CBAM Q&A - Moving away from the EU’s economic and environmental goals

As it stands, the Carbon Border Adjustment Mechanism (CBAM) will fall short of its objective, and drive production and investment outside of Europe. Our Q&A takes you through all the ramifications of CBAM as currently proposed on EU industrial competitiveness.

As it stands, the Carbon Border Adjustment Mechanism (CBAM) will fall short of its objective, and drive production and investment outside of Europe. Our Q&A takes you through all the ramifications of CBAM as currently proposed on EU industrial competitiveness.

Q1: What is the reason for a Carbon Border Adjustment Mechanism (CBAM)?  

A: The first and foremost purpose of the Carbon Border Adjustment Mechanism is to prevent carbon leakage. This mechanism is an alternative to the measures that address the risk of carbon leakage in the EU’s Emissions Trading System (ETS). In the proposal, the European Commission explains that carbon leakage ‘occurs if, for reasons of costs related to climate policies, businesses in certain industry sectors or sub sectors were to transfer production to other countries or imports from those countries would replace equivalent but less GHG emissions intensive products’. Therefore, the CBAM proposal wants to ensure that emissions reduction efforts made by EU businesses are not offset globally by emissions increase outside the Union.

In this context, CBAM also comes as a complementary environmental policy to the EU-ETS that seeks to avoid businesses to delocalise production for climate policies

Q2: Does CBAM effectively prevent carbon leakage in downstream products?

A: The Mechanism ensures a level playing field for steel producers. And jointly with the EU-ETS,  CBAM will create a similar additional cost for EU and third countries producers. Nevertheless, imported downstream products, including  washing machines among others, made outside the EU, will not be subject to an  increase in the manufacturing cost and will become more competitive than EU-made goods, hence sending the wrong price signal to consumers. Manufacturing goods in the EU will incur additional costs that are not necessarily faced by third country manufacturing industries that produce the same goods, triggering  a serious negative environmental impact and incentivising industrial delocalisation.


In February 2022, APPLiA and other downstream business associations called for the ETS and CBAM to assess the impact of the Mechanism on the competitiveness of downstream users of goods that will be subject to this measure, in order to to help preventing carbon leakage from EU manufacturing , before the financial impact of CBAM harms EU industry (link)Furthermore, a study conducted by the French Federation of Mechanical Engineering (FIM), replicating unpublished investigations of the French Ministry of Economic and Financial Affairs, shows that many of the downstream sectors would be adversely affected by these measures. Products like home appliances, agriculture equipment, and transport would be exposed to carbon leakages. This represents in France 3,000 companies and 300,000 jobs.

Q3: What is the impact of the proposal on home appliance manufacturers?

A: CBAM effectively addresses the risk of carbon leakage on the materials listed in the scope (i.e. iron and steel, cement, etc). As such, European manufacturers of home appliances will face at least 5-10% increase of manufacturing costs for all EU-based production, due to higher prices of raw materials and energy (gradually increasing while ETS free allowances are phased-out, and the price of ETS emissions allowances is also increased over time) which will severely impact their competitiveness. More than half of the raw materials used to produce home appliances in the EU will be subjected to carbon pricing.

By not properly tackling  the case of downstream products, CBAM is detrimental to European competitiveness, to European consumers, to European workers, and – more importantly – to the environment.

    • Impacts on European competitiveness: EU home appliances manufacturers faced a double unfair competitive disadvantage. On the export side, EU home appliances manufacturers that sell their washing machines in the global market will have to compete with third countries washing machines which do not face a parallel additional cost. On the import side, EU home appliances manufacturers that sell their washing machines in the EU market will have a similar competitive disadvantage. Thereby, the unintended negative impact of the CBAM will affect the competitiveness of the home appliance industry in Europe and globally.
    • Impacts on European consumers: European consumers will be incentivised to purchase cheaper imported goods to which no equivalent carbon pricing is applied, rather than EU-made goods at a higher price. The price signal is absolutely wrong and opposed to the most fundamental purpose of carbon pricing policies. Consequently, European imports will likely increase because of the wrong price signal given to EU consumers. 
  • Impacts on European workers: If corporate investments are diverted away to non-EU countries, employment will also suffer. It is likely that certain European manufacturing sites will close to  be ultimately relocated in non-EU countries. A recent study from the Dutch Central Bank (DNB, 2021) shows that the impact on jobs and competitiveness will be higher in Central and Eastern European countries, as well as in countries with a high share of exports towards non-EU countries (i.e., Mediterranean region). 
  • Impacts on climate: CBAM is intended to reduce carbon emissions at one single point of the value chain: raw materials production. Yet,  it will simply ‘move’ carbon emissions from raw materials to downstream products. Overall, the total balance of carbon emissions may even be aggravated: if carbon-intensive downstream products are more competitive than sustainable alternatives, there may be an increase of total carbon emissions, despite a reduction at the level of raw materials.

