Europe’s CBAM lacks sufficient incentives to comply: panelists

The European Union's carbon border adjustment mechanism offers insufficient incentives to comply, while key legislation and methodologies are still pending publication, with three months before the regulation enters its definitive phase, panelists said at Energy Trading Week Europe in London late Sept. 26.

"You might argue that it's really not acceptable to have pieces of legislation that are defining the next year and are defining trading strategies to be published a few months before the go-live of a policy," said Federico Barbieri, policy coordinator for electricity and carbon markets at Energy Traders Europe.

Panelists agreed that CBAM's 'carrot and stick' approach lacked sufficient incentives, while methodological vagueness created problems for importers from countries outside the EU.

The EU's CBAM aims to level the playing field for companies in the bloc, which have to compete with exporting countries that implement no tax or compliance market for emissions.

Carrots and sticks

CBAM is expected to apply to emission-heavy goods, including cement, iron, steel, aluminum, fertilizers and hydrogen. Electricity will also be affected when the definitive period starts in January 2026. But the EU has not published a methodology that would allow for efficient differentiation between thermal and renewable generation sources.

The issue of power imports would disproportionately impact countries that export high amounts of electricity to the bloc, such as the UK and the Balkans.

"It's a huge concern about how CBAM is being implemented right now, especially from the Western Balkans point of view," said Ezgi Ozkirim, energy regulation and compliance manager and CBAM coordinator at GEN-I.

CBAM cost adjustments will be based on the average historical carbon intensity since pinpointing imported electrons is difficult. This approach raises concerns that costs will not be charged accurately for renewable energy production.

"For now, we don't see any fair price methodology being implemented. So, I don't see any carrots at the moment. What we see is only sticks," said Ozkirim.

Other panelists echoed these concerns, highlighting the impact CBAM, in its current format, will have on businesses.

"The problem is that the stick is very big, and it will hurt a lot of countries, a lot of business, a lot of consumers, and the carrot is not big enough to incentivize a quick adoption," said Federico Barbieri.

Linking markets

Current regulation allows for CBAM exemptions for linked compliance systems. The UK and the EU agreed earlier in May to work toward this end, with consultations and a timeline still pending.

"The carrot should be linking," said Paul Dawson, head of regulatory affairs at RWE Supply and Trading. "The will is there, both on the UK and the EU side, to pursue linking, but there are significant challenges."

Hurdles remain because connecting emissions trading systems requires agreement on several regulations. These include sector coverage, the new ETS for buildings and road transport (known as ETS2), international offsets, as well as reduction credits.

"The carrot is greater liquidity, reducing the cost of managing that carbon risk, expanding the sectors, the efficiency using the carbon price to steer what you do next," said Dawson.

"We don't want two systems overlapping where both compliance entities have to have two strategies when it comes to pricing, reporting and monitoring," said Luke Hanley, carbon emissions analyst at SmartestEnergy.

From a market perspective, CBAM could lead to a rise in liquidity for EU Allowances down the line, since CBAM certificates will not be tradable, and pricing will be based on EUA quarterly averages in the first year of coverage, moving onto weekly averages during subsequent years.

"There is likely to be a lot of hedging through EUAs as the price is going to be very matched to CBAM," said Luke Hanley. "You might see a lot of entities coming to the market through hedging purposes to protect price movements in the future and doing that through EUA."

Platts, part of S&P Global Energy, assessed the EU Allowance for the nearest December 2025 delivery at Eur75.92/mtCO2e ($88.93/mtCO2e) on Sept. 26. On the same day, the weekly average for nearest-December EUAs was assessed at Eur76.09/mtCO2e.