How CBAM affects metals trade

Metals moving through EU borders are now under the spotlight. Before an imported cargo of aluminum or steel arrives into the EU, it’s already generated a significant carbon footprint.

The EU’s new Carbon Border Adjustment Mechanism (CBAM) mandates importers to account for and pay a price on these emissions – just as they would for EU-produced goods under the EU Emissions Trading System.

Products covered under EU CBAM for the steel and aluminum sectors

To help meet its legally-binding Fit for 55 climate goals, the European Commission has focused on some of the most carbon-intensive industries in the initial CBAM regulation, including steel and aluminum; steel emissions and aluminum emissions account for around 12% of global emissions combined. 

CBAM covers various forms of these metals used in construction, manufacturing and consumer goods.

Aluminum products covered by EU CBAM

Unwrought aluminum, powders, flakes, bars, rods, profiles, wire, plates, sheets, strip, foil, tubes, pipes, and several other aluminum products are included in the EU CBAM.

• Check the full list of CBAM aluminum CN codes to establish whether your products are covered.

Iron and steel products covered by EU CBAM

The CBAM regulation covers a wide array of steel products, from raw materials like agglomerated iron ores and concentrates to primary forms such as pig iron and spiegeleisen, and extends through a spectrum of steel forms including ferro-alloys, semi-finished products, flat-rolled products, bars, rods, and structural shapes. This includes both alloy and non-alloy steel in various forms.

The regulation has deep coverage of the steel production and trade lifecycle, from initial extraction and processing to finished goods.

• Check whether your product is included in the CBAM’s list of steel CN codes. 

Steel and aluminum products excluded from EU CBAM

A good is only covered by CBAM if it is relatively simple. It can’t be too processed or complicated.

For example, in the case of car manufacturers, while most of a car is made out of steel or aluminum, the only products automakers might purchase that fall under CBAM are fasteners, nuts and bolts, and sheets. Everything else (such as a car body or door) is considered too complicated, at least for the first phase of CBAM's implementation.

How will CBAM affect the steel and aluminum industry?

Steel and aluminum supply chains wrap around the world in complex ways. The impact of the EU CBAM will be felt throughout.

In the short term, CBAM is making customs compliance more complex, as importers and installations navigate new rules and as the European Commission itself experiences teething errors in CBAM implementation. 

CBAM is also a physical and logistical challenge; after the transitional period, importers may not be allowed to import CBAM-covered steel and aluminum products into the EU if they’re not compliant with the carbon reporting and CBAM certificate-purchasing rules. 

Most of all – and this is the EU’s primary intention – CBAM will impact the way in which carbon emissions accounting and reporting is embedded into business operations, supplier relations and procurement in the steel and aluminum sectors. By putting a price on these emissions, CBAM aims to drive transparency and decarbonization towards global climate goals, in a way that carbon regulations applying to home-made goods can’t do alone.

Impacts of CBAM on steel and aluminum importers

Importers of steel and aluminum ('CBAM declarants’) now have complex new compliance challenges. The first CBAM report (January 31st 2024)  demonstrated how CBAM is not just a customs issue, nor just a steel and aluminum emissions issue, but requires the involvement of sustainability, finance, tax and procurement teams too. 

Compliance starts with quarterly CBAM reports of the emissions of consignments, requiring importers to:

• Track every steel and aluminum import that includes CBAM-covered products;
• Report emissions for those products, using the European Commission’s default values for the first three reports (January 31^st, April 30^th, July 31^st 2024), then primary emissions data from suppliers (from October 31^st 2024 onwards);
• Report additional data about their steel and aluminum suppliers (including production route information and carbon price due in the jurisdiction of origin).

From 2026, the EU CBAM will also impact the cost of buying, importing and trading aluminum and steel through a certificate-purchasing scheme. 

Navigating the responsibilities and ownership of CBAM is so far one of the biggest challenges – within an importer’s business, but also between importers and their indirect customs representatives and suppliers. How steel and aluminum importers reduce this friction and build strong partnerships, especially with suppliers, will determine whether they make a success out of CBAM for the long term. CBAM reports won’t be compliant from October 2024 if suppliers don’t provide importers with emissions data calculated using the correct methodology.

Importers (not suppliers) will face penalties for non-compliance, of 10-50 EUR per tonne of non-reported emissions. This means importers must engage their steel and aluminum suppliers now to make sure they get this emissions data in time.

Impacts of CBAM on steel and aluminum manufacturers (installations)

Steel and aluminum installations affected by CBAM are in a world-first situation. A carbon regulation in a jurisdiction that’s not their own is suddenly requiring them to measure and report emissions. 

Non-EU metals manufacturers are receiving mounting requests from customers to:

• Start real-time tracking their installation emissions ASAP with a 12-month monitoring period using EU-approved methodologies;
• Include both direct and indirect emissions during the transitional period;
• Communicate emissions to customers ASAP for each quarterly report.

How will CBAM impact the cost of aluminum and steel?

