EU Moves to Broaden Carbon Border Fees and Tighten Compliance Rules

Key Moments

Scope of the EU Carbon Border Levy Set to Grow

The European Union plans to widen the scope of its carbon border levy to include more products with high embedded emissions. According to draft European Commission proposals expected on Wednesday, the expansion would cover items such as car parts and washing machines.

Currently, the levy targets a limited range of industrial inputs. However, the carbon border fee forms part of the EU’s Carbon Border Adjustment Mechanism (CBAM), which is described as the world’s first carbon border tariff. Under CBAM, the EU charges for CO2 emissions linked to imports of certain goods, including steel, aluminium, cement and fertilisers.

At present, the system remains in a pilot phase. Nevertheless, it is scheduled to begin imposing financial costs from January.

CBAM is designed to protect European manufacturers from competition originating in jurisdictions with weaker climate rules. However, the policy has drawn criticism from several trading partners, including China, India and South Africa. In response, these countries argue that the measure unfairly targets their economies.

New Products and Sectors Targeted

Despite this external pushback, draft legal texts seen by Reuters on Tuesday suggest the EU intends to reinforce and expand the mechanism. Specifically, the proposals would bring downstream products into scope if they contain a high proportion of steel and aluminium.

As a result, construction materials, power grid components and various types of machinery would fall under the expanded levy.

Moreover, Leon de Graaf, acting president of the “Business for CBAM Coalition” — a grouping of companies and industry associations — expressed support for the planned changes. He said the proposals focus on “products that face the highest risk of carbon leakage.” In this context, carbon leakage refers to the risk that manufacturers relocate abroad to avoid Europe’s strict climate policies.

Clampdown on Emissions Under-reporting

Alongside expanding product coverage, the EU is also preparing measures aimed at preventing attempts by foreign suppliers to circumvent the levy. In particular, the Commission is concerned that some firms could try to minimise their CBAM liabilities by under-reporting emissions.

Under the draft approach, if there is evidence that companies in a specific country are providing inaccurate or incomplete emissions data, the EU could apply “default” emissions values to those imports. Consequently, CBAM costs for affected exporters would increase, according to sources familiar with the proposals.

Meanwhile, the same sources cautioned that the plans could still change before official publication.

Notably, this approach seeks to address a specific concern among EU officials. Some producers — particularly in China — could send lower-carbon products to the EU market while continuing to manufacture higher-carbon goods for other destinations.

As a result, such a strategy would limit exposure to CBAM charges without reducing overall emissions intensity.

A spokesperson for the European Commission declined to comment on the draft proposals.

Implementation Timeline and Market Response

While the levy is set to begin charging importers for embedded emissions from 2026, compliance will be phased in gradually. Therefore, companies will have until September 2027 to purchase and surrender CBAM certificates.

Since Brussels first announced its intention to introduce the carbon border levy in 2021, several major trading partners have responded. For example, China, India and Brazil have begun creating or expanding their own carbon pricing systems, despite maintaining strong criticism of the EU policy.

“They have changed behaviour. That is the success of CBAM in my book already,” said Totis Kotsonis, a partner at law firm Pinsent Masons who advises on trade issues.

Revenue Use and Support for EU Industry

In addition to strengthening CBAM’s environmental and trade objectives, Brussels is also considering how to allocate the revenue it generates. According to the draft plans, 25% of income from the border levy would be used to support European manufacturers facing higher costs.

However, this compensation would not apply universally. Instead, only sectors that commit capital to lower-carbon production technologies would qualify. As a result, financial support would be directly linked to decarbonisation efforts.

Key CBAM Design Features