Nailing It? Further Proposed Improvements To The EU CBAM Regulation – Downstream Extension, Anti-avoidance And Electricity

One of the main goals of the EU CBAM is to ensure that the EU's climate policies are not undermined by carbon leakage, which would hamper wider efforts to reduce greenhouse gas emissions and fight climate change across the world. Following the EU CBAM's transitional period, as well as a Call for Evidence, a consultation and ongoing engagement with stakeholders, the European Commission (the Commission) has released a legislative proposal (the Proposal) which includes numerous amendments to ensure that the effectiveness of the EU CBAM These include:

• the extension of the EU CBAM scope to include certain downstream goods;
• the introduction of anti-circumvention measures; and
• the implementation of more tailored rules for the calculation of embedded emissions in imported electricity.

The new legislative proposal is complex and even amends provisions that were included in the simplification text adopted in October 2025. It would also confer wide ranging powers on the Commission to make subsequent changes through agreements and secondary legislation. The proposed amendments will affect large numbers of importers and third country exporters, and it can be expected that it will be subject to significant revisions by the Council and the EU Parliament during the legislative process. This process provides potentially affected importers and third country exporters an opportunity to influence the outcome.

Scope extension to include certain steel and aluminium-intensive downstream goods

In addition to the risk of upstream carbon leakage (ie, the relocation of production of carbon-intensive goods to third countries with less onerous climate policies), the EU has identified an increased risk of downstream carbon leakage (ie, the relocation of the production of goods that incorporate these carbon-intensive goods). This risk is driven by an increased cost in base materials for EU producers due to: (1) the phase-out of free allocation; and (2) the phase-in of the EU CBAM. These costs are increasing the gap between the carbon costs faced by EU producers as compared to producers in third countries.

As outlined in the European Steel and Metals Action Plan, the coverage of the EU CBAM will be extended to include certain steel and aluminium-intensive downstream products (i.e., metal sectors and goods that contain a significant share of downstream products). These sectors account for the highest imports into the Union by number, value and volume. They face the highest risk of carbon leakage but also have the highest technical feasibility for the calculation of actual embedded emissions. The Commission has proposed to include 180 additional CN codes; they include such things as nails, machinery, cars and washing machines.

The Commission has indicated a potential future scope extension to downstream goods in other CBAM sectors such as cement, fertilisers and hydrogen but this would require a new legislative proposal.

These scope extensions would make the EU CBAM applicable to products not covered by the EU ETS which may also increase its vulnerability to objections under trade agreements.

Measures to combat avoidance of CBAM liability

The transitional phase of CBAM has allowed the identification of some avoidance practices. The Commission is now seeking wider powers to combat these and other practices that may emerge. It underlines however that it will aim to balance the need to ensure that the EU CBAM is effective, with the need to limit complexity and the administrative burden for CBAM declarants.

Anti CBAM avoidance measures

• The CBAM Regulation already contains a power to investigate circumvention and make minor adaptations to the list of CBAM goods. The definition of circumvention was extended in the amendments of last October and the current proposal would extend it further to cover "artificially adjusting the supply chains of goods to benefit from a lower default value".

Thus, directing low carbon-intensity goods to the EU while selling higher carbon-intensity goods elsewhere could, if this definition remains, be considered circumvention.

The Proposal would add another tool to the arsenal to combat CBAM avoidance practices. It introduces a concept of "abusive practices". This is widely defined as practices "pursued by an actor for the purpose of gaining a benefit by unduly avoiding, wholly or partially, the CBAM financial liability and thereby undermining the effectiveness of CBAM". The word "actor" is not defined.

The remedies against abusive practices that are proposed include requiring more details to be provided in CBAM declarations and requiring the use of the less favourable default emission values instead of actual emissions for the purposes of assessing CBAM liability. These measures would be introduced by Commission delegated acts.

Requirement to provide a guarantee

Under the Proposal, national competent authorities would be able to require CBAM declarants to provide a guarantee, and to use this in the event that a declarant does not surrender a sufficient number of CBAM certificates.

Implementation of more tailored rules for the calculation of embedded emissions in electricity

Emissions factor for imported electricity

Currently the default emissions factor for electricity is based on emissions from the use of fossil fuels in the exporting country. This therefore does not take into account decarbonisation efforts, as electricity from renewable sources is not currently considered. Under the Proposal, the default emission factor for electricity would include electricity from renewable sources.

Conditions for applying actual embedded emissions to become more flexible

During the transitional period, the conditions for the use of actual embedded emissions in imported electricity proved to be overly rigid. In light of this, the Commission has proposed the following adjustments:

• the requirement to demonstrate the absence of physical network congestion at the time of import is to be removed, along with the alternative criterion to provide the direct connection to the Union transmission system;
• it would not be necessary to evidence a firm nomination of allocated interconnector capacity where transmission capacity is allocated through implicit capacity allocation; and
• it would be clarified that although Power Purchase Agreements ("PPAs") only include physical PPAs, certain PPAs concluded between intermediaries may be used.

These changes will be of particular benefit to countries neighbouring the EU and in particular the UK and the Western Balkans.

Next steps

The Proposal will now proceed through the ordinary legislative procedure, requiring agreement between the European Parliament and the Council. This may take a considerable time, and the resulting amendments may differ from what has been proposed.

It is proposed that, once adopted, the changes to the CBAM Regulation would apply on entry into force except that:

• the downstream‑goods extension would only apply from 1 January 2028; and
• the electricity changes would mostly apply from 1 January 2026.

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