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EU Carbon Border Adjustment Mechanism to raise $80B per year by 2040

This research was authored by S&P Global Commodity Insights.

Published: Feb. 24, 2023


The EU has agreed to implement a new Carbon Border Adjustment Mechanism (CBAM) as a long-term alternative to the issuance of EU Emissions Trading System free allocations to covered entities.

Europe’s aim is to prompt its industry to decarbonize without being undercut by imports facing no carbon cost.

From 2026, EU importers of power, iron and steel, cement, fertilizer, aluminum, hydrogen, and some polymers will be required to surrender CBAM certificates (equivalent to the prevailing EU carbon price) to match emissions associated with their production. Discounts may be provided where carbon prices in host jurisdictions are already paid.

Using S&P Global Trade Atlas data and carbon price outlooks from our Energy and Climate Scenario service, we calculate the EU CBAM could rase more than US$80 billion per year by 2040. We expect this will prompt jurisdictions to consider domestic carbon pricing policies to mitigate their exposure in the long term.


Michael Evans | S&P Global Commodity Insights, Quantitative Senior Analyst
Roman Kramarchuk | S&P Global Commodity Insights, Head of Future Energy Outlooks
Jamie Dorner | S&P Global Commodity Insights, Quantitative Analyst
Matthew Williams | S&P Global Commodity Insights, Energy Policy Analyst
Sara Giordano | S&P Global Commodity Insights, Principal Research Analyst
Xiaonan Feng | S&P Global Commodity Insights, Senior Research Analyst
Yuejia Peng | S&P Global Commodity Insights, Research and Analysis Associate Director



EU policymakers agree on final design of EU CBAM; monitoring report and verification of emissions to commence from Oct. 1, 2023

The EU has agreed on the design of a new Carbon Border Adjustment Mechanism (CBAM) as a long-term replacement to EU Emissions Trading System (ETS) free allocations to industrial entities covered under that cap-and-trade program. Importers of energy-intensive materials or products to the EU will need to surrender certificates to match emissions from their production. Producers from countries where there is a carbon price will pay only the difference between the EU and their cost of carbon. Importers of power, iron and steel, cement, fertilizer, aluminum, hydrogen, some polymers, and a few sub-products of iron and steel will need to buy certificates to match their emissions. CBAM certificates will be required for direct emissions and indirect emissions; however, clarity over how the latter will apply to selected products remains subject to further technical details to be provided by the European Commission.

Negotiators have agreed that the CBAM will initially cover iron and steel, cement, aluminum, fertilizers and some chemicals, and electricity, as originally proposed by the Commission, and will also be extended to hydrogen, indirect emissions (under certain conditions), and selected downstream products, such as screws and bolts and similar products of iron or steel, following negotiations with the European Parliament from the start. Refined products, such as oil/petroleum products and LNG, were considered but were not covered within the initial scope of the CBAM.

Negotiators have agreed the European Commission will report on the effectiveness of the CBAM before the end of 2027, allowing for possible further sectoral scope expansion in the future.

The methodology of the EU CBAM will categorize products into "simple goods," meaning goods produced by materials and fuels that have zero embedded emissions, and "complex goods," meaning goods other than simple goods, where embedded emissions in materials and fuels used in production will also be covered by the CBAM. To calculate embedded emissions (within selected goods), the EU describes a specific embedded emissions methodology in the legislation, with the final details expected to be released following approval of the measure by the European Council and European Parliament in the coming months. To determine CO2 emissions from electricity, a CO2 emissions factor will be determined using CO2 emissions data from the electricity sector, divided by the gross electricity generation based on fossil fuels in the relevant geographic area. Where actual emissions cannot be adequately determined by the authorized CBAM declarant, default values shall be used, set at the average emission intensity of the exporting country increased by a "proportionately designed mark up." Should reliable data not be available for a specific geography, average emission intensities of the worst performing EU ETS installations for that type of good shall be used instead; previous expectations of this were around 10%, but the final value will be subject to future implementing acts. These details set the basis for our initial cut of analysis — where we have applied global average carbon intensity benchmarks to goods to determine emissions volumes covered by the EU CBAM.  Refinements of our calculations will follow with additional detail on regional emissions intensities in due course. 

