CBAM based on standardized values Q&A

• To ensure WTO compatibility, the current CBAM-design does not comprise rebates on exported goods. European producers therefore face higher costs on international markets than non-EU competitors. This puts domestic industries at a competitive disadvantage abroad.infoStede, J., Pauliuk, S., Hardadi, G., & Neuhoff, K. (2021). Carbon pricing of basic materials: Incentives and risks for the value chain and consumers. Ecological Economics, 189, 107168. (link)
• To avoid excessive administrative burden, the current CBA applies only to basic materials and selected basic material products (e.g. steel, cement, screws) and not to semi-finished or finished products. As a result, EU manufacturers who use these materials face higher input costs, while competitors importing finished goods do not. This creates a competitive disadvantage for downstream EU producers, in both domestic and international markets.infoSee above
• Foreign producers may redirect their cleaner product lines to the EU, while continuing to use dirtier processes for other markets (“Resource shuffling”).infoCRU Consulting (2021) Assessing the drivers and scale of potential resource shuffling under a CBAM. (link) This doesn't reduce global emissions but can make imported goods look artificially cleaner, undermining climate goals and distorting competition. 

• Applied irrespective of production location and process, hence applied to both domestic production and importers of materials, it qualifies as an excise charge and can therefore be waived for exported products, ensuring EU producers are not disadvantaged in international markets.infoIsmer R, Neuhoff K and Pirlot A (2020) Border carbon adjustments and alternative measures for the EU ETS: An evaluation. DIW Berlin Discussion Paper No. 1855. (link)
• The use of standardized value per ton of material reduces public and private costs for monitoring, reporting, and verification, thus allowing for the application for every product containing the material and hence throughout the value chain.infoIsmer R, Haussner M, Neuhoff K and Acworth W (2016) Inclusion of consumption into emissions trading systems: Legal design and practical administration. DIW Berlin Discussion Papers, 1579. (link) 
• Because of the use of standardized emissions values per ton of material rather than producer-specific values, it does not create incentives for resource shuffling.infoNeuhoff K, Chiappinelli O, Richstein J, Köveker T, Gerres T, Linares P et al. (2022) Addressing export concerns in the CBAM file. Climate Strategies. (link)

Existing elements of the EU ETS and Carbon Contracts for Difference (CCfDs) are combined to ensure effective investment incentives without carbon leakage risks:

• Industrial Emissions are covered under the EU ETS and thus the carbon price ensures emission reductions in line with the ETS cap. Primary production of materials covered by CBAM based on standardized values (e.g. steel or organic chemicals) receives free allowances at full benchmark level. This avoids cost disadvantages for domestic producers. The use of a benchmark preserves their carbon efficiency improvements, but implies that revenues and incentives for efficient material use, choice and circularity are muted.
• Import and domestic production of materials incur a liability per ton of material. It is set at the benchmarked carbon intensity of conventional production of the material (steel, organic chemicals) multiplied by the EU ETS carbon price. Full border adjustment applies to this liability, e.g. it is waved on exports. Thus, carbon pricing revenue and incentives for efficient material use, choice, and circularity are reinstated.
• Investors in climate neutral production obtain Carbon Contracts for Differences (CCfDs). For recipients, the CCfDs for climate neutral production ensure long-term guaranteed payments for emission savings. The carbon pricing revenue dedicated to climate action ensures the availability of CCfDs at sufficient scale for the industrial transition.

ETS with free allocation linked to benchmarks will continue to provide incentives to improve the carbon efficiency of existing conventional material production. However, producers face two challenges in the current policy framework. First, benchmarks decline as climate neutral production and cleaner fuels become part of the reference. Second, if clean production receives free allowances, there will be insufficient allowances under the CAP to provide the full benchmark for conventional and clean producers. Hence, allocation will be scaled back with a cross-sector reduction factor. For both reasons, domestic producers will have disadvantages compared to international producers despite free allocation.

These challenges can be addressed with a CBAM based on standardized values. It ensures full carbon price revenues are captured, at current carbon pricing levels up to 50 billion Euros per year. Against this revenue dedicated to climate action, CCfDs can be granted to clean production processes. These clean processes no longer require free allocation. As a result, allowances under the ETS Cap suffice to grant the full benchmark to conventional production processes. CBAM based on standardized values, therefore, avoids the cross-sector reduction factor or benchmark reductions below the level of best available conventional production technologies with conventional fuels.