Q4: Will it be possible for the industry to absorb the additional cost and keep the production in the EU?

A: No. The home appliance industry is highly competitive at both the EU and global level. The sector's trade intensity with non-EU countries (imports and exports) amounts to  around 30%, so any increase in the manufacturing cost as applied to EU manufacturers only, will have a severe negative impact on the sector. 

A washing machine that complies with European environmental  standards (e.g, energy efficiency) can be manufactured in a third country, instead of the EU market. Thereby, the production of products compatible with EU standards will be delocalised in third countries where environment requirements are lower. Keeping the EU industry in the EU prevents carbon leakage. 

An incomplete CBAM purely focused on raw materials and electricity cannot effectively prevent carbon leakage down the value-chain; it will simply stimulate a transfer of carbon emissions (and production investments) outside the EU, with harmful socio-economic impacts on all European downstream industries, workers and consumers.

Q5: Does extending the scope through delegated act represents an adequate approach?

A: No. The Mechanism was designed for raw materials and electricity, while the inclusion of finished products was discarded due to administrative complexity. Indeed, raw materials and carbon emissions are not isolated in the value-chain; they are used by many different downstream sectors to produce other types of goods, from home appliances to cars, electronic devices, product components, and many more. For this reason, it is key to establish a comprehensive framework for downstream products as for the latter to be included  in the scope of CBAM through delegated acts is not a solution. 

Adding downstream products into its scope (Annex 1) would only create new problems related to definitions (at which stage of the value-chain should the new system apply?), calculations of embedded emissions (which standards should be used, for which categories of goods?), value-chain traceability, disruption and administrative costs (how to avoid double emissions counting throughout the value-chain?), and finally WTO compatibility (formally, CBAM can only apply to categories of goods already covered by the EU-ETS, which is not the case for downstream products)

Q6: Why is a legislative proposal more appropriate?

A:  A legislative proposal, with its impact assessment, would allow EU institutions to tackle the complexity of adding carbon pricing on downstream products. 

  • Scope and definitions: the gradual extension of the scope without clear guidelines nor benchmarks will bring uncertainty to the EU industry. Before tackling the impact on downstream sectors, is it key to agree on a clear definition of downstream products.
  • Calculation of embedded emissions: by their nature, downstream products are more complex than raw materials and therefore require a proper methodology to assess their relative levels of carbon intensity. Given that these  are made of components and materials with different embedded emissions, applying carbon pricing will require a tailor-made methodology, for example to include indirect emissions. This is crucial to determine the cost of carbon that will then apply to each downstream product.
  • Value-chain traceability: the enforcement of carbon pricing requires more comprehension of the value-chain. The European Commission indicated in its Impact assessment that the administrative complexity was the main barrier to list finished products in the CBAM. The reason for this complexity resides in the value-chain traceability. A legislative proposal could ensure value-chain traceability in downstream sectors as it could propose new guidelines for reporting methods and clear definition of downstream products.
  • Reporting methods: one size does not fit all. Downstream industries are very diverse in terms of business models, material composition, and value-chain. Therefore, in order to ensure carbon pricing enforcement, it is essential to provide guidelines for the report obligations on downstream industries.
  • WTO compatibility: extending the scope of the CBAM through delegated acts without a parallel extension in the EU - ETS will not comply with the The General Agreement on Tariffs and Trade (GATT) of the World Trade Organisation (WTO). Formally, CBAM only applies to categories of goods that are explicitly covered by the EU-ETS (Directive 2003/87). A legislative proposal, with a defined framework for downstream products, will better ensure the compatibility of the  EU-ETS and CBAM with WTO.


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