Reporting obligations for the CBAM will commence from Oct.1, 2023, with the introduction of obligations for importers to purchase CBAM certificates commencing from 2026, increasing to 100% of emissions by 2034. Equivalent EU ETS free allocations issued to the CBAM-covered sectors in the EU market will be phased out over the same period.

CBAM obligation phase in timeline











CBAM obligation (% of reported emissions)










Equivalent EU ETS free allocation (for sectors participating under the CBAM)











Impacts of EU CBAM to differ by country, based on carbon price levels and CO2 intensity of production

Canada, South Africa, Brazil and Turkey lead CBAM-covered EU trade, forecast at more than 40% of total exports to the EU between 2026–2040

The EU CBAM will have a global impact, with the EU accounting for around 16% of total global imports in 2021 (all products)[1]. The US, Russia, the UK and Turkey emerged as key countries that collectively accounted for nearly 30% of value of EU imports in 2021. Levels of exported goods from Russia have since declined significantly following the Russian invasion of Ukraine and therefore fall out of the most affected countries, on a volume of CBAM-covered goods and volume of CBAM-covered emissions between 2026–2040 from our modeling.


In this analysis, we have calculated using our Global Trade Atlas[2] model forecast CO2 emissions covered by the EU CBAM between 2026 and 2040. We also determined the CO2 costs of the EU CBAM between 2026–2040 using draft explicit domestic carbon price forecasts from our Energy and Climate Scenarios service[3]. Our analysis focuses on key CBAM-covered products exported to the EU market, as a proxy for future CBAM obligations[4]

Our country modeling shows Turkey, Brazil, South Africa and Canada are expected to have a higher volume of total CBAM exports between 2026–2040 to the EU market (by metric ton) than the US, mainland China and India. Although Turkey is forecast to export the second-most CBAM-covered products to the EU market (by tonnage) between 2026–2040, these exports comprise a larger share of cement exports, with a lower globally averaged CO2/metric ton footprint.  Consequently, Turkey has a smaller volume of CBAM-covered emissions in our forecasts than Brazil and South Africa.

By sector, our modeling calculates that emissions from iron and steel products could account for more than 75% of CBAM obligations as the sector currently has one of the highest global emission intensities by metric ton of product. There are wide variations in emissions intensity of production of each product; for this analysis we have taken, where appropriate, global average emission intensities to provide a comparable analysis by volume of export to the EU market in order to determine CBAM exposure size. As noted earlier, for CBAM products from geographies where emissions cannot be measured, the EU plans to use a benchmark derived from a certain percentage of the most polluting participants (of that product) in the EU market. This percentage is currently undetermined in the draft regulations published Dec. 14, 2022, but was expected to be around 10% based on previous negotiating positions. It currently remains unclear how this might apply in respect of indirect emissions which will also be in scope for selected products. We have weighted our analysis to consider the average tCO2e by EU production and associated free allocation benchmarks currently employed under the EU ETS for industrial participants.

Of all sectors reviewed in this analysis, we identify global carbon intensities of chemical and fertilizer production as sectors with the highest average CO2/metric ton intensity — with research estimates varying depending on method of ammonia production. Our research identifies a carbon intensity of 2.1tCO2/ton ammonia produced in the US[1] but more than 3tCO2/ton from coal gasification production (common in China)[2], with a global value of 2.7tCO2/ton production reported by the Ammonia Energy Association.[3],[4] Depending on the age of the plant, this can increase to around 5tCO2/ton ammonia, according to S&P Global Commodity Insights research. For our modeling of fertilizer production, which will be included in the CBAM from 2026, we have taken the more conservative average of 2.1tCO2e as CO2 emitted will change depending on whether the ammonia is produced using coal, natural gas, naphtha or oil as a feedstock. Given the spread of carbon intensities for ammonia production by country, one of the possible responses to the EU CBAM includes countries opting to reduce the emissions intensity of products, including ammonia, to reduce overall CBAM exposure. We calculate that 100% CBAM certificate costs from 2034 could add around 30% to the dollar-per-metric ton ammonia price in countries that supply the most ammonia to the EU market — Russia, Algeria, and Trinidad and Tobago — meaning such products with the highest carbon intensities currently are most likely to be subjected to higher emission intensity reduction targets in their host countries in the longer term.