It requires that all material producers gradually shift their production to clean processes, such that the aggregate material production with conventional processes declines with the emission cap. For this reason, it is necessary that all firms develop, submit and comply with transition plans. It thus avoids that individual non-compliant firms escalate emissions and trigger the cross-sector reduction factor for all firms.

Importers and domestic producers of materials incur a liability at a standardized value per ton of materialinfoNeuhoff K, Chiappinelli O, Richstein J, Köveker T, Gerres T, Linares P et al. (2022) Addressing export concerns in the CBAM file. Climate Strategies. (link):

• The liability mirrors the carbon cost of conventional material production processes. These costs are otherwise not passed by material producers to material prices due to the combination of dynamic free allowance allocation and international trade. 
• A liability is created with domestic production and import of materials ensuring fair competition. The liability is also created for imported materials as part of products (e.g. steel in cars). 
• The liability is waived for exported materials (or products comprising these materials), so European producers are not disadvantaged abroad.  
• The liability is based on the existing benchmark carbon intensity of the EU ETS for each material and the EU ETS carbon price of the preceding year, ensuring practical feasibility of implementation. 
• For materials that require additional financial incentives for recycling (e.g. plastic), de-minimis rules are used to exempt the recycled plastic from the liability, thus encouraging innovation and circular use. 

To encourage the shift to low-carbon processes, countries like Germany and Netherlands are implementing carbon contracts for difference (CCfD or SDE++), and others following. This policy instrument compensates clean material producers for the carbon costs that are not internalized by conventional producers.infoRichstein, J. C., Anatolitis, V., Blömer, R., Bunnenberg, L., Dürrwächter, J., Eckstein, J., ... & Winkler, J. (2024). Catalyzing the transition to a climate-neutral industry with carbon contracts for difference. Joule, 8(12), 3233-3238. (link)

However, limited budgets create uncertainty around CCfD funding and asymmetries depending on fiscal capabilities. One major challenge is ensuring adequate and harmonized financing for CCfDs across Europe. Effective carbon pricing on the use of materials addresses this by generating dedicated revenue to support these investments, crucial for industrial modernization and global climate cooperation.

The fact that the CBAM is a European instrument facilitates a joint distribution of revenues across sectors and Member States, compared with the current situation in which, for example, CCfDs are funded exclusively with national funds (under approval of State Aid compatibility).

CBAM based on standardized values avoids the need for importers to report information on the country of origin, production facility details, total embedded emissions (direct and indirect), the emissions calculation methodology, and the carbon price paid in the countryof origin.

Instead, importers and domestic material producers only have to report the weight of the different basic materials they produce or that are comprised within their imported products.

Firms can choose two compliance routes.

Default compliance (no duty suspension scheme). Domestic producers of basic materials and importers declare the relevant tonnage and incur the liability for this volume multiplied by the standardized value. The liability is reflected in the price of the material (and products comprising these materials). Downstream firms that do not seek to waive the liability on exports do not incur additional reporting requirements beyond normal commercial documentation.

Duty suspension scheme (with associated reporting). Firms can self-select into the duty suspension scheme if they wish to waive the liability on exports or to avoid liquidity needs. Under this route, participating firms report quarterly how many tonsthe tonnage of basic materials they produce or place on the market, how much liability has been passed to them by different sellers, and how much they have passed on to different buyers. The liability is paid when the material, usually as part of products, is sold to final users (or to firms that do not envisage to export purchase products free of the liability), and the liability is waived for exported materials (or products comprising these materials).

The combination of EU ETS, CCfDs and a CBAM based on standardized values makes a shift to production and use of climate-neutral production processes economically viable. With transition plans, firms commit to the transition to clean processes and, on this basis, are granted free allocation for conventional plans during the transition period.

