According to McCloskey, a division of the US-based Oil Price Information Service (OPIS), European steel importers are entering a period of heightened uncertainty as the Carbon Border Adjustment Mechanism (CBAM) moves toward its full implementation in 2026.
The report notes that final CBAM benchmark values, which determine carbon cost calculations for imported steel, will only be provisionally released in December 2025, while definitive figures are expected in early 2026, once the EU Emissions Trading System (ETS) benchmarks for 2026-30 are finalized.
CBAM-ETS linkage - core to WTO compliance
McCloskey emphasizes that CBAM benchmarks are derived directly from ETS benchmarks, effectively extending the EU’s domestic carbon cost system to imports. This alignment is crucial to ensuring World Trade Organization (WTO) compliance, as CBAM must demonstrate cost equivalence with domestic carbon pricing to avoid being treated as a trade barrier.
The European Commission will therefore first release methodological guidance, explaining how ETS process benchmarks are converted into CBAM product benchmarks, before publishing the actual numerical values in the first quarter of 2026.
From 2026 onward, ETS free allowances for carbon leakage sectors, including steel, will begin to phase out, starting with a 2.5 percent reduction in 2026 and continuing annually until 2030. CBAM will gradually replace these allowances to equalize carbon costs between domestic and imported steel.
DRI-EAF competitiveness in question
McCloskey highlights a key technical issue regarding direct reduced iron (DRI). Although DRI was included in the “hot metal” ETS category in 2023, it has been excluded from the 2026-30 reference period to avoid statistical distortion.
This decision may affect DRI-EAF competitiveness, depending on whether a separate CBAM benchmark is introduced:
- Blast furnace products may face reduced CBAM benchmark values, increasing their carbon cost.
- EAF-based imports could see sharper benchmark reductions, lowering their allowable embedded emissions and compliance flexibility.
Commission to publish interim guidance in December 2025
McCloskey concludes that CBAM benchmarks will remain fluid until ETS benchmarks are fully validated. Importers and traders should expect benchmark revisions and methodology updates throughout early 2026.
The European Commission is expected to issue technical implementing acts in early December 2025, clarifying transposition methodologies, benchmarking formulae and interim compliance guidance for steel trade.