S&P: CBAM Could Cost Europe US$15bn in Import Values

From 2026, the EU’s Carbon Border Adjustment Mechanism (CBAM) will be fully implemented, meaning all EU-based importers of CBAM-covered goods will need to declare the emissions associated with those goods.

This will apply carbon pricing to key goods, including aluminum, cement, fertilisers and iron and steel, potentially putting trade-related pressure on reliant industries.

According to research by S&P Global, CBAM could add US$15bn-25bn every year to these goods' import values over the next 10 years.

The impact of CBAM

S&P Global provides businesses with financial information and analytics. Using a combination of data, technology and human expertise, it helps organisations around the world make confident and informed business decisions.

In a recent study, the organisation examined CBAM, which acts as a carbon tariff on carbon-heavy products, such as steel and cement, which are imported to the European Union. The aim of CBAM is to avoid 'carbon leakage' and encourage cleaner production of these products in countries around the world. It underwent a transitional period from 2023, but is due to take full effect in 2026.

In keeping with these regulations, all EU-based importers of these covered goods will be required to declare carbon emissions embedded within these products and present CBAM certificates, which will be linked to the EU Emissions Trading System (ETS) prices. As a result, imported product prices will be more closely aligned with EU-produced equivalents. This means non-EU produced goods will be more expensive for EU importers.

This could result in dramatic supply chain transformation as business leaders look to cut costs through the diversification of their suppliers. However, though many of these goods are vital to European infrastructure, production within the EU is low, meaning imports are heavily relied upon.

Between 2021 and 2024, the EU imported an average of 11 million tonnes of cement, nine million tonnes of aluminium, 17 million tonnes of fertilisers and 76 million tonnes of iron and steel products. These imports cost an average of US$120bn every year. There are varying levels of demand for these products:

• Aluminium imports face 70%-80% of demand
• Fertilisers dependence is 40%-60%
• Steel imports are 27% of demand
• Cement imports only cover 3%-4% of demand

A need for supplier diversity

The EU has a diverse supplier base for aluminium, steel and iron. The biggest suppliers of aluminium in 2024 were China (11%), Turkey (10%) and the United Arab Emirates (5%). Already, they have suffered the impact of CBAM.

This demonstrates that the majority of imports are distributed among other suppliers at a smaller level, showing that EU industries have more flexibility to switch to lower-cost suppliers for aluminium.

Some industries receive a free allocation to cover production emissions, which are designed to prevent industries from relocating outside the EU. The CBAM charge will be phased in as free allowances are reduced. Revenue generated as a result of CBAM is currently planned to support the EU's climate goals. 

S&P estimates that 5-15% of cement imported into the EU carries greater emission intensity than EU counterparts. The figure stands at 50-60% of aluminium and more than 90% of fertilisers, steel and iron

Supply chain impact

By 2035, S&P predicts that CBAM could create US$222bn in cumulative additional costs. According to the research, the first year of CBAM implementation could average at US$7bn-8bn.

S&P has created various scenarios, estimating costs of goods. If EU carbon prices increase but those of other countries do not, CBAM could lead to yearly additional costs of US$16bn$25bn in the first 10 years. 

"Our scenario analysis indicates CBAM could add at at least US$15bn annually to these goods' import values over the next decade, all other factors unchanged," states Terry Ellis, Director, Climate Transition Risk at S&P Global and co-author of the analysis.

"That compares to about US$120bn of annual trade in those goods in the last four years. We estimate EU import prices could increase annually by 2%-3% under our moderate carbon price scenarios. Although these goods, overall, represent less than 1% of GDP in most exporting countries, some sectors could face increasing exposure as supply chains adjust."

EU-based importers will be faced with navigating a more complex procurement landscape, as identifying suppliers with lower emissions becomes a top priority to keeping down extra costs.

Global supply chains will be rerouted with implications for European industries and their international trading partners.