EU Carbon Border Adjustment Mechanism: Financial Obligations Commence Amid Proposed Scope Expansion to Include New Downstream Products

The definitive stage of the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM), including financial obligations, commences on 1 January 2026, following the expiration of the transitional three‑year reporting phase. To prepare, the European Commission published on Wednesday eight Implementing Acts covering, among other topics, default values, verification principles, registry rules, authorisation procedures and pricing of CBAM certificates.

In parallel, the Commission proposed a regulation amending the CBAM to increase significantly the scope to cover steel and aluminium intensive derivative products.

Financial Obligation Kicks In

As of 1 January 2026, importers bringing covered goods into the EU will face the full impact of the EU’s CBAM. These importers will not only have to report embedded emissions but will also be required to purchase and surrender CBAM certificates for the embedded carbon in products like steel, aluminium, cement, fertilizers and hydrogen.

Changes to Product Scope

CBAM presently covers six basic upstream materials: cement, fertilisers, iron and steel, aluminium, electricity, and hydrogen (e.g., cement clinker, nitric acid, ferrosilicon and unwrought aluminium). Only a very limited number of downstream products (e.g., screws and bolts) are included presently, and no complex finished goods.

The Commission is proposing to extend CBAM beyond today’s basic materials to include finished and semi‑finished products with a high steel or aluminium content at the border when they enter the EU. This expansion targets downstream goods—items further along the value chain—that are manufactured using steel and aluminium, which are already in CBAM’s scope.

In total, the Commission is proposing to add 180 downstream products. These products reportedly were selected because they combine a high risk of carbon leakage with a high share of steel and/or aluminium in their composition (on average, 79% by content).

Sectors that would be impacted by the proposed changes include machinery, hardware and fabrications, vehicle components, domestic appliances, and construction equipment. Illustratively, the list includes stranded wire, ropes and cables made of more than 95% stainless steel and more complex goods built from several CBAM inputs. For example, washing machines, which typically contain around 60% steel, 5% aluminium and 5% cement.

The following is an indicative list of the new products:

• Motor vehicles for the transport of goods
• Diesel vehicle engines
• Vehicle parts (incl. chassis, bodies, gear boxes, road wheels, suspension systems, radiators, and parts and accessories thereof)
• Industrial robots
• Household washing machines
• Drying machines
• Refrigerators-freezers and parts thereof
• Sawing machines
• Seats with metal frames
• Metal furniture of a kind used in offices
• Other metal furniture containing steel or aluminium
• Prefabricated buildings containing steel or aluminium
• Pneumatic elevators
• Continuous-action elevators and conveyors.

The full product list is available in the annex to the proposed regulation.

In addition, consumer steel and aluminium scrap will be treated as CBAM precursors with emissions counted, while post‑consumer scrap stays excluded to protect circularity.

When Would the Expansion Take Effect

The expansion to downstream products is proposed to apply from 2028, giving traders and authorities time to implement product‑level rules, publish default values and adapt systems.

How Emissions Would Be Counted

For downstream goods, CBAM would attribute emissions only to the precursor materials (steel/aluminium) used, not to downstream fabrication or assembly. For example, if a non‑EU plant stamps car doors from steel sheet, CBAM would cover the embedded emissions in the steel sheet, not the stamping/assembly emissions. Where verified actuals are impracticable for complex assemblies, default values published by the Commission would apply without mark‑ups for these downstream goods.

For small flows, the 50‑tonne de minimis threshold remains. This exemption would exclude around 90% of importers while still keeping ~99% of embedded emissions within CBAM, materially reducing burdens for small- and medium-sized entities (SMEs) and sporadic consignments.

Additional Anit-circumvention Tool

While the current CBAM already provides several anti-circumvention safeguards, including to reducing risks of misclassification and under-declaration of goods, the proposal introduces additional anti‑circumvention provisions to address concerns that these safeguards are insufficient. Targeted additional reporting requirements would apply in specified cases to deter misdeclaration of emission intensity. Moreover, where the Commission finds sufficient evidence of a high risk of abusive practices, it would be empowered to stipulate that actual emissions may only be used when supported by extra documentation demonstrating that the relevant producers have not engaged in abusive practices.

Serious and Unforeseen Circumstances

To enable swift action where inclusion of a good within CBAM leads to serious, unforeseeable harm to the EU internal market, the Commission would be empowered to adopt delegated acts to remove that good from CBAM’s scope.

Fund for Exporters

Despite requests by European industries, the proposal does not include an export rebate mechanism. However, the Commission is proposing a temporary decarbonization fund, designed to reimburse companies for part of the CO₂ costs incurred by exporters as they lose free emission allowances under the European Emissions Trading System (ETS) in 2026 and 2027. Compensation will focus on exporters and be limited to products that are exposed to a particularly high risk of carbon leakage. In addition, the amount of support will depend on how much effort companies make to decarbonize.

Further Future Expansions

The Commission’s Review Report sets out “Step 2” issues for consideration after the 2025 package, including potential:

• Treatment of indirect emissions.
• Inclusion of transport emissions.
• Extensions to additional sectors/precursors (e.g., chemicals, polymers, refinery products).

Future expansions are subject to review of the market situation, feasibility and the legislative process. No final decisions have been made on these elements.

Next Steps

The scope expansion will proceed through the EU’s ordinary legislative procedure, requiring negotiations with, and approval of, the European Parliament and the Council. There is a broad agreement across the political spectrum and EU member states on the overall concept of CBAM and its expansion. However, we expect the specific product list proposed for expansion to be subject to lobbying and negotiations.

We also expect non-EU operators and governments to seek to influence the final outcome. For example, the August EU-US Joint Statement mentions CBAM and the US government will follow this process closely. As the obligation for non-EU operators to purchase CBAM certificates kicks in on 1 January 2026, there is likely to be heighted scrutiny of the CBAM regime by the EU’s trading partners. The Russian Federation has already brought a challenge to the CBAM at the World Trade Organization (WTO). Other EU trading partners could pursue similar actions under the WTO, in their free trade agreements with the EU or in bilateral negotiations.

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