EU CBAM on the Table for Simplification Agenda
First omnibus package expected to shrink scope of carbon levy on imports as bloc wrestles with competitiveness fears.
The simplification of the EU’s carbon tax mechanism for emissions-intensive imported goods will help to reduce the compliance burden for companies, but its application timeline must be upheld, according to policy specialists.
The EU has committed to a five-year simplification agenda via a series of omnibus packages which will propose measures to streamline core pieces of sustainability-focused regulation. According to a draft of the first omnibus, this will include slashing the scope of companies falling under the bloc’s Carbon Border Adjustment Mechanism (CBAM).
“The simplification agenda is driven by the European Commission’s focus on strengthening EU competitiveness,” Ellie Belton, Senior Policy Advisor on Trade and Climate at think tank E3G, told ESG Investor.
“Streamlining CBAM reporting requirements and data collection methodologies would help to ease the administrative burden on importing businesses.”
However, she warned this process could also increase the risk of circumvention and potentially undermine the effectiveness of the instrument if not handled carefully.
The mechanism requires companies in the EU to pay tariffs on some of their carbon-intensive imports linked to the carbon price under the EU Emissions Trading Systems (ETS). It aims to prevent carbon leakage – where industries shift their production to areas they are taxed less heavily.
“We are expecting the CBAM de minimis threshold to increase, which would exempt many smaller businesses from the cost and administrative burden of the scheme,” said Belton.
In the context of the EU CBAM, the ‘de minimis threshold’ refers to a specific value below which imported goods are exempt from the mechanism. Currently, this is set at €150 (US$156) per consignment.
EU Climate Commissioner Wopke Hoekstra has said that the commission’s analysis shows 97% of emissions covered by CBAM are produced by just 20% of companies falling under the mechanism.
As such, it is expected that around 80% of companies impacted by CBAM today will be excluded from its scope.
Additional exemptions for specific industries are also under discussion, according to Stephan Freismuth, Director of Trade and Customs at KPMG Germany.
“One big issue [with CBAM] was already sorted at the end of last year, with green offshore wind power electricity in exclusive economic zones (EEZ) excluded from its scope,” he said.
To improve the effectiveness of the instrument, the EU may also consider expanding CBAM to include downstream products, Belton suggested.
“The CBAM will be a key driver of industrial decarbonisation in the EU,” she said.
“By unlocking the phase-out of free allowances under the ETS, the CBAM forms a vital part of the business case for investment into low-carbon projects in sectors like steel, cement, and hydrogen. It will also unlock additional revenue for EU member states to support the green transition in European industries.”
Earlier this month, the commission had closed door meetings with businesses and NGOs on its omnibus plans. This reportedly included discussion of CBAM, which involved a presentation and concrete proposals for the future of the mechanism.
No delays, please!
Although companies are likely to benefit from a more streamlined CBAM, there are calls to ensure the application timeline remains untouched.
The CBAM is currently in its three-year transitional period, with EU importers only required to report their emissions without paying the carbon levy. It will enter into full force on 1 January 2026.
“A timely implementation of CBAM is business-case critical for the uptake of clean technologies in some industries,” said Victor van Hoorn, Director of Cleantech for Europe.
“A delay in the application may put on hold actual investments and really undermine the investment climate for some cleantechs. Therefore, we support targeted, evidence-based simplifications of CBAM if the application date is not modified (and which the commission has indicated it will not want to change).”
However, the European People’s Party – the largest group in the European Parliament – published a paper in January calling for a two-year delay and review of CBAM, citing its concern that the carbon tax could harm European competitiveness.
The first omnibus package, which is expected to be formally published on 26 February, will also contain plans to consolidate the Corporate Sustainability Reporting Directive (CSRD), Corporate Sustainability Due Diligence Directive (CSDDD) and EU Taxonomy Regulation.
Earlier this month, a group of more than 160 investors co-signed a statement highlighting their concerns around the EU’s forthcoming omnibus package and the impact it could have on the bloc’s sustainable finance rules.
Mitigating tensions
Europe’s decision to take a second look at its sustainable finance regulatory landscape follows increasing tensions in the wake of the election of US President Donald Trump.
Trump’s decision to take “protective measures” against countries imposing taxes that “disproportionately affect American companies” prompted concerns that he would take aim at the EU’s CBAM.
A recent academic paper suggested that Trump’s proposed tariffs could reduce the EU’s GDP by -0.11% – although this will vary across member states. As such, the paper warned against weaponising CBAM, noting it would need to levy a carbon tax of €240/tCO2 on US products to match tariff revenues from EU exports to the US.
The CBAM is expected to have a huge impact on non-EU countries. A study by the Asian Development Bank suggested that Indian manufacturers could face tariffs of around 10.5% value-added tax once the mechanism comes fully into effect.
“Simplifying the CBAM would help to reduce the burden on EU trade partners, which could mitigate tensions internationally,” said E3G’s Belton.
“But this agenda must not result in a delay to CBAM implementation – EU industries need certainty to move forward with low-carbon investments. The priority should be preserving the integrity of an ambitious long-term carbon price signal.”
To ensure competitiveness, Cleantech for Europe’s van Hoorn emphasised the importance of lower energy prices, faster permitting procedures – in particular for cleantechs, grids and long-duration energy storage – easier access to EU funding instruments for small and medium sized enterprises, and clearer and faster state aid procedures.
“The omnibus package will not touch on these items and is therefore a ‘sideshow’ of the critically important competitiveness debate we must continue to have,” he said.
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