Are there additional incentives and motivations for firms to shift and use clean materials? The liability based on standardized values cannot create additional incentives, as it does not differentiate between the carbon intensity of products to ensure WTO compatibility and simplify administration.infoNeuhoff K, Chiappinelli O, Richstein J, Köveker T, Gerres T, Linares P et al. (2022) Addressing export concerns in the CBAM file. Climate Strategies. (link)

Further policy instruments can facilitate and encourage the transition to climate friendly material production use, by addressing information needs, overcoming (organizational) behaviour barriers, or providing strategic incentives for innovation and infrastructure.infoNeuhoff, K., Chiappinelli, O., Gerres, T., Haussner, M., Ismer, R., May, N., ... & Richstein, J. (2019). Building blocks for a climateneutral European industrial sector: policies to create markets for climate-friendly materials to boost EU global competitiveness and jobs. (link) Green lead markets play an important role in providing the information for users, encouraging the use of clean materials, and preparing the ground for future requirements to phase out use of the conventionally produced materials. Thus, they are valuable complements to effective carbon pricing under EU ETS, but they are not, on their own, insufficient for the transition to clean material production and use.

The need for financial incentives to promote enhanced circularity varies across different materials. This can be provided by the propagation of the standardized liability along the value chain:  

• For metals, such as iron, copper, and aluminium, the high intrinsic value of the material already provides strong economic incentives to use scrap. In these sectors, the main challenges relate to the quality and purity of collected scrap, which is often linked to product design.infoSun Xi, Sophie Behr, Merve Kükuc (2024) Enabling Circular Economy Dynamics in the Plastics and Steel Industries: Perspectives from Multiple Stakeholders, DIW Berlin Discussion Paper No. 2093 (link) Addressing these challenges requires targeted policies for design and recycling rather than purely price-based incentives. Increasing domestic incentives for secondary production could even risk distorting global scrap markets, encouraging scrap imports without delivering significant global environmental benefits. For this reason, the charge should apply equally to both primary and secondary metals production.  
• For plastics recycling, the economics remain challenging.infoXi Sun (2023) The Role of Carbon Pricing in Promoting Material Recycling: A Model of Multi-Market Interactions, Discussion Papers, (link) Recycling rates for plastic tend to fall sharply when global oil prices decline, illustrating the weak financial case for secondary plastic production. In this case, a de-minimis rule could be used to exempt recycled plastics from the charge. This would create a strong financial incentive to increase the use of recycled plastics, thereby directly supporting greater circularity in plastic materials.
• For all types of circularity, innovation and infrastructure required to enhance the scale and quality of recycling and re-use can be supported with carbon pricing revenue.

The standardized value is calculated based on the amount (weight) of material used, which directly rewards using less material to deliver the same function.infoNeuhoff K, Chiappinelli O, Richstein J, Köveker T, Gerres T, Linares P et al. (2022) Addressing export concerns in the CBAM file. Climate Strategies. (link) This encourages manufacturers and the construction industry to optimize their designs and processes to use materials more efficiently. For example: 

• A construction project using fewer excess materials and fewer carbon-intensive building materials pays less. 
• Designers and engineers are incentivized to create products that minimize waste and maximize material utility.

The EU ETS prices actual emissions at the installation level under a cap. Free allocation at the benchmark level addresses carbon leakage risks for domestic producers on their benchmark emissions, but also partially mutes the carbon cost. The liability related to the standardized CBAM, restores the full EU ETS price. It ensures that a carbon-related price signal still travels through value chains (including downstream products) and is treated consistently at the border.

A CBAM based on standardized values does not create direct incentives for carbon pricing or clean material production in third countries. As a result, greater emphasis is placed on complementary initiatives such as product labelling schemes and standards. This also underscores the role of bi-and multilateral cooperation among progressive countries, backed by carbon pricing revenue and instruments like international CCfDs.

Indeed, a CBAM based on standardized values also creates a dedicated revenue stream, of which a fraction (e.g. 20%) could be used to support the transition to climate-neutral production in partner countries from the Global South, focusing on measures to support their domestic production and use rather than exports to the EU.infoNeuhoff, K., Sato, M., Ballesteros, F., Böhringer, C., Borghesi, S., Cosbey, A., ... & Zetterberg, L. (2025). Industrial decarbonisation in a fragmented world: an effective carbon price with a" climate contribution". Policy insight. (link)

Finally, enhancing the European transition to climate-neutral material production strengthens Europe’s position in international climate and trade negotiations: It does not need to worry about risks for its industry transition from failed negotiations, and thus can focus on reaching outcomes adequate to meet climate objectives.  

