SunSirs: CBAM Officially Takes Effect on January 1: Six Major Impacts and Responses for China's Steel Industry

The EU Carbon Border Adjustment Mechanism (CBAM) entered its transition period on October 1, 2023, and will be fully implemented starting January 1, 2026. By 2028, it is planned to expand to downstream steel-intensive products such as machinery, automotive components, and home appliances. This will have far-reaching implications for China's steel industry, compelling the sector toward low-carbon transformation. The impact will be most significant for long-process, high-emission enterprises, while short-process and low-carbon technology companies will see opportunities.

Six Major Impacts

First, increased steel export costs. CBAM implementation will raise China's steel export expenses. The EU's free carbon allowance allocation will decrease annually from 97.5% in 2026 to zero by 2034, requiring full carbon emission costs for EU-bound products thereafter.

Second, weakened product competitiveness. High-value-added steel products like plates dominate China's exports to the EU, primarily produced via long-process methods with higher carbon intensity. Rising export costs will erode these products' price advantage in the EU market, diminishing competitiveness.

Third, expanded scope of trade and compliance barriers. CBAM will extend beyond steel products to downstream items like screws, bolts, and nuts. EU clients are mandating full life-cycle carbon footprints and EPD (Environmental Product Declaration) statements. SMEs face insufficient data capabilities and rising compliance costs.

Fourth, pressure from carbon price differentials. China's carbon price differs significantly from the EU Emissions Trading System (EU ETS) price, with the latter being 4 to 14 times higher. The greater the price gap, the higher the CBAM costs.

Fifth, supply chain transmission and restructuring. Steel export costs will be passed upstream (to raw materials) and downstream (to automotive, machinery, and home appliances), driving up overall manufacturing costs. Loss of EU market share may force enterprises to optimize export structures (by increasing high-end, low-carbon products) and expand into emerging markets, or trigger capacity relocation to avoid tariffs.

Sixth, transformation opportunities and competitive differentiation. CBAM implementation will accelerate the shift to green electricity, drive investment in low-carbon technologies like electric arc furnace steelmaking and carbon capture, utilization, and storage (CCUS). Short-process, low-carbon certified products will command premiums, hastening the phase-out of high-emission capacity and boosting the steel industry's energy efficiency and carbon management capabilities.

Three Key Response Strategies

First, establish a carbon management system. Develop a product carbon emissions monitoring, reporting, and management system aligned with the EU's CBAM mechanism. Conduct carbon emissions data audits to avoid default values. Publish EPD reports and actively prepare environmental product declarations, enhancing data credibility through third-party certification to serve as a “green business card” for international markets. Participate in carbon market trading, actively engage in the national carbon emissions trading market, and reduce carbon costs through carbon quota trading.

Second, strengthen international cooperation. Promote mutual recognition by establishing internationally recognized EPD platforms, such as through communication and mutual acceptance with EPD platforms in Japan, Italy, Sweden, and other countries.

Third, optimize production processes. Develop guiding policies to support the development of electric arc furnace short-process steelmaking in eligible regions. Increase financial support for disruptive technologies like hydrogen metallurgy and CCUS.

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