decline sharply as Indian producers seem unaffected by these discrepancies. India, the second-largest steel producer globally and a significant exporter to the EU, is facing challenges because its steel manufacturing relies on coal-fired blast furnaces, which do not align with the EU's emission reduction goals. Switching to electric arc furnaces, which have a lower emissions footprint, is possible but requires time and investment.
One analyst mentioned to Reuters that many companies are still determining how to adapt to the CBAM. Ravi Sodah from Elara Capital anticipated a slowdown in India's exports to the EU in the near term.
Consequently, two of the world's largest industrial goods exporters, significant suppliers to the EU, are contemplating responses to the CBAM that could involve reducing exports. While this may benefit European producers, it poses challenges for consumers, who will bear the costs of this market intervention by the EU, which is fundamentally protectionist. The United States is also likely to express its dissatisfaction with these developments soon.
The carbon border adjustment mechanism, or CBAM, was created to address the unintended consequences of the world's strictest emission reduction standards for industries, which have led to high production costs that make European products less competitive. This issue is particularly acute for European producers of goods like steel and cement, where China stands as the main competitor due to its lack of stringent emissions requirements, resulting in significantly lower prices.
In essence, to enhance the competitiveness of European steel, cement, and electricity producers, the EU implemented measures to ensure that cheaper imports aren't as economically attractive. This has displeased nations like China and India, which may take actions that could hinder European business competitiveness.
Upon the CBAM's implementation, China's Ministry of Commerce labeled the legislation as "unfair" and "discriminatory," according to a Bloomberg report, stating, “We will resolutely take all necessary measures to respond to any unfair trade restrictions.”
An expert on carbon markets mentioned to the Financial Times that while CBAM is not favored by major exporters to the EU, it has already encouraged hesitant countries to advance their carbon pricing initiatives. This represents a significant policy shift for the EU aimed at safeguarding its own industries while promoting carbon pricing concepts to other nations.
China, which has its own carbon market established since 2021—the largest in terms of emissions volume—sees the issue not as promoting carbon markets but as a threat to its competitiveness. The country is apprehensive about the impact the CBAM will have on its market position.
Simply put, the carbon border adjustment mechanism assigns a cost to the carbon dioxide emissions produced during the manufacture of goods like cement and steel. This cost is determined by calculating emissions from industries in countries exporting to the EU. The mechanism includes default emission values for specific goods and emission benchmarks, although the application of these benchmarks remains unclear, with some asserting it may inadvertently favor China.
Concerns were raised at the end of last year, as Politico reported, with industry executives indicating that the default emission values for certain exporting countries were unrealistically low. For instance, some analyses suggested that steel production in China may emit less carbon than that in the EU.
An industry representative told Politico that inconsistencies in default values and benchmarks could undermine incentives for cleaner production, allowing high-emission imports to enter the EU with inadequate carbon costs. This might result in a CBAM that is less effective and potentially counterproductive.
At the same time, Indian steel imports are likely to decline sharply as Indian producers seem unaffected by these discrepancies. India, the second-largest steel producer globally and a significant exporter to the EU, is facing challenges because its steel manufacturing relies on coal-fired blast furnaces, which do not align with the EU's emission reduction goals. Switching to electric arc furnaces, which have a lower emissions footprint, is possible but requires time and investment.
One analyst mentioned to Reuters that many companies are still determining how to adapt to the CBAM. Ravi Sodah from Elara Capital anticipated a slowdown in India's exports to the EU in the near term.
Consequently, two of the world's largest industrial goods exporters, significant suppliers to the EU, are contemplating responses to the CBAM that could involve reducing exports. While this may benefit European producers, it poses challenges for consumers, who will bear the costs of this market intervention by the EU, which is fundamentally protectionist. The United States is also likely to express its dissatisfaction with these developments soon.