EU Carbon Tariffs 2026: How Chinese Steel Exports Can Adapt to Rising CBAM Costs

• Additional Carbon Cost: €130–€160 per ton of steel
• Estimated Export Price Increase: 10%–15%
• Projected Export Volume Decline to EU: 15%–25%
• CBAM Product Expansion: 180 types of downstream components by 2028

Starting January 1, 2026, the European Union’s Carbon Border Adjustment Mechanism (CBAM) officially went live.

After a nearly two-year transition period, this marks the beginning of a fundamentally different global industrial competition—one centered on carbon costs rather than just labor and logistics.

Think of it this way: carbon emissions just became a financial line item that determines whether your products can compete internationally.

For the steel industry, this shift is already the biggest disruption since globalization.

And since China is the world’s largest steel producer and exporter, the stakes couldn’t be higher.

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Why CBAM Matters: The Quick Version

CBAM isn’t just environmental policy—it’s a trade mechanism that fundamentally changes how international commerce works.

Here’s what you need to know:

• Carbon costs are now baked into export pricing for goods entering the EU.
• The EU is essentially saying: “If you want to sell to us, you need to prove your products aren’t carbon-intensive—or pay the difference.”
• This isn’t just about steel today—it’s expanding to aluminum, cement, fertilizer, electricity, hydrogen, and soon to 180 types of steel and aluminum-intensive components (starting 2028).

For Chinese exporters, this represents the most significant cost shock to their supply chains in decades.

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The History Behind CBAM: How We Got Here

2019: The First Spark

It started with the European Green Deal in December 2019.

The core problem the EU wanted to solve: carbon leakage.

That’s when companies relocate production outside the EU to avoid strict emission standards, which defeats the purpose of having those standards in the first place.

2021: The Proposal Enters Politics

By July 2021, CBAM moved from concept to legislative reality.

The European Commission formally introduced it as part of the “Fit for 55” package—a sweeping climate initiative designed to reduce EU emissions by 55% by 2030.

The initial scope included six sectors:

• Steel
• Aluminum
• Cement
• Fertilizer
• Electricity
• Hydrogen

2023: CBAM Becomes Official

In May 2023, CBAM was formally promulgated as EU Regulation 2023/956.

The policy included a three-phase rollout structure.

2026: The Real Charges Begin

On January 1, 2026, CBAM entered its substantive “implementation phase”.

This means actual financial charges—not just reporting requirements—for carbon emissions in imported products.

Simultaneously, EU industries started losing their free carbon quotas, which will decline annually from an initial 97.5%.

2034: The Full Reckoning

By 2034, free quotas reach zero.

This means imported products will face identical carbon costs as domestic EU-produced goods.

No more subsidies. No more special treatment.

2028: CBAM Expands Downstream

On December 17, 2025, the European Commission announced an expansion.

Starting in 2028, 180 types of steel and aluminum-intensive products will be included in CBAM.

This moves carbon tariffs beyond raw materials and energy to components and finished products downstream—automotive parts, appliances, machinery, and more.

It’s a full-system approach to eliminating carbon-intensive supply chains.

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Understanding the CBAM Formula: The Math That Matters

The actual cost calculation is straightforward but brutal:

CBAM Fee = (Product Embedded Carbon – EU Equivalent Free Quota) × EU ETS Carbon Price

Let’s break this down:

• Product Embedded Carbon: How much CO2 was produced making the steel (measured in tons of CO2 per ton of steel).
• EU Equivalent Free Quota: The carbon allowance the EU gives for the equivalent product made in Europe (shrinking annually to zero by 2034).
• EU ETS Carbon Price: The current price per ton of carbon in the EU Emissions Trading System (currently volatile but significant).

The result: a direct financial penalty for high-carbon products.

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Why Chinese Steel Is in the Crosshairs

The Carbon Intensity Problem

Here’s the brutal reality: Chinese steel is significantly more carbon-intensive than European steel.

The reason comes down to production methods.

China dominates the blast furnace-converter long-process method, which is the traditional way to make steel from iron ore.

According to the China Iron and Steel Association (Zhongguo Gangtie Gongye Xiehui 中国钢铁工业协会):

• Chinese long-process steel: Approximately 2.0–2.2 tons of CO2 per ton of steel.
• EU electric arc furnace (EAF) short-process: As low as 0.4–0.6 tons of CO2 per ton of steel.

That’s a difference of 3–4x the carbon footprint.

Why? Because EAF short-process melts recycled scrap steel using electricity, which is cleaner (especially in the EU with renewable energy targets).

Long-process requires mining raw ore and smelting it from scratch—massive energy requirements.

The Cost Translation

This carbon gap translates directly into money.

For a shipment of steel plates with 2 tons of CO2 per ton embedded, once free quotas disappear by 2034:

CBAM costs alone could add €130–€160 per ton (based on current carbon price estimates).

To put this in perspective: that’s roughly a 10–15% price increase on top of base steel costs.

And that’s before accounting for compliance infrastructure, certification, and potential supply chain disruptions.

What Exporters Are Actually Expecting

Research from the China Council for the Promotion of International Trade (Zhongguo Guoji Maoyi Cujin Weiyuanhui 中国国际贸易促进委员会) surveyed steel exporters directly.

The finding: Over 70% of surveyed exporters expect export costs to the EU to increase by more than 10%.

That’s not worst-case scenario—that’s what industry insiders are already pricing in.

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Five Dimensions of CBAM Impact on Chinese Steel

1. Systemic Cost Surge

The most immediate effect is direct financial pressure on margins and competitiveness.

