A group of European industrial and climate organisations has warned the European Commission that allowing carbon credits to reduce obligations under the Carbon Border Adjustment Mechanism (CBAM) could undermine the framework designed to protect the EU’s carbon pricing system and industrial competitiveness.
The intervention targets draft implementing rules that would define how carbon costs paid in third countries are recognised when calculating CBAM liabilities for imported goods.
CBAM Implementation Rules Under Scrutiny in Brussels
Under current Commission proposals, importers subject to CBAM would be allowed to deduct carbon costs already paid in non-EU jurisdictions from the number of CBAM certificates they must surrender.
The coalition, which addressed senior officials at DG TAXUD, argues that only carbon pricing systems equivalent to the EU Emissions Trading System (EU ETS) should qualify for such deductions.
CBAM is structurally linked to the EU ETS, which requires European producers to surrender allowances corresponding to verified emissions. As free allowances are phased out, CBAM is intended to ensure imported carbon-intensive goods face comparable carbon costs.
Dispute Over Treatment of Carbon Credits
The central point of contention is whether carbon credits should be recognised as part of an effective carbon price in third countries. The Commission’s draft rules would allow both domestic credits and international credits to be considered in calculating carbon costs, subject to certain safeguards. Domestic credits would not be subject to additional qualitative or quantitative requirements beyond proof of payment, according to the draft framework.
The coalition argues this approach would create a regulatory imbalance, as EU producers operating under the EU ETS are not permitted to use offsets or carbon credits to meet their compliance obligations.
Industrial Sectors Directly Exposed to CBAM
The issue is particularly relevant for CBAM-covered sectors including iron and steel, aluminium, cement, fertilisers, electricity, and hydrogen.
These industries are characterised by high capital intensity, long investment cycles, and complex decarbonisation pathways involving electric arc furnaces, hydrogen-based processes, low-carbon electricity procurement, carbon capture technologies, process efficiency improvements, and recycling systems. CBAM is intended to ensure imported products reflect comparable embedded carbon costs to those borne by EU producers under the ETS.
Concerns Over Competitive Neutrality and Market Signals
The coalition warns that allowing credit-based deductions could weaken the policy signal embedded in CBAM. A third-country producer could potentially reduce its CBAM liability through credit purchases without implementing equivalent emissions reductions at the facility level.
This, the organisations argue, could lower compliance costs for exporters without requiring comparable decarbonisation, creating a competitive imbalance with EU-based producers that must comply directly with ETS obligations.
The statement emphasises that a carbon pricing system based on verified emissions allowances is fundamentally different from crediting mechanisms that allow emissions reductions or avoidance claims to be purchased externally.
Legal and Policy Framework Tensions
The organisations also raise legal concerns regarding alignment with ongoing EU discussions on carbon credits linked to Article 6 of the Paris Agreement. They argue that recognising credits through implementing legislation could pre-empt broader legislative debate within the EU on how such mechanisms should be treated in downstream goods and anti-circumvention provisions. CBAM rules on eligible carbon pricing instruments are therefore seen as both commercially material and politically sensitive, given their direct impact on import costs and compliance obligations.
Impact on Trade Partners and Industrial Supply Chains
CBAM implementation is already affecting exporters in regions including the Western Balkans, Turkey, North Africa, and other industrial suppliers to the EU.
Exporters in CBAM-covered sectors are being required to strengthen emissions monitoring, reporting, and verification systems, improve electricity sourcing documentation, and provide detailed embedded emissions data for exports into the EU market.
The coalition warns that reliance on carbon credits instead of operational emissions reductions could shift incentives away from industrial decarbonisation investments toward compliance-driven credit procurement strategies.
Policy Options for Carbon Cost Recognition
The Commission is weighing multiple approaches to recognising carbon costs paid outside the EU, including safeguards for international credits and definitions of qualifying pricing systems.
Industry groups have proposed excluding both domestic and international carbon credits from CBAM deductions, limiting eligibility to carbon pricing instruments that impose obligations comparable to the EU ETS.
Alternative mechanisms discussed in broader policy debate include contracts for difference, offtake-based structures, stockpiling systems, and minimum purchase arrangements, although these remain outside the current CBAM design.
Strategic Role of CBAM in EU Industrial Policy
CBAM is designed to prevent carbon leakage and ensure imported goods reflect embedded emissions costs comparable to EU production standards. It also aims to incentivise emissions reductions in exporting countries by linking market access to carbon intensity.
The coalition argues that weakening the link between CBAM and the EU ETS through credit recognition would reduce the mechanism’s effectiveness in driving real emissions reductions in global supply chains.
The European Commission now faces competing priorities between implementation flexibility for trade partners and maintaining strict alignment with the EU ETS-based carbon pricing structure that underpins the EU’s industrial decarbonisation framework.
