EU Carbon Border Adjustment Mechanism Is Set to Get Bigger: Implications for trade and industrial value chains

The EU CBAM has only just entered its operational phase, yet it is already set for significant expansion. The carbon border adjustment currently applies to a limited set of products, including cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. Carbon-related fees have been applied to these products since the beginning of the mechanism’s definitive implementation in January 2026. The proposed reform to extend the mechanism beyond basic materials is the outcome of a legally mandated review of the CBAM regulation following its transitional phase. It responds to growing concerns that rising EU carbon prices could intensify downstream carbon leakage and avoidance strategies. With its expanded scope, the CBAM could reshape both carbon pricing at the EU border and global industrial value chains. What will that mean for global trade, and what might come next?

What changes is the European Commission proposing?

Under the reform proposed by the European Commission (EC) on December 17, 2025, the CBAM would be extended to approximately 180 downstream products—manufactured goods incorporating materials already covered by the CBAM. Those are primarily steel- and aluminum-intensive downstream goods, most of which are industrial and supply-chain products like machinery, equipment and construction products, as well as a wide range of transport-related products. For example, the mechanism would apply to certain cargo vehicles, reflecting their high embedded steel and aluminum content, but passenger cars would remain excluded as finished products. Beyond vehicles, the proposed downstream scope would extend to a wide range of metal-intensive components and machinery, including a range of automotive parts, such as wheels, gearboxes, and certain engines. It also includes industrial equipment like industrial robots. Manufactured goods with significant steel or aluminum content—such as washing machines—would also be covered, as would some electrical goods and furniture.

How much more would be covered under an expanded CBAM?

CBAM-covered goods accounted for around 4.7% of total EU imports in 2023. The expansion would add a further ~2.5% of EU imports to the CBAM list. EC analysis indicates that China would be the most exposed trading partner, with additional downstream exports to the EU of around EUR 18 billion per year, followed by Türkiye (EUR 8 billion), the United States (EUR 6 billion), the United Kingdom (EUR 5 billion), and Japan (EUR 3 billion).

What are the risks of expanding the CBAM downstream?

Extending the CBAM downstream would significantly increase administrative and compliance complexity, particularly for products with long and fragmented supply chains, such as automotive goods. The further down the value chain coverage is extended, the further back up the value chain the newly covered goods need to reach to report emissions embedded in their CBAM-covered inputs. Calculating embedded emissions requires tracing steel and aluminum inputs across multiple supplier tiers and countries, posing challenges for data collection, verification, and consistency.

Expanding the CBAM downstream could also create material implicit trade costs on a larger set of imports. Frontier Economics and IISD estimates suggest that applying the CBAM to all downstream automotive products could be equivalent to an ad valorem tariff of around 4.6% on Chinese exports of those products by 2034 and around 2.6% for Japan and Korea. It should be stressed, however, that these estimates hypothesized a complete inclusion of the automotive value chain, including all finished vehicles, which is not the case with the proposal.

At the same time, the EC’s impact assessment suggests that EU import volumes of covered goods would change by well below 1%. At the macroeconomic level, impacts on GDP in both the EU and its trading partners are assessed as negligible (close to zero) in the same impact assessment. Similarly, an assessment by Frontier Economics and IISD simulating the inclusion of the entire automotive value chain under the EU CBAM found that the resulting impacts on trade flows and macroeconomic indicators would be very small, with percentage changes in gross national income (relative to baseline) and production remaining close to zero at the aggregate level.

What are the upsides of expanding the CBAM downstream?

Carbon prices in the EU’s carbon market have increased markedly in recent years and are widely expected to rise further over the next decade. Prices under the EU Emissions Trading System (ETS) have recently fluctuated roughly in the EUR 60–90 per tonne of CO₂ range, and many projections point to carbon prices in the order of EUR 120–200 per tonne by the mid-2030s.

If the EU were to extend CBAM to a wider range of steel-containing downstream products, a larger share of steel production would be exposed to these carbon costs when selling into the EU market. Such an extension would therefore amplify the impact of EU carbon pricing along steel value chains, beyond primary steel production alone.

