As the next global climate conference COP30 in Belem, Brazil is approaching in November, the future of global carbon pricing has become a crucial topic in climate action. Global momentum around carbon pricing is rising as the EU is starting to apply its Carbon Border Adjustment Mechanism (CBAM) in 2026. For the CBAM to prevent carbon leakage in Europe, precision is key.
The Carbon Border Adjustment Mechanism (CBAM) is a cornerstone of the European Union’s climate regulation and a key element of the Clean Industrial Deal. It was introduced to replace free allowances within the EU Emissions Trading System (ETS) and ensure that Europe’s ambitious climate goals are not undermined by carbon leakage – or the delocalization of carbon-intensive production to countries with less stringent climate policies.
CBAM is also closely linked to the EU’s Steel and Metals Action Plan, which aims to decarbonize hard-to-abate sectors while maintaining industrial competitiveness. By applying a carbon price to imports equivalent to that faced by EU producers, CBAM will ensure fair pricing of carbon emissions for imported goods, prevent carbon leakage, and incentivize cleaner production globally.
While CBAM aims to mitigate climate leakage in Europe, it also becomes especially important considering the current state of the steel industry. Global overcapacity is becoming a significant issue, with a projected 721 million tonnes of overcapacity expected by 2027 – with imported steel having up to six times higher emission intensity compared to the European steel production. The overproduction of steel leads to lower prices, decarbonization investment delays, and puts tens of thousands of EU jobs at risk.
As CBAM moves from transitional reporting to full implementation in 2026, it’s crucial to get the details right. The design must be robust to truly prevent carbon leakage and drive global decarbonization.
In order for CBAM to be effective, there are three points in particular which the EU needs to consider.
Include all emission scopes – especially Scope 2
Currently, CBAM covers direct emissions (Scope 1) and partially supply chain emissions (Scope 3). However, currently the indirect emissions (Scope 2), those from electricity used in production, are a significant contributor to the carbon footprint of imported steel, as many non-EU producers rely on electricity from fossil fuels.
Excluding Scope 2 would create a loophole, which would not incentivize high-carbon imports to decarbonize. The EU Emissions Trading System (ETS) only accounts for direct emissions (Scope 1) for domestic producers, so CBAM must align with this principle to ensure fairness.
Default values for calculating the emissions of the imported product play a significant role. If default carbon values are set too low, importers could exploit the system by underreporting emissions. Instead, default values should reflect the most imported grades which have much higher actual emissions than current averages suggest. Without this adjustment, CBAM risks underestimating the carbon intensity of imports and undermining its own effectiveness.
Cover key downstream sectors and prevent resource shuffling
CBAM’s scope should not stop at raw materials. Key downstream sectors – those that consume large volumes of steel – should also be included. If they are left out, we risk incentivizing the relocation of steel-consuming industries outside the EU, leading to job losses and increased carbon leakage.
Another critical issue is resource shuffling, which is currently being assessed by the EU Commission. Without proper safeguards, exporters could send their lowest emission steel to the EU while selling higher emission products elsewhere, effectively gaming the system. To prevent this, CBAM should require emissions reporting at the corporate group level and apply default values based on representative grades. This ensures that the mechanism reflects real-world emissions and cannot be circumvented through selective exports.
Apply the “Melted & Poured” principle to rules of origin
Steel production is a complex, global process. Today, the origin of a steel product is defined by where the last substantial transformation occurs. This creates a loophole: steel melted and poured in a high-emission country can be minimally processed elsewhere and then imported into the EU as if it originated from the second country.
To close this gap, rules of origin must be based on the “Melted & Poured” principle –meaning the origin is where the steel was first melted and poured, regardless of subsequent processing. This approach reflects where most emissions occur (over 90% during liquid steelmaking) and prevents circumvention.
Linked to this is the issue of inward processing. Currently, companies can import semi-finished steel, process it in the EU, and export the final product without paying CBAM costs. This loophole allows high-carbon steel to enter the EU supply chain and compete unfairly against lower emission European steel. CBAM must cover all steel entering the EU, whether for domestic use or export, to maintain integrity and fairness.
Now is the time to act to shape Europe’s competitiveness and climate leadership
If implemented effectively, CBAM can drive global decarbonization by incentivizing cleaner production methods worldwide. The loopholes I’ve outlined need to be tackled, at the risk of CBAM not successfully contributing to the decarbonization goals that the world must urgently reach.
We at Outokumpu are committed to supporting a strong, fair, and effective CBAM. By including also indirect emissions, covering key downstream sectors, and applying robust rules of origin, we can ensure that CBAM truly levels the playing field and accelerates the transition to a low-carbon future.
The time for action is now. As the EU finalizes CBAM’s design, the decisions made today will level the playing field for the low-emission European stainless steel and the success of global climate efforts for decades to come.