CBAM’s next phase: wider import coverage, tighter rules and an export backstop
Author: Luyue Tan (She/Her), Senior Research Specialist, Carbon, London Stock Exchange Group
The European Parliament has put a materially broader CBAM on the negotiating table. The immediate market question is no longer whether downstream products will be covered, but how far the final scope will reach — and what this means for importers, suppliers and EU producers competing abroad.
Downstream expansion changes the unit of CBAM exposure
Parliament’s position would extend CBAM to downstream steel and aluminium products from 2028. The scale of the proposed expansion is material: Parliament backed the inclusion of more than 400 downstream products, compared with 180 in the Commission proposal, while the Council had previously supported adding around 200 products.
CBAM exposure is moving from basic materials into manufactured goods with more complex supply chains. For importers, this increases the importance of CN-code classification, bill-of-materials visibility and access to installation-level emissions data. Products with relatively small quantities of steel or aluminium could become subject to CBAM even where those materials represent only one component of the product’s commercial value.
The difference between the Parliament, Council and Commission positions also makes the final CN-code perimeter one of the main sources of regulatory uncertainty. Companies cannot yet assume that the narrower Commission list will define their 2028 exposure. A prudent planning approach would assess products against the broadest negotiating position, while distinguishing between confirmed obligations and potential future scope.
Excluding Article 6 credits narrows the acceptable forms of carbon-cost recognition
Parliament removed the Commission’s proposed route for using Paris Agreement Article 6 credits to reduce CBAM obligations. The amendment draws a firmer boundary between paying a carbon price and purchasing a carbon credit. A foreign producer may still seek recognition of an actual carbon price paid in the country of origin, subject to the final CBAM rules. The value of foreign credits for CBAM purposes may therefore be limited even where those credits are recognised under another jurisdiction’s climate policy.
This increases the importance of identifying the precise carbon-cost instrument in each exporting country. Importers will need to distinguish among carbon taxes, emissions-trading obligations, free allocation, rebates, export adjustments and voluntary or Article 6 credits. The relevant question will not merely be whether the supplier faces some form of climate cost, but whether that cost qualifies for recognition and can be documented to the standard required under CBAM.
The export mechanism addresses a separate competitiveness problem
Parliament also supported bringing forward the Temporary Decarbonisation Fund (TDF), with assistance running from 2027 to 2029 rather than beginning in 2028. It backed broader eligibility, including fertiliser producers and downstream companies exposed to higher carbon-related input costs, with products such as urea, ammonium nitrate and ammonium sulphate specifically relevant.
The TDF reflects an important structural limitation of CBAM: a border charge can address carbon leakage in the EU import market, but it does not protect EU producers competing in third-country markets. An EU producer may incur an EU ETS carbon cost when manufacturing a product for export, while a non-EU competitor serving the same destination may not face an equivalent cost. CBAM does not correct that asymmetry because it applies to goods entering the EU.
The proposed fund is therefore not simply another CBAM exemption or adjustment. It is a separate policy response to export competitiveness. Its design will determine whether it operates as narrowly targeted transition support or as a broader mechanism for compensating carbon costs along European industrial value chains.
The proposed inclusion of downstream companies is particularly significant. It acknowledges that carbon-cost exposure can be transmitted through input prices even where the downstream producer is not directly regulated under the EU ETS. That could widen demand for support considerably and make eligibility, cost attribution and funding limits central to the final negotiations.
Why importers should care
The significance of Parliament’s position lies in the combined direction of the amendments. CBAM is moving further down the value chain while anti-circumvention rules are becoming more important and potential routes for flexibility or deduction are being narrowed.
This changes CBAM from a predominantly emissions-reporting obligation into a broader procurement and margin-management problem. For many importers, the central challenge will no longer be calculating embedded emissions for a clearly covered primary material. It will be determining whether a manufactured product falls within the final CN-code perimeter, obtaining sufficiently granular data from suppliers, establishing whether a foreign carbon cost is deductible and managing the resulting certificate exposure.
The burden is also unlikely to be distributed evenly. Large suppliers may be able to produce verified installation-level data and negotiate contractual treatment of CBAM costs. Smaller suppliers, traders and multi-tier manufacturers may be more reliant on default values or incomplete upstream information. This could make emissions-data capability a factor in supplier selection, alongside price, quality and delivery reliability.
