In January, the EU became the first place in the world to charge fees on imports based on their carbon emissions. For those of us who favor market‑based approaches to climate policy over prescriptive regulation, this should be cause for celebration.
Instead, the EU’s development and early implementation of the Carbon Border Adjustment Mechanism (CBAM) expose avoidable challenges in standing up a policy of this magnitude. It’s also a reminder of why the United States should be leading in the design and implementation of this new form of trade and environmental policy. If done right, U.S. manufacturers would gain a meaningful competitive advantage thanks to their lower‑emissions production—something the Council has studied closely.
Exporters to the EU are already accumulating liabilities under a program whose final rules remain unsettled nearly five years after the policy was proposed. While the broad contours of the CBAM have been known—covering iron and steel, aluminum, cement, nitrogen‑based fertilizers, hydrogen, and electricity—many of the most consequential details were deferred to implementing regulations. Those regulations were supposed to be released gradually over the past two years. Instead, the European Commission issued a massive tranche of more than 2,000 pages of rules just last month.
Stakeholders are scrambling to understand the implications, and EU officials are exploring major changes and exemptions in response to concerns that should have been foreseen years ago. The program is not irredeemable, but the EU has significant work ahead to restore certainty and ensure the CBAM delivers on its environmental objectives.
As we dig into the new regulations, a few early takeaways are starting to emerge.
1. The default values are set punitively high—especially for U.S. manufacturers.
Some of the default values—the EU’s predetermined estimates of carbon emissions that are applied to imports when reliable, facility‑specific data is unavailable—are set at unjustifiably high levels. For example, the CBAM law states that default values should be based on the average emissions generated by producing that product in the exporting country. But at least some of the default values released in December appear to be based instead on the most emissions-intensive methods of production. This not only contradicts the CBAM legislation; it undermines the policy’s environmental integrity by subjecting relatively low‑emissions products to inflated charges.
Under these defaults, U.S. manufacturers in several covered sectors—whose emissions profile is indisputably among the lowest in the world—would be placed at a competitive disadvantage. That is the opposite of the market signal needed to accelerate global decarbonization.
2. The regulations lack flexibility to recognize and reward distinct production pathways within a facility.
The implementing rules indicate that goods produced through different processes within the same facilityshould be assigned the same embedded emissions, based on a weighted average, unless the producer can demonstrate “valid commercial reasons” for distinguishing between production routes.
This approach slows the adoption of lower‑emissions processes. Allowing producers to use more granular, production‑route‑specific data within existing facilities would accelerate emissions reduction investments.
Moreover, requiring average facility‑level data risks treating lower‑emissions products less favorably than higher‑emissions ones. That conflicts with the EU’s stated intent to mirror ETS pricing and raises questions under international non‑discrimination rules. The EU should clarify that responding to the growing market for low‑carbon products is a valid commercial objective and allow production‑route‑specific emissions data when it can be credibly demonstrated with adequate safeguards in place to prevent gaming the system.
3. The EU is reconsidering which sectors are covered, undermining business certainty.
For years, the scope of the CBAM was one of the few details that seemed stable and was clear to manufacturers. That perceived certainty helped catalyze tens of billions of dollars in decarbonization investments globally—exactly the kind of market response policymakers hoped for.
Now, only days into implementation, serious discussions are underway in Brussels about exempting certain currently covered sectors. There may be good policy reasons for including or excluding a given sector—but those determinations should be made as the program is being developed. Doing so after the program is operational sets a troubling precedent. It effectively penalizes companies that invested in lower-emissions production methods in anticipation of the policy. It also creates hesitation, or outright delays, for future capital investments if coverage is seen as negotiable.
A pivotal moment for global climate‑aligned trade
With Norway and the United Kingdom preparing to implement CBAMs in 2027, and major industrial economies including Australia, Japan, South Korea, and Taiwan considering their own versions, we are still in the early days of a new era in which traded goods are priced for their emissions.
The EU deserves credit for moving first. But first movers carry an outsized responsibility to get the design right. The decisions Brussels makes in the coming weeks and months will shape not only the success of its own policy but also the precedent it sets for jurisdictions that follow.
From where we sit in the United States, this moment underscores something else: we should be leading in the development of these policies—not reacting to others’ designs. A well‑crafted U.S. approach would strengthen our manufacturers and help set global standards that reward cleaner production rather than penalize it.