Investments in energy efficiency and lower-carbon energy resources have given American manufacturers a carbon advantage over their competitors—they emit less carbon per dollar of value created. Under the European Union’s (EU) Carbon Border Adjustment Mechanism (CBAM) and similar emerging policies in the United Kingdom, Norway, and Taiwan, they could see this carbon advantage become a competitive advantage—but only if the rules are fair.
With the EU CBAM in its definitive phase, we have an opportunity to check in on how the implementing rules are impacting clean U.S. manufacturers. Early experiences indicate that the regulations may inadvertently disadvantage carbon-efficient American firms and diminish CBAM’s ability to deliver on its stated climate goals.
Two problems stand out:
- CBAM’s available compliance pathways penalize lower-emissions producers.
- CBAM’s methodology to determine embedded emissions creates incentives that can favor higher-emitting production.
CBAM compliance penalizes the producers it is meant to reward
The CBAM assigns importers a charge based on embedded emissions using either shipment-specific data or country-level default values based on the EU’s assumptions of emissions performance. Shipment-specific reporting is intended to let efficient producers demonstrate lower emissions, but the pathway remains theoretical: it requires a full year of emissions data verified by an EU-approved independent third party before it can be used for compliance. With third-party accreditation beginning in September 2026, importers will not be able to leverage verified shipment-specific emissions until the first annual declaration in September 2027. Until then, they will rely on default values.
Defaults hit efficient American firms twice. First, when creating defaults for some U.S.-made products, the European Commission made the choice to assume that all U.S. production relies on the highest-emissions manufacturing pathway available. The burden falls particularly heavily on fertilizer and steel makers, given the clear and demonstrable carbon advantage they have over competitors. Second, to encourage shipment-specific reporting (even though verification is not yet possible), the EU marked up default values for most products 10% for 2026, 20% for 2027, and 30% for 2028 (fertilizer is only marked up 1%).
Until the verification process bears out, producers cannot demonstrate their carbon advantage, and importers are making purchasing decisions based on the doubly punitive assigned default rates. As a consequence, American firms are finding it difficult to close new sales in the EU market despite having lower emissions. Rather than rewarding lower-emissions production, the current system is preventing the market from distinguishing cleaner producers from more carbon-intensive competitors.
These shortcomings may be addressed when the CBAM has a fully functioning verification pathway and when the European Commission reviews and reconsiders default values next year. In the interim, U.S. firms are at a disadvantage.
The CBAM methodology overlooks significant emissions
A second limitation concerns which emissions the CBAM presently values. Products of iron and steel, aluminum, and hydrogen are priced only for their direct emissions—emissions associated with manufacturing, heat, and cooling—not for indirect emissions associated with electricity. This is by design; the CBAM extends the EU’s emissions trading system to imports, and some EU manufacturers receive compensation for costs associated with the price effects of the ETS on electricity. The omission of indirect emissions is particularly significant for aluminum, which requires enormous amounts of electricity in its production process. Across aluminum manufacturing, roughly half the emissions are related to electric power; in smelting (converting inputs to pure aluminum) roughly 80% of emissions are related to consumed electricity. These emissions fall entirely outside CBAM’s current methodology.
The resulting incentive is misaligned with the policy’s objective. Because CBAM excludes indirect emissions, aluminum importers can reduce their CBAM liability by sourcing aluminum with lower direct emissions, even if its overall carbon footprint is higher. For example, the EU assigns the same default value to aluminum imported from the U.S. and Türkiye, even though Türkiye’s electricity grid is approximately 25% more carbon-intensive than the U.S. grid. The U.S. advantage in low-carbon power is entirely obscured.
The EU is transitioning both its ETS and CBAM to cover a broader swath of industrial emissions; future changes to the methodologies may allow U.S. firms to capitalize on their carbon advantage. At present, however, CBAM rules allow some higher-emissions products to out-compete cleaner American production.
Why this matters to U.S. firms
The EU CBAM is a first-of-its-kind policy, and the implementation process will inevitably face challenges. In spite of its intention to reduce the carbon intensity of imports, early implementation is inadvertently benefiting higher-emissions products. The implications for U.S. competitiveness—and for climate—go beyond the EU; other countries developing CBAMs are using the EU regulations as a guide for their own approaches. The risks to American competitiveness cement the case for the ongoing analysis by the National Energy Technology Laboratory (NETL) to measure and compare the emissions intensity of CBAM-covered goods in the U.S. and internationally.
U.S. manufacturers have invested their resources in efficiency, lower-carbon energy sources, and electrification to achieve a distinct carbon advantage across the economy; that carbon advantage should give them a leg up in markets that implement CBAMs. Yet the rules matter and early signs suggest that CBAM implementation guidelines fail to appropriately capture the carbon advantage and work against the EU’s own decarbonization goals. The result for American firms is a cascade of penalties. They bear significant administrative and compliance costs to ship goods to the EU and aren’t—yet—seeing their carbon advantage translate into a competitive advantage. As the U.S. continues its dialogue with the European Commission on CBAM’s implementation, these methodological shortcomings warrant direct, strengthened attention.