Importers should therefore consider CBAM exposure at four connected levels:
- Product exposure: whether the relevant CN code is included in the final scope.
- Emissions exposure: whether actual embedded emissions can be substantiated or default values must be used.
- Deduction exposure: whether a foreign carbon price qualifies and can be evidenced.
- Commercial exposure: whether the importer can recover CBAM costs through pricing or contractual arrangements.
Failure at any one of these levels could increase the effective cost of importing, even if the underlying product and supplier remain unchanged.
The market read
For companies planning imports for 2027 and 2028, uncertainty is becoming more concentrated but also more commercially consequential.
The first variable is scope. The gap between the institutional positions means that companies near the edge of the proposed downstream perimeter face a binary risk: a product may move from having no direct CBAM obligation to requiring emissions data, reporting systems and certificate purchases.
The second variable is recognition of foreign carbon costs. The economic outcome will depend not only on the nominal carbon price in the exporting country, but also on what was actually paid after free allocation, rebates or other forms of compensation. Documentation requirements could be as important as the carbon-pricing policy itself.
The third variable is the speed of downstream implementation. A 2028 start leaves limited time for companies to map product classifications, renegotiate supplier information requirements and adapt purchasing contracts, particularly where emissions data must be obtained from multiple tiers of a supply chain.
The fourth variable is the design of export support. The TDF would separate the treatment of imports from the competitiveness challenge facing EU exporters. If eligibility is broad, the final package could influence both sides of the trade equation: importers through the direct CBAM obligation and EU exporters through targeted financial support.
The result is an increasingly asymmetric policy structure. Import-side carbon leakage would be addressed through compliance obligations imposed on importers, while export-side carbon leakage would be addressed through public financial support to eligible EU producers. The effectiveness and distributional consequences of the package will depend on how closely those two mechanisms align.
What to watch in trilogue
The final downstream CN-code list. The distance between Parliament’s broader position and the other institutional proposals will determine the number and type of importers brought into CBAM.
The treatment of complex manufactured goods. The practical effect of expansion will depend on how embedded emissions are attributed where covered materials form only part of a downstream product.
Any replacement for Article 27a. The key issue is whether the final regulation retains a mechanism that can directly adjust obligations during severe supply or market disruption, rather than relying solely on revenue-funded support.
The distinction between foreign carbon prices and international credits. Negotiators will need to determine which costs qualify for deduction, how actual payment is calculated and what evidence importers must obtain from suppliers.
The timing and eligibility rules for the TDF. An earlier start increases the fund’s near-term relevance, while broader downstream eligibility could significantly expand its fiscal and administrative scope.
Anti-circumvention data requirements. Stronger enforcement could lead to more scrutiny of product composition, production routes, supplier relationships and country of origin.
The allocation of liability across contracts. Even where the importer remains legally responsible, commercial contracts will determine whether CBAM costs and data obligations can be passed back to suppliers or forward to customers.
CBAM is evolving from a border-reporting mechanism into a system that can influence product design, sourcing decisions, supplier selection, contract terms and working-capital requirements. For importers, the next phase will be determined by more than the carbon embedded in a product. Exposure will depend on whether the product falls within the final scope, whether reliable supplier data are available, which foreign carbon costs can be recognised and who ultimately bears the certificate cost.
The central risk is therefore not carbon intensity alone. It is the combination of carbon intensity, regulatory classification and limited control over upstream information. Companies that treat CBAM solely as a reporting exercise may identify their financial exposure too late. Those that integrate it into procurement and trade planning will be better positioned to manage scope changes, compare suppliers on an effective carbon-cost basis and allocate liability before obligations crystallise.
LSEG is a leading financial markets infrastructure and data provider operating connected businesses to serve customers across the entire financial markets value chain.
With capabilities in data, indices and analytics, capital formation, trade execution, clearing and risk management, we operate at the heart of global markets – driving financial stability and empowering economies all over the world. Together, our four business divisions – Data & Analytics, FTSE Russell, Risk Intelligence and Markets – make accessing and deploying capital simpler, faster and more effective.
LSEG is headquartered in London and has a major presence throughout Europe, the Americas, Asia Pacific and emerging markets.
Meet Luyue Tan at the upcoming CarbonZero 2026, October 28-29, in Brussels, Belgium! Email us at contact@industrylink.eu for securing a seat at the event and a meeting with Luyue!