Because hydrogen-based direct reduced iron combined with electric arc furnaces (H₂-DRI-EAF) generates far fewer emissions than conventional blast-furnace basic oxygen furnace (BF-BOF) steelmaking, producers using low-carbon technologies would face significantly lower carbon costs under the CBAM. As illustrated in Figure 3, at carbon prices of EUR 120–200 per tonne, “green” steel can become cost-competitive—or cheaper—than conventional BF-BOF steel for exports to the EU across major producing countries. This suggests that extending the CBAM downstream could materially strengthen incentives to switch to low-carbon steel in EU-oriented manufacturing. From a climate perspective, this shift would support mitigation objectives by strengthening incentives to deploy low-carbon steelmaking technologies and by reducing the emissions intensity of steel used in goods placed on the EU market.

The downstream expansion is also expected to deliver modest but measurable emissions reductions, according to simulations by the EC, which indicate that the proposed expansion could reduce global emissions by 0.8 megatonnes by 2035, assuming a carbon price of EUR 125 per tonne of carbon. This corresponds to roughly 0.002% of current global annual CO₂ emissions, highlighting that the climate impact is small in absolute terms.

What other CBAM expansions could follow?

Looking ahead, further CBAM expansions are possible as the EU seeks to align CBAM coverage with the full scope of the EU ETS, its domestic carbon pricing scheme, in order to avoid production in any ETS sectors from “leaking” out of the EU.

Organic chemicals and polymers, including plastics, are widely seen as potential candidates for CBAM expansion in the medium term. If the CBAM were expanded to these sectors with full inclusion of their downstream value chains, the share of EU imports covered by the mechanism could rise to up to 10%. More ambitiously, full alignment of the CBAM with all EU ETS sectors (including chemicals, polymers, plastics, refineries and petroleum products, glass, ceramics, and pulp and paper) could increase coverage to over 30% of total EU imports.

Expanded coverage would also reshape partner exposure. Under the current CBAM, China accounts for around 18% of EU imports of CBAM-covered goods, followed by India (7%) and the Russian Federation (6%). As CBAM coverage broadens, the relative exposure of certain high-income economies increases markedly: for example, the United States’ share of CBAM-covered EU imports would rise from around 4% to 13%–14% under the largest expansion scenario.

These shifts reflect underlying trade patterns across ETS-relevant sectors. China dominates EU imports of ceramics (45%) and glass (36%), while organic chemical imports are split primarily between China (26%) and the United States (25%). The United States leads refined oil products with 15%, followed by India, Qatar, and Saudi Arabia (around 10% each).

The trade exposure by trading partner (the share of their total exports that would fall under the CBAM) could become very high for certain insular economies, reaching close to 80% for Bonaire, mostly through its exports of refined oil products, and over 50% for Saint-Barthélemy, in large part due to exports of refined copper. Gibraltar could witness a large increase in its exposure due to exports of refined oil products. It should be noted, however, that these are upper-bound estimates and that an expansion to all ETS sectors is unlikely.

What comes next for the CBAM and border carbon measures globally?

From a comparative perspective, the EU’s approach would be far more encompassing than other border carbon adjustments currently under discussion. The United Kingdom CBAM remains, for now, focused on upstream products. Schemes currently under discussion in Australia and Chinese Taipei typically focus solely on cement. By extending carbon pricing deep into downstream goods or to new upstream sectors, the potential expansions of the EU CBAM would position the EU as the most ambitious jurisdiction globally in applying carbon pricing at the border, with far-reaching implications for global value chains and trade partners.

This piece draws on modelling results conducted by Frontier Economics for IISD. We would like to acknowledge George Riddell (Goyder Ltd.) for his analytical input on the administrative, technical, and political economy considerations relevant to extending EU CBAM downstream. We also acknowledge valuable comments by Alice Tipping and Aaron Cosbey (IISD).