The EU’s CBAM regulation aims to ensure that the environmental cost of emissions is reflected in the price of carbon-intensive goods.

Here’s where the CBAM’s alignment with the EU’s Emissions Trading System is particularly important. Pre-CBAM, EU products remained competitive compared to imported products via a mechanism known as free allocations. These free allocations are set to be phased out. Under the same timeline, CBAM’s carbon pricing will be phased in.

Will metal production move to avoid CBAM?

As outlined above, certain complicated goods that contain steel and aluminum are initially excluded from CBAM. This might prompt a shift in production of these goods to outside the EU so companies can import them without paying the CBAM carbon price – reminiscent of how some companies use transfer pricing to avoid tax.

However, the European Commission is undoubtedly aware of these risks, and it knows the potential loopholes that need to be closed. They’ve indicated that more complex goods will be covered by the regulation in the future.

Product Carbon Footprints versus EU CBAM for steel and aluminum

Importers will likely find that a few of their metals producers are already measuring their emissions in some way. They might be reporting corporate emissions across Scopes 1, 2 and 3 or undertaking emissions audits at a factory level. Others may already be sharing Product Carbon Footprints (PCFs) with customers.

Like a PCF, CBAM’s scope is also focused on quantifying the emissions of a product during its lifecycle (as opposed to emissions at a company level or factory level). However, to comply with CBAM, emissions need to be measured according to a CBAM-approved methodology, which differs from standard PCFs.

• Need support measuring steel and aluminum emissions for CBAM and PCFs? Book a call with CarbonChain's experts.

How are trade partners reacting to CBAM?

The influence of EU CBAM on global carbon pricing schemes 

It’s not just EU importers who could see themselves impacted by the carbon border adjustment mechanisms. 

The UK is following suit with its own CBAM from 2027, while other jurisdictions like Canada and India are reviewing their own carbon tax systems and trade agreements in light of the cost and regulatory pressures the EU’s CBAM will impose on their industries. 

For instance, the tabled US Foreign Pollution Fee Act would set up a fee on certain imported products with a higher “pollution intensity” than similar goods produced in the US.  

In a way, the EU CBAM creates an incentive for other jurisdictions to develop their own Emissions Trading System. Because a carbon price only needs to be paid under CBAM if no carbon price was due in the country of origin (or if there’s a difference between those two prices), countries could capture the coming CBAM carbon price themselves by creating their own Emissions Trading System.

Challenges of the CBAM for trade partners

Some trade partners, including China, have raised concerns about the EU's CBAM, viewing it as a unilateral move that could disrupt global trade dynamics and disadvantage certain countries by raising export costs; they could potentially challenge the EU’s policy at the World Trade Organization (WTO).

What CBAM means for aluminum trade

The anticipation of carbon pricing is driving importers to evaluate the cost of their suppliers under the CBAM certificate mechanism; if these costs are passed down to suppliers, or if customers start looking for lower-carbon suppliers, this could drive switches to less carbon-intensive aluminum production practices. 

A key factor that will determine the impact of CBAM on aluminum decarbonization is whether – and when – indirect emissions (electricity) will be included in the carbon price. Electricity is the most significant source of emissions in aluminum production and EU regulators have committed to include indirect emissions for all CBAM products “as soon as possible”.

When that day comes, there will be a sharp average cost increase for EU metals importers of an estimated 500%. For certain export counties (South Africa and China) this could be as high as 800%.

What CBAM means for steel and iron trade

Analysis by ING shows that while Russia, the EU’s largest steel supplier in 2022, has lower-than-average emissions per tonne of steel, EU sanctions rather than CBAM pose a greater challenge to its steel exports. Turkey (benefitting from electric arc furnace technology which is far less carbon intensive than basic oxygen furnace production), has emissions intensities well below averages, potentially making CBAM adaptation easier.

China, despite having higher emissions, is set to implement domestic measures, including an ETS, to reduce the steel sector’s carbon footprint, while India’s steel production may face significant challenges under CBAM due to its high emissions intensities.

For steel imports, the impact of including indirect emissions in CBAM is lower than for aluminum, but still significant (around 9%) – particularly for steel made using electric arc furnaces (even though that production method is relatively low-carbon). 

• View a full map of steel emissions intensity by country

CarbonChain’s advice for metals traders

Whether you met the first CBAM deadline or have an extension due to the technical issues, CBAM requirements for aluminum and steel traders will now get stricter. There are three golden rules your company can follow to be CBAM-prepared for the long term:

Steel and aluminum importers:

1. Review and correct your first 3 reports by July 31^st 2024;
2. Engage suppliers now to avoid fines (you’ll need their primary data for the fourth report due on October 31^st 2024);
3. Get a data management process in place to capture all the right customs and supplier information, and avoid fines for incomplete reports.

Steel and aluminum installations:

1. Start measuring emissions with the EU’s methodologies ASAP;
2. Use the EU’s data communication template to report emissions to customers;
3. Lower your carbon price tag by setting decarbonization targets in time for 2026 (when customers will start paying for imported emissions).

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