EU’s leaked draft details CBAM benchmark calculations for steel industry, though sources warn of misleading data

The European Union’s recently leaked draft document on the Carbon Border Adjustment Mechanism (CBAM) benchmarks establishes the formal methodology for calculating the free allocation adjustment (FAA) that importers may deduct from the number of CBAM certificates they are required to surrender. For each imported good, FAA is defined as the product of the specific embedded free allocation (SEFA) for that good and the total mass imported during the reporting year. The document sets out reporting-period definitions, production-route classifications, SEFA calculation rules, and the provisional CBAM benchmark values that apply across covered sectors, including a detailed chapter for iron and steel. Meanwhile, market sources told SteelOrbis that, even though the draft makes it possible to calculate costs, many people consider that these data are misleading.

Methods for determining SEFA values and calculating benchmark calculations

The SEFA of a good can be determined either through actual data or through default values. When actual emissions data are used, the operator is required to calculate a process-level specific free allocation on the basis of three parameters: the CBAM factor applicable to the reporting year, the cross-sectoral correction factor (CSCF), and the process-related CBAM benchmark value. In the case of simple goods, SEFA corresponds directly to the process-level value. For complex goods, SEFA must also incorporate the embedded free allocation of each precursor used during production. This is done through a recursive calculation in which precursor SEFA values are determined either through benchmark-based calculations aligned with the reporting period, or through verified producer-level data if sufficient evidence of the precursor’s actual year of production is provided.

There are precise instructions on determining the mass share of each precursor. The operator must calculate the specific mass of every precursor consumed per metric ton of the final good, using the total mass of the precursor consumed during the reporting period divided by the relevant activity level of the production process. These rules ensure consistency between SEFA calculations, activity levels, and the production boundaries defined in the broader CBAM methodological regulation.

When default values are used instead of actual data, the SEFA of a good is calculated using a simplified formula. It multiplies the CBAM factor and the cross-sectoral correction factor by the default benchmark value. To identify the correct default benchmark, the country of origin, the CN code, and, where applicable, the default production route assigned to that country under the separate implementing regulation on embedded emissions are required.

Benchmark and precursor selection rules

The EU has also provided detailed rules for selecting the appropriate CBAM benchmark for each product when using either actual or default data. For default values, the production route must follow the default route assigned to the country of origin in the corresponding emissions-calculation regulation. For actual data, there are product-family-specific rules. In the iron and steel sector, these rules distinguish between carbon steel, stainless steel, low-alloy steel, and high-alloy steel, and specify the relevant precursors for each CN code. For goods under heading 7201, sintered ore may serve as a precursor; for goods under heading 7205, pig iron or crude steel may be used; and for goods under headings 7206 to 7224, pig iron or crude steel after continuous casting is referenced as the precursor. For products classified at CN 7225 and above, crude steel is used unless the product belongs to cast-iron categories, in which case pig iron is designated as the precursor.

Identifying correct production route

The draft prescribes specific rules for selecting the production route for iron and steel goods. When more than half of the mass of crude steel in the final good originates from scrap, the route must be classified as Scrap-EAF. When more than half derives from direct reduced iron (DRI), the correct route is DRI-EAF. When more than half originates from a blast furnace or smelting-reduction route, the route is BF-BOF. If none of these routes exceed the 50 percent threshold, the production route is assigned based on the component contributing the highest mass share to the final steel. These rules apply across both simple and complex steel goods and serve as the basis for determining which benchmark value applies.

Provisional benchmarks for iron and steel

A comprehensive table of provisional CBAM benchmark values for iron and steel products is also provided. Each CN code receives both a process benchmark for use in actual-data calculations and a default benchmark for default-value calculations. For many flat and long products, including hot rolled coil, cold rolled coil, galvanized products, slab, billet, rebar, and wire rod, three separate benchmark values are provided reflecting the BF-BOF, DRI-EAF and Scrap-EAF routes. In addition to these, benchmark values for ferroalloys such as ferromanganese, ferrochromium and ferronickel, as well as for direct reduced iron (DRI) and spongy ferrous products, are included.

Meanwhile, according to the calculations of McCloskey, a division of the US-based Oil Price Information Service (OPIS), based on the leaked draft, CBAM costs for HRC imported into the EU would range between €43-140/mt for Turkish material depending on the production route, €223/mt for ex-India HRC, and climb as high as €540/mt for Indonesian material.

Indirectly, it is implied that complex goods will require a multi-layered interpretation of the benchmark table, particularly when the final product incorporates multiple steelmaking stages or alloy elements. The presence of multiple benchmark levels within a single CN code, for example, distinctions between carbon steel and low-alloy steel, demonstrates the importance of correctly identifying both the product type and the production route. The draft also defines temporal indicators within the benchmark table, specifying which benchmark values apply to production years 2026-2027 and which apply to 2028-2030. This allows operators to align SEFA and FAA values with the appropriate reporting year, ensuring consistency with ETS benchmark-revision cycles.