Overall, emissions coverage of the EU CBAM certificate price could reach around 2.5% of global emissions from products destined to reach the EU market by 2040. In our view, this demonstrates the potential value of the EU CBAM in driving "global" carbon pricing and incentivizing decarbonization through reducing emission intensity of production of CBAM goods in the highest-polluting economies to reduce the costs paid to the EU Commission to trade these goods into the EU market. However, as explored below, this is not the only response possible to the EU CBAM, and we expect this will depend significantly on geography and CBAM cost exposure. 

EU CBAM carbon cost can be mitigated by carbon price in host country; UK forecast as only country to avoid CBAM charge

The EU CBAM has been designed with the potential to accept explicit carbon costs paid in the host territory as a "contributing cost" toward CBAM certificate obligations, essentially requiring importers to demonstrate carbon prices already paid for production of goods and settling the difference to the costs paid by EU industry under the EU ETS.

For most countries, the phase in of CBAM obligations — along with expectations of domestic carbon prices as a percentage of the EU ETS market price — will delay significant cost implications for importers to the EU until 2029 as annual CBAM charge obligations increase. Exceptions include Canada, where we forecast a stronger price signal that could delay EU CBAM impacts until 2032–2033. Canada currently implements a backstop federal-level carbon tax and is expected to see the strongest carbon price growth in the near term (C$15/year to 2030), rising more quickly than expectations for the European Union Allowance (EUA) price between 2021–2030. By 2034 however, we forecast stronger demand for EUAs from industrial and transport (aviation and maritime) sectors, which will significantly increase EUA carbon prices by 2040.

The UK is the only country expected to have a long-term carbon price — under the UK Emissions Trading System + Carbon Price Support, which applies to electricity generation — that remains at levels above the EU ETS price. We continue to expect strong price parity between these markets in the long term owing to the geographic proximity of the two carbon markets and hedging observed across these markets by participants in the oil and gas and aviation transport sectors, which manage obligations covered by both jurisdictions. The UK maintained a 15% premium to EUAs in 2022, but we forecast this premium is likely to narrow as liquidity in the UK market develops.

Further clarity is expected from the EU over which existing carbon pricing mechanisms will be accepted toward CBAM obligations. This is likely to be disclosed in final publication of the regulations later this year following approval by the European Council and European Parliament. Our expectation is that ETSs will generally be accepted, such as the UK ETS, alongside selected carbon taxes that apply an explicit carbon price to the production of CBAM-covered goods. However, whether the EU will recognize regional carbon pricing schemes, as well as national schemes, remains unclear. We consider that it is possible that such schemes are recognized, subject to proof that the carbon cost has been paid against the production of the good in the jurisdiction where the carbon price applies. Where free allocations or tax exemptions are issued to participants under current carbon pricing initiatives, it is unclear how the EU CBAM charge will be adjusted to reflect the "true" cost of carbon paid toward the production of a particular good.[1] Implicit carbon pricing (as part of fuel duty taxation) is unlikely to be accepted toward reducing EU CBAM obligations, along with voluntary carbon market initiatives (pairing the production with the purchase of carbon credits), where there remain ongoing concerns over the integrity of the emission reductions achieved under select project/credit types.

Overall, our modeling of future EUA carbon prices and exposed CBAM sectors covered in this analysis calculate that the EU CBAM could raise more than US$80 billion per annum to the EU Commission from 2039, accounting for existing carbon pricing mechanisms in force in key jurisdictions. The top 10 countries by volume of CBAM goods to the EU market between 2026–2040 — Canada, Brazil, South Africa, Turkey, mainland China, the US, the UK, India, South Korea and Egypt — represent more than 68% of total export volume by tonnage of product and more than 70% of total CO2 emissions covered by CBAM obligations during this period. As a result, this group of countries will be liable for nearly 70% of total CBAM costs, despite existing carbon prices already operating in six of the 10 countries under known or implemented mechanisms recorded at of the end of 2022.