Because imports are equally liable to the charge, and the liability can be waived on exports, this CBAM design does not reduce the competitiveness of Europe’s industry.infoSee previous To the contrary:

• The liability ensures the business case for investments in climate-neutral production, use of materials, and circularity, thus avoiding delays and cancellation of industrial modernization investments.  
• It further enhances the leeway for policymakers in response to global developments. Should the shift from free allowance allocation to full auctioning need to be delayed, a CBAM design with standardized values would help safeguard the EU clean industry strategy.  
• Finally, it facilitates effective carbon pricing without risking carbon leakage in a world of diverging carbon prices. It serves as a bridging instrument until domestic carbon prices have sufficiently converged for a full shift to full auctioning and CBAM to address carbon leakage risks. 

No, the CBAM reform to standardized values can be adopted with a qualified majority voting in the Council under Article 192(1) because it is designed as an environmental instrument just like the EU ETS itself.infoIsmer, R., & Haussner, M. (2016). Inclusion of Consumption into the EU ETS: The Legal Basis under European Union Law. Review of European, Comparative & International Environmental Law, 25(1), 69-80. (link) This environmental nature is reflected in three elements:

• First, this CBAM design is legally and operationally linked to the EU ETS by using the same benchmark as applied for free allowances allocation under EU ETS and applies the EU ETS allowances price.
• Second, its primary objective is environmental to support decarbonisation by reinforcing the carbon pricing signals currently weakened by free allowance allocation, thus incentivising material efficiency, circularity and the transition to climate-neutral production.
• Third, any revenue raised is earmarked for reaching environmental objectives, e.g. supporting global climate action through, in particular, a green industrial transition.

For these reasons, such a reform is not “primarily of a fiscal nature" and the implementation, unlike a taxation instrument, does not require unanimity under Article 192(2)(a) TFEU.

Revenues from the charge can be recycled back into the economy, especially into industrial decarbonisation investments. This may include support for: 

• Climate Contracts for Difference (CCfDs), which guarantee a carbon price for clean investments. 
• Innovation funding for breakthrough technologies. 
• Support for small and medium enterprises (SMEs) to modernise production. 
• Support for the transition to climate neutrality in partner countries from the global South. 

The economic incidence of a CBAM based on standardized values would likely be similar to the economic incidence of a global carbon price. Since all competing firms face the same cost increase, they would, depending on their ability to pass costs through, increase their product prices to reflect this cost increase.

Detailed simulations using multi-regional input output tables suggest that at a carbon price of 75 Euro/t CO2, households in the lowest income decile face an increasein expenditure of 0.4 % across all their purchases, while households at the highest income decile would experience an average price increase of 0.45%.infoStede, J., Pauliuk, S., Hardadi, G., & Neuhoff, K. (2021). Carbon pricing of basic materials: Incentives and risks for the value chain and consumers. Ecological Economics, 189, 107168. (link) The effect will be lower, however, to the extent that the manufacturing and construction industries implement more material efficiency, use of alternative materials, and enhance circularity.

A CBAM with standardized values corresponds to an excise charge that is levied on materials used in Europe, irrespective of their origin. It is comparable to existing excise charges levied on gasoline and does not discriminate between domestic and international producers. It will therefore not distort international competition.infoHaussner, M. W. Including Consumption in Emission Trading: Economic and Legal Considerations. (2021). Edward Elgar Publishing Limited. 235 p. (link) Instead, it contributes to climate objectives by encouraging more circular and efficient material use. To further support the climate objectives, some of the revenues should also be dedicated to international climate action.

• The EU ETS continues to cover actual industrial emissions under the cap; free allocation at the benchmark level for firms during their transition to avoid domestic cost disadvantages, 
• Carbon contracts for difference (CCfDs) are offered to clean production processes to offer reliable remuneration for carbon savings,
• A standardized liability (“charge”) is created when basic materials are produced in the EU or imported into the EU, and it also applies to imported materials embodied in products (e.g., steel in a car).
• The liability is calculated using the EU ETS benchmark carbon intensity for the material and the EU ETS carbon price (e.g., the preceding year’s price), multiplied by the weight of the material.
• Full border adjustment applies to the liability, meaning it is waived on exports of the material (or products comprising it), so EU producers are not disadvantaged in third markets.