What CBAM means for steel buyers, and why it matters now

By Nicklas Magnusson, Head of Group Sustainability and Safety, Ovako

Regulations for imported steel are changing in ways that will have direct, quantifiable cost implications for buyers across Europe. As someone who works daily on the intersection of carbon policy and steel production, I want to cut through the complexity and explain what the Carbon Border Adjustment Mechanism (CBAM) actually means in practice, and why I believe a well-functioning CBAM is not just good policy, but essential to a fair market.

The connection between CBAM and the EU ETS

To understand CBAM, you first need to understand its relationship to the EU Emissions Trading System (ETS). The ETS is a cap-and-trade system that requires European industrial installations to hold one EU allowance for every tonne of CO₂ they emit. The total number of allowances decreases over time, which is how Europe reduces its emissions.

Steel, as a sector exposed to what is called carbon leakage, has historically received a significant proportion of its allowances for free. The logic is that if the cost of compliance becomes too high, production risks moving outside Europe to jurisdictions with no equivalent carbon price. Free allocation has been the tool used to prevent that outcome.

CBAM flips this on its head. Its purpose is to ensure that imported goods carry the same carbon cost as if they had been produced within Europe. Once that equivalence exists, the economic rationale for free allocation disappears, and that is precisely what we are seeing: a phased withdrawal of free allowances running in parallel with the phased introduction of CBAM.

What changes, and when

The financial liability under CBAM begins in 2027, but this is where many buyers are caught off guard: the liability applies to imports made from 2026 onwards. Steel you are procuring today will require CBAM certificates to be surrendered next year.

The sectors covered include cement, electricity, fertilisers, aluminium, hydrogen, and iron & steel. For steel specifically, coverage is based on customs nomenclature codes, primarily in Chapter 72 (ingots, billets, bars, rods and most semi-finished and finished steel products). Selected codes from Chapter 73 (sheet piling, railway material, tubes and pipes) are also included. The threshold for declaration is 50 tonnes of imports per year, which in practice captures the vast majority of commercial volumes.

It is important to note that European precursors are excluded from CBAM declarations. If Ovako supplies steel to a UK customer who then processes it into components sold back into the EU, our emissions do not appear in the importer's CBAM declaration. Because we are covered by the EU ETS, our embedded carbon is already accounted for.

How the cost is calculated

The calculation formula is more straightforward than it might appear. You start with the CO₂ emissions of the product being imported: either supplier-specific verified data, or, where that is unavailable, published default values. You then subtract a benchmark figure representing the free allowances that European producers receive, apply the CBAM phase-in factor (in 2026, only 2.5 percent of emissions are subject to CBAM, so the correction factor is 97.5 percent), and multiply by the price of CBAM certificates, which mirrors the EU allowance price.

Using published default values for bars and rods imported from China, the CBAM cost on a 100-tonne shipment could already reach approximately €162 per tonne in 2026, even at the current 2.5 percent phase-in rate. Across different origin countries and product types, costs using default values could reach close to €500 per tonne as phase-in progresses. Suppliers who can provide verified, supplier-specific emissions data below the benchmark threshold, however, may face a CBAM cost of effectively zero. The spread between best and worst case is enormous.

This creates a strong commercial incentive for buyers to really understand the carbon intensity of their supply chains, not just as a matter of sustainability reporting, but as a direct procurement cost.

The reform debate and what comes next

There is currently significant debate within Europe about the post-2030 structure of the ETS — specifically, how quickly free allocations should be phased out and what the benchmarks should be. Some producers, particularly those operating blast furnaces with long transition timelines, are pushing to slow or pause the process. Others, including Ovako and most Nordic steel producers, support maintaining the current trajectory. Our position is clear: a strong carbon price and a functioning CBAM are the only mechanisms that create a genuinely level playing field between low-carbon and high-carbon steel.

CBAM is also set to expand. The European Commission has proposed extending coverage to downstream products, i.e. the components used in heavy machinery, vehicles, and construction. In our view, the current proposal does not go far enough. Many steel-intensive products such as bearings, transmission shafts, and springs remain outside scope. We continue to advocate, including through Eurofair, for broader downstream coverage that reflects the true embedded carbon in finished goods.

What this means for buyers

The practical implication is this: as CBAM phase-in increases and free allocations decline, the carbon intensity of your steel supply chain will become a visible line item in your procurement costs. Buyers who have invested in understanding their suppliers' true emissions data will be in a far stronger position than those relying on default values. And suppliers who have genuinely decarbonised their production through recycled feedstocks, fossil-free electricity, and verified emissions reporting, will offer a material cost advantage that grows every year.

Beyond the CBAM itself, Ovako monitors the progress of other EU legislation, including the EU Emissions Trading System (ETS), the Carbon Border Adjustment Mechanism (CBAM), EU Industrial Emission Directive (IED), Ecodesign for Sustainable Product Regulation (ESPR) and additional initiatives such as the Industrial Accelerator Act (IAA) and the EU Clean Industrial Deal (CID), to evaluate their potential impacts on our business and identify opportunities to create value.

In a world where CBAM makes the carbon cost of steel visible and quantifiable, sustainability is the new commercial reality.