The European Union is preparing a comprehensive reform of its carbon border adjustment mechanism (CBAM) aimed at preventing companies from relocating production to countries with weaker environmental standards, while at the same time protecting the competitiveness of European industry. The reform seeks to balance climate ambition with industrial resilience, ensuring that decarbonization does not come at the cost of lost production capacity or jobs within the EU.
Under the current framework, CBAM applies mainly to basic materials such as steel, aluminium, cement and electricity. From 2028 onward, the mechanism is set to expand much deeper into the industrial value chain, covering around 180 additional products. These will primarily include machinery and industrial equipment with a high steel and aluminium content. The goal is to prevent carbon costs from pushing production outside the EU or allowing high-emission imports to displace cleaner European products.
Drawing on lessons from the transitional phase, the European Commission is proposing stricter emissions reporting rules and stronger safeguards to prevent circumvention of the system. The revised methodology would also factor in production waste from steel and aluminium manufacturing, ensuring equal treatment of domestic and imported goods and closing loopholes that could otherwise be used to bypass CBAM obligations.
A key pillar of the reform package is the creation of a temporary decarbonization fund targeting EU-based companies that remain exposed to the risk of relocating production abroad. Access to financial support would be conditional on verified investments in emissions reduction, with the fund financed through CBAM revenues and additional contributions from member states.
According to the Commission, the reinforced mechanism serves multiple strategic objectives. It is designed to strengthen European competitiveness, protect climate-related investments and accelerate emissions reductions, while ensuring fair competition between EU producers and foreign suppliers. A parallel assessment suggests that CBAM is already influencing decarbonization beyond EU borders, driven not only by the carbon price signal but also by increased awareness and technical assistance provided to trading partners.
CBAM entered its transitional phase in October 2023, giving companies inside and outside the EU time to adapt within a predictable and proportionate framework. After two years of transition, the financial component of the mechanism will begin to apply gradually from 1 January 2026. This rollout will coincide with the phased removal of free emission allowances under the EU Emissions Trading System, a process scheduled to continue until 2034.
