• The EU plans to expand its Carbon Border Adjustment Mechanism to cover car parts, household appliances, and downstream steel and aluminium products to close carbon leakage loopholes.
• Draft proposals show 25% of CBAM revenues would be recycled to support EU manufacturers investing in decarbonization between 2028 and 2029.
• The levy is expected to generate €2.1bn ($2.47bn) by 2030, intensifying trade tensions with major exporting economies while testing WTO boundaries.
Brussels is preparing a significant expansion of its carbon border levy, moving to capture emissions embedded deeper in industrial supply chains as the bloc seeks to prevent manufacturers from sidestepping climate costs.
Draft European Commission documents seen by Reuters show plans to widen the Carbon Border Adjustment Mechanism, or CBAM, to include car parts, refrigerators, washing machines, construction products, and a range of industrial equipment. The move would substantially broaden a policy that from January will begin charging importers for emissions embedded in steel, cement, aluminium, fertilisers, electricity, and hydrogen entering the EU market.
Closing Carbon Leakage Gaps
The Commission’s rationale is explicit. “The proposal will extend the scope of the Carbon Border Adjustment Mechanism to address the risk of carbon leakage for products further down the value chain of the steel and aluminium products currently in CBAM’s scope,” the draft proposal states.
Carbon leakage refers to the risk that production shifts outside the EU to jurisdictions with weaker climate rules, undermining both industrial competitiveness and emissions reduction goals. According to the draft, the newly targeted goods were selected based on their exposure to that risk, particularly where steel and aluminium inputs account for a large share of embedded emissions.
Construction products used in bridges, power transformers and cables, as well as farming machinery, are also listed for inclusion, signalling that the EU is willing to extend CBAM well beyond raw materials into manufactured goods that sit at the heart of industrial supply chains.
A Trade Tool With Climate Ambitions
CBAM is designed to align the cost of imported goods with the EU’s internal carbon price, shielding domestic producers from cheaper, high-emission imports while creating incentives for foreign manufacturers to decarbonise.
That ambition has already triggered resistance. Trading partners including China, India, and South Africa have criticised the policy as discriminatory, arguing it places disproportionate pressure on emerging economies whose industries face higher transition costs and more limited access to clean technologies.
The expansion outlined in the draft is likely to sharpen those tensions, particularly as more consumer-facing products become subject to border carbon charges.
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Revenue Recycling and Industrial Support
A second draft Commission proposal, also seen by Reuters, details how CBAM revenues could be used to cushion the policy’s domestic impact. The Commission plans to allocate 25% of CBAM revenues to compensate European manufacturers over 2028 and 2029 for higher costs linked to the carbon levy on imports.
The EU expects the carbon border tariff to generate €2.1bn ($2.47bn) in revenue by 2030, a figure that places CBAM among the bloc’s more material climate-linked fiscal instruments.
Access to the support would be conditional. Industries would only qualify if they are investing in reducing the carbon footprint of their manufacturing, according to the draft. The design reflects mounting pressure from European industry groups that argue CBAM must be paired with reinvestment to preserve competitiveness during the transition.
WTO Lines and Export Concerns
The proposal stops short of explicitly compensating exporters, a politically sensitive issue in Brussels. Some EU officials have warned that direct export rebates or subsidies could violate World Trade Organization rules, opening the bloc to legal challenges.
While the draft responds to industry calls for relief, it avoids specifying that funds would directly target exporters competing in markets where rivals do not face carbon pricing. The EU has consistently maintained that CBAM is fully WTO-compliant, but the expanding scope and revenue recycling mechanisms are likely to face increased scrutiny.
A Commission spokesperson declined to comment on the draft proposals, noting they could still change before formal publication.
What Executives and Investors Should Watch
For C-suite leaders and investors, the direction of travel is clear. CBAM is evolving from a narrow climate policy into a broader industrial and trade instrument with real balance-sheet implications. Companies with exposure to EU markets, whether as exporters, importers, or supply chain partners, will need to reassess product design, sourcing strategies, and capital investment plans.
At a global level, the expansion reinforces the EU’s intent to use market access as leverage in driving decarbonization, even as it navigates geopolitical and legal constraints. As CBAM moves downstream, the line between climate policy and industrial strategy is becoming increasingly difficult to separate, with consequences that will extend well beyond Europe’s borders.
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