Individually, we assess Turkey and Brazil to be among the countries exposed to the highest total CBAM costs between 2026–2040, as countries currently without a carbon pricing mechanism in force, and with a high percentage of iron and steel exports to the EU market. However, South Africa, despite operating a carbon tax since 2019, is forecast to face the highest percentage of CBAM cost obligations by 2040 as the current carbon tax design in the country features a high level of tax exemptions issued to participants, and export volumes of CBAM products to the EU are forecast under our Global Trade Atlas to increase by 40% between 2026–2040. Accounting for differences in the carbon intensity of CBAM products globally, China has the potential to see its CBAM exposure rise from our assessment in this analysis, given a higher carbon intensity production of ammonia and iron and steel products compared to the global average owing to China’s dependency on coal power generation, which from our Global Integrated Energy Model forecasts more than 70% of total emissions from coal between 2026–2040. Although the China national ETS only applies to power generation at present, we expect this scheme will expand ahead of CBAM obligations to include heavy industry and financial participants, which are expected to increase the carbon price signal in the country and keep China's total CBAM cost exposure below levels forecast in Brazil, South Africa, and Turkey. 

Next steps: EU to provide clarification over methodology (recognition of existing CO2 costs, measurement, reporting and verification for indirect emissions) following approvals in European Parliament and Council; other governments to consider response

To implement the CBAM, the final agreed-upon text is subject to approval by the European Parliament and European Council. The European Parliament gave its approval to the file in February 2022, and European Council approval is expected before the end of the first quarter of 2023. This is expected to be a routine procedure, and we do not anticipate any delays, with reporting obligations due to commence from Oct. 1, 2023.

For importers subject to future CBAM obligations, preparations will begin for the measurement, reporting and verification (MRV) data collection period that is expected to run between Oct. 1, 2023, and Dec. 31, 2025. The EU CBAM is designed to apply to direct emissions of greenhouse gases emitted during the production process of the imported products but also to indirect emissions from selected goods where the methodology for determining these emissions remains unclear. Participants therefore await final publication of the methodology for calculating emission rates, which will be set out in the annex to the regulation; a draft copy of the regulation was released Dec, 14, 2022, following the negotiations and is available here. Clarity on how emissions values will be determined for EU "default values" will be significant in determining final exposure of charges to importers under the mechanism. The EU proposed that these values (for use on CBAM-covered products other than electricity) will be determined using the average emission intensity of each exporting country and increased "proportionately." Default values for electricity will be set at the CO2 emission factors in the third country based on best data available to the European Commission.

Importers and governments will also be keeping a close observation on how the EU plans to recognize any existing carbon prices paid toward the production of CBAM-covered goods; this will also be set out in the final CBAM regulations. Our current expectation is that compliance carbon markets and carbon taxation policies may be recognized while markets that have been developed from the global voluntary carbon market — such as credit exchanges emerging in Southeast Asia and plans for a carbon market in India based on existing Perform Achieve and Trade credits and renewable energy credits — are less likely to be considered acceptable as contributing carbon costs.

We expect government responses to the CBAM will differ by geography and by cost exposure to the mechanism. Overall, we expect that less-developed countries will pursue exemptions to the CBAM or even dispute the measure at the World Trade Organization level. While legislation of the EU CBAM has made clear plans to use collected revenue toward the decarbonization of manufacturing industries in less-developed countries, some countries have already vocalized concern over how they will be impacted from the EU CBAM and the signal it sends for the potential of future "carbon clubs," where jurisdictions provide favorable trading opportunities based on the harmonization of climate action and, in some cases, carbon market prices. The UK, US and Canada are all separately considering similar carbon leakage mechanisms, with many either in public consultation or due to be, such as the UK’s consultation expected in 2023, or under political discussion, such as the Clean Competition Act in the US. Maintaining key political relationships will be of importance to EU policymakers; the US and EU have already held dialogue over the potential for exemptions based on shared climate objectives; we expect pressure for this to increase as CBAM compliance obligations become better understood following the reporting phase. 