Exporters now need to either absorb these costs (reducing profit) or pass them to customers (reducing demand).

2. Trade Volume Risk

China’s exports to the EU include heavy volumes of high-value-added plates like automotive steel and home appliance steel.

These are traditionally produced via the carbon-intensive long-process method.

As costs increase, price advantage evaporates.

Research predicts that under full CBAM implementation, China’s steel export volume to the EU could drop 15–25%.

That’s a significant revenue loss for an industry already dealing with overcapacity domestically.

3. Compliance Barriers (Especially for SMEs)

CBAM requires detailed emissions reporting.

Exporters must now document and verify:

• Scope 1 emissions: Direct emissions from production (immediate requirement).
• Scope 2 emissions: Indirect emissions from purchased electricity (starting 2026).

If companies can’t provide verified data, the EU applies “default values” based on the worst-performing producers.

Here’s the catch: Some default factors for Chinese products are 60–70% higher than actual industry leaders.

This creates a perverse incentive where failing to report accurately costs more than being inefficient.

For small and medium enterprises (SMEs) without sophisticated environmental accounting systems, this could price them out of EU markets entirely.

4. Supply Chain Restructuring

Companies will need to invest in carbon tracking, certification, and potentially relocate production to lower-carbon facilities.

This disrupts established logistics networks and requires capital investment.

5. Industrial Structure Pressure

The long-term implication: the entire Chinese steel industry model is under pressure to evolve.

This touches China’s broader “dual carbon” goals (peaking carbon by 2030, achieving neutrality by 2060), not just trade dynamics.

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China’s Strategic Response: Three Key Initiatives

China has several levers it can pull to help the steel industry adapt and compete under CBAM.

Initiative 1: Strengthen Data Foundations

The first step is getting the basics right.

Government and industry associations must help enterprises establish carbon accounting systems that meet international standards.

Specific actions:

• Promote Environmental Product Declarations (EPDs): Get Chinese producers certified with third-party carbon audits.
• Seek mutual recognition with EU platforms: Work toward agreements where Chinese certifications are accepted by European standards bodies.
• Integrate steel into national carbon trading markets: Embed the industry into China’s domestic ETS as quickly as possible, creating price signals that drive efficiency internally before CBAM becomes the constraint.

This removes the risk of default value penalties and levels the playing field.

Initiative 2: Accelerate Technological Innovation

The medium and long-term solution is fundamentally changing how steel is made.

Key areas:

• Shift to EAF short-process production: Where feasible, convert blast furnace operations to electric arc furnaces using recycled scrap. This isn’t universally possible (China has less scrap infrastructure than the EU), but targeted investment can help.
• Support “disruptive” technologies: Invest heavily in hydrogen metallurgy (using hydrogen instead of carbon as a reducing agent) and CCUS (Carbon Capture, Utilization, and Storage). These are still nascent but could be game-changers.
• Form green supply chain alliances: Partner with downstream industries (automotive, machinery, appliances) to co-design low-carbon products and share the burden of transition costs.

China has the scale and capital to lead here—but it requires sustained R&D and policy support.

Initiative 3: Shape Global Rules

China shouldn’t just react to CBAM—it should actively participate in defining what comes next.

Recommendations:

• Advocate for “Common But Differentiated Responsibilities”: In multilateral forums (UN climate talks, WTO discussions), argue that CBAM should account for the different development stages of nations. Not all countries have the same capacity to decarbonize at the same speed.
• Engage major economies in dialogue: Work toward mutual recognition of carbon pricing mechanisms. If China’s domestic ETS becomes credible, there’s a case for the EU accepting it as equivalent to CBAM compliance.
• Position as a solutions provider: Lead on hydrogen metallurgy, CCUS, and low-carbon steel technologies. If China can export solutions (not just steel), it shifts the dynamic.

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The Bigger Picture: CBAM as a Bellwether

CBAM isn’t an isolated trade policy.

It’s the first major implementation of carbon pricing as a trade barrier.

Other regions (US, UK, Japan) are watching closely to see if they should follow suit.

For the Chinese steel industry, this is the moment to demonstrate that transformation is possible and that low-carbon competitiveness is achievable.

By treating CBAM as an opportunity within the broader context of New Industrialization (xinxing gongyehua 新型工业化), China can flip a constraint into a competitive advantage.

The companies that master low-carbon technology and establish transparent carbon management systems first will own their market segment.

Everyone else will struggle.

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Key Takeaways: What Investors and Founders Should Watch

• CBAM goes live January 1, 2026 with full cost implementation—this isn’t theoretical anymore.
• Chinese steel faces 3–4x higher carbon intensity than EU producers due to production method differences.
• Export costs could increase 10–15% once free quotas phase out completely by 2034.
• Export volumes may drop 15–25% as price competitiveness erodes.
• Compliance barriers particularly hurt SMEs that lack carbon accounting infrastructure.
• CBAM expands to 180 types of downstream products in 2028—this isn’t just about raw materials.
• Innovation opportunities exist in hydrogen metallurgy, CCUS, recycled steel infrastructure, and carbon accounting software.
• Policy dialogue will be critical—mutual recognition of carbon pricing could reshape global trade rules.

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References

• The EU Starts Levying Carbon Tariffs: How can Chinese Steel Break the Deadlock? – Jiemian News
• Carbon Border Adjustment Mechanism – European Commission
• Sustainability and Steel – World Steel Association
• Environmental Protection and Climate Change Policy – Ministry of Ecology and Environment of the P.R.C.