EU Member States Agree to Expand CBAM Carbon Import Tax to Broader Range of Downstream Industrial Products

The European Council has announced an agreement by EU member states on a series of proposed changes to the Carbon Border Adjustment Mechanism, expanding the scope of the carbon import tax to a broader range of downstream products than the European Commission's original proposal and introducing a requirement for annual CBAM reviews to consider further scope expansion. The Council's position, which will form the basis of negotiations with the European Parliament expected to adopt its own position in September, adds a range of metal-intensive industrial, construction, machinery and electrical equipment products including fork lifts, conveyor equipment, machinery parts and electric motor components beyond the 180 products with high carbon leakage risk and high steel or aluminium content that the Commission proposed in December 2025. CBAM entered into force at the beginning of 2026 to prevent carbon leakage by equalising the carbon price paid by EU producers under the EU Emissions Trading System with the cost of carbon embedded in imported goods.

 

The Carbon Leakage Problem CBAM Is Designed to Solve

 

Carbon leakage occurs when companies move production of emissions-intensive goods from jurisdictions with stringent carbon pricing to countries with weaker climate policies, effectively circumventing the environmental and cost incentives that carbon pricing is designed to create. CBAM addresses this by requiring companies importing goods into the EU to purchase CBAM certificates that make up the difference between the carbon price embedded in the production of those goods and the price that EU producers pay under the ETS, levelling the competitive playing field without requiring the EU to lower its own carbon pricing ambition. The mechanism targets basic materials including aluminium, cement, electricity and steel in its current form, but the transitional phase revealed that taxing basic materials while leaving downstream products manufactured from those materials outside the scope creates a structural incentive to shift the value-added processing stages to non-EU locations.

The December 2025 Commission proposal to expand CBAM to downstream products was driven by precisely this feedback from the transitional phase, which identified a pattern in which higher costs for EU steel and aluminium producers were creating competitive advantages for non-EU manufacturers of steel and aluminium-intensive products who could import those finished goods into the EU without facing equivalent carbon costs. The 180 downstream products proposed by the Commission spanning machinery, hardware and fabrications, vehicle components, domestic appliances and construction equipment represent the categories where the combination of high carbon leakage risk and high steel or aluminium content creates the most significant competitive distortion. The Council's position goes further by adding additional metal-intensive industrial and electrical equipment categories that the member states identified as carrying similar leakage risks.

 

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The Council's Expanded Scope and Anti-Circumvention Measures

 

The EU Council's decision to expand the CBAM scope beyond the Commission's proposal reflects member state concerns that a narrowly defined downstream product list would still leave significant leakage opportunities for importers to route production through product categories not covered by the mechanism. The addition of fork lifts, conveyor equipment, machinery parts and electric motor components alongside the Commission's proposed categories closes gaps in coverage that could otherwise become channels for carbon leakage as producers optimise their supply chains around the mechanism's boundaries. The introduction of a requirement for the Commission to review CBAM annually and consider further scope expansion institutionalises a continuous improvement process that prevents the mechanism from becoming obsolete as supply chains evolve in response to the existing coverage.

The Council's position also largely aligns with the Commission's proposed anti-circumvention package, which includes enhanced reporting requirements for better traceability of CBAM goods, measures to address emission intensity misdeclarations and authority for the Commission to tackle evidence-based abuses circumventing CBAM. These procedural and enforcement enhancements address the integrity of the mechanism's operation rather than its scope, ensuring that the carbon pricing signal is applied accurately and consistently rather than being undermined by reporting manipulation or deliberate misclassification of goods. The European Commission welcomed the Council's rapid progress, describing it as demonstrating strong support for CBAM and firm commitment to ensuring it remains effective in advancing the EU's climate objectives and industrial transition.

 

Implications for Global Trade and Carbon Pricing

 

The expansion of CBAM to a broader range of downstream industrial products has significant implications for global trade flows and the competitive dynamics of industrial supply chains serving the European market. Non-EU manufacturers of the newly covered product categories will face additional costs when exporting to the EU if their production processes have higher embedded carbon intensity than EU equivalents, creating financial incentives to decarbonise production even in jurisdictions without domestic carbon pricing. Conversely, manufacturers in countries with robust carbon pricing systems that can demonstrate equivalent carbon costs in their production will face reduced or eliminated CBAM charges, rewarding climate policy ambition at the national level and creating a de facto extension of the EU's carbon pricing signal into trading partner economies.

For EU industrial manufacturers, the expanded CBAM scope provides stronger protection against the competitive disadvantage of operating under the ETS while non-EU competitors face no equivalent carbon cost. This protection is particularly important during the current phase of the EU's industrial decarbonisation agenda, where significant capital investment in cleaner production technologies requires a business case that would be undermined if lower-carbon EU production simply lost market share to higher-carbon imports without carbon cost adjustment. The annual review requirement provides the policy flexibility to maintain CBAM's effectiveness as the industrial landscape evolves and as EU carbon prices change over time.

 

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Outlook for CBAM Negotiations and Implementation

 

The European Parliament's expected adoption of its position in September will set the stage for trilogue negotiations between the Council, Parliament and Commission to finalise the expanded CBAM legislation. The Council's position going further than the Commission's proposal on scope suggests that the final negotiated outcome is likely to result in a more expansive downstream product coverage than the Commission's December 2025 proposal, as both co-legislators appear aligned on the direction of expansion even if they differ on specific product inclusions. The timeline for these negotiations will determine when the expanded CBAM enters into force and when the additional downstream product categories begin generating certificate purchase obligations for importers.

Whether the expanded CBAM can effectively deter carbon leakage across the broader product range will depend on the accuracy of the embedded carbon intensity calculations used to determine certificate requirements, the robustness of the anti-circumvention enforcement framework and the degree to which non-EU trading partners respond to the mechanism through domestic carbon pricing development or supply chain decarbonisation rather than trade friction. The convergence of CBAM expansion, strengthening ETS carbon prices and growing corporate supply chain decarbonisation requirements from CSRD creates a reinforcing set of incentives that are progressively raising the cost of high-carbon industrial production for companies serving the European market, making continued investment in industrial decarbonisation commercially rational regardless of domestic climate policy in the country of production.