Lastly, EU industry is not immune to the impacts of the shift to the CBAM, and preparations by EU businesses are expected in the coming years to prepare for future EU ETS carbon price exposure. Free allocations to sectors covered by the CBAM regulation will be phased out in line with the phase-in of CBAM obligations importers. We reflect the rollout of CBAM obligations in our EU ETS market balances by reducing EU ETS free allocations to CBAM-participating sectors from 2026–2034. In our current modeling, we do not make any adjustments in our balances for downstream products, hydrogen, polymers and indirect emissions, pending further details of how the CBAM MRV methodology will apply in respect of these products.

Based on our calculations of reduced free allocations to these sectors (that we calculate account for more than 75% of total free allocations issued under the EU ETS in 2022), total EU ETS free allocations will be reduced more than 73% by 2030 and by 660 million metric tons of CO2 between 2022–2030. This we expect will add bullish pressure on EUA prices toward 2030 as EU ETS free allocations are nearly halved to participating sectors, with the trajectory of free allocation phase-out increasing between 2028–2030 while the EU ETS cap declines by 17% over the same period and more than 40% between 2021–2030. Despite potential pressure arising from some EU industries, particularly regarding the role of an export rebate for EU businesses to claim when exporting products to territories operating without a carbon price, we continue to assume that a CBAM will become operational in line with the agreed legislative text in Fit for 55 negotiations in December 2022.

[1] EU position in world trade (europa.eu)

[2] The S&P Global Trade Atlas provides a comprehensive view of global trade data in every commodity at the most detailed level of harmonized system code (HS code). The Global Trade Atlas encompasses dependable monthly bilateral trade data for 113 countries and annual data for close to 200 countries, based on official imports and exports statistics. We have used forecast data from the Global Trade Atlas to model future volumes of EU CBAM- covered products imported into the EU market, as a proxy for determining EU CBAM emissions and cost exposure.

[3] Draft carbon prices in this analysis are valid February 2023. Carbon prices are converted to USD and are taken as prices from our Inflections scenario modelling. All prices used in this analysis assume national level carbon pricing instruments for jurisdictions that do not apply national level carbon prices (e.g., Japan, US), an average of available carbon prices in the country are used. All carbon prices are subject to further updates. Carbon prices reflect either emission trading systems or carbon taxes.

[4] Note that these calculations assume a global emissions intensity value per sector (and are not adjusted or weighted by country). Not all CBAM covered products are currently covered by our modelling and analysis, but we will update our assumptions as emissions levels captured under the CBAM become clear within the transitional phase between October 1, 2023, and 2026.

[5] US Natural Gas Weekly Update (eia.gov)

[6] Measuring and Reporting Fertilizer Emissions: https://www.fertilizer.org/images/Library_Downloads/2018_IFA_Measuring_and_Reporting_Fertilizer_Emissions.pdf

[7] Life-cycle analysis of green ammonia and its application as fertilizer building block – Ammonia Energy Association

[8] Broader chemical sector inclusion in the CBAM is currently limited as MRV methodologies for organic chemicals is technically challenging and therefore requires more time to determine an accurate emission intensity per ton. The EU Commission will review CBAM before 2026, when a decision on whether chemical production will be covered by CBAM obligations will be made. If expanded to more chemical products, we expect the sector to account for around a quarter of CBAM obligations between 2026-2040, while fertilizers make up 9% over the same period.

[9] Draft carbon prices used in this report (under our Energy and Climate Scenarios service) include assumptions regarding free allocations and tax exemptions issued to participants. However, the EU methodology for capturing these allocations to determine EU CBAM cost obligations currently remains unclear. Therefore, we do not make any specific determinations of this in this analysis, and EU CBAM cost values used in this report are subject to change.