State of Sustainability Podcast

Solo Episode: CBAM — The Big Picture

SAIF: Welcome back to another episode of the State of Sustainability. I'm your host Saif Hamid, CEO of Altruistiq.

In this episode, we're going to talk about CBAM — the Carbon Border Adjustment Mechanism — and try to cover ground that hasn't already been exhausted by the many other commentators discussing CBAM purely from a legislative or data-gathering angle. I want to go bigger picture: global strategy, national strategy, trade dynamics, and where I think this all settles.

I'm not going to spend much time on the intricacies of the legislation itself or how to do your CBAM reporting — I'll assume most listeners are already conversant with that. What I want to explore is how the CBAM rollout is going, what I think the implications are for trade and business, and where I see this heading.

What CBAM Is and Where It Stands

As of the start of this year, the definitive phase of CBAM implementation began and the first certificate prices have been published — approximately €75 per tonne of CO2 equivalent.

Quick refresher on the mechanism: CBAM targets specific industries — steel, fertilizer, cement, aluminium, hydrogen, and electricity (the latter two handled somewhat differently). Its purpose is to prevent the offshoring of emissions. Without CBAM, there's a straightforward arbitrage: because European producers pay a carbon price through the EU Emissions Trading Scheme, they face higher costs than competitors in countries without equivalent carbon pricing. The rational response is to outsource production to China, India, or elsewhere — which means Europe loses the jobs and tax revenue while also failing to reduce global emissions, since those emissions simply move. CBAM addresses this by requiring exporters into Europe to pay the difference between the carbon cost they paid in their home country and what they would have paid under the EU ETS.

By volume, steel dominates the sectors in scope at around 69%, followed by fertilizer at roughly 15%, cement at 11%, and aluminium at 5%. China and Russia are among the largest likely exporters of steel into Europe under these rules. Whether or not CBAM was designed with this in mind, it functions in practice as something of a proxy carbon tax on those two countries — and that's broadly how it's being perceived.

The Political Backlash

The early pushback on CBAM framed it as anti-competitive behaviour by the EU — a trade barrier that denies emerging markets the same industrialisation pathway that European countries enjoyed for decades, producing without constraint while building up scale and capacity. That argument has some merit in principle. The actual revenues involved are relatively modest — estimates suggest CBAM will generate a few billion euros annually in the near term — so the issue isn't really the magnitude of the money. The sting is felt disproportionately because these are commodity sectors: steel, fertilizer, cement. Margins are thin. Even a couple of percentage points of additional cost in the form of a de facto tax can meaningfully harm the competitiveness of specific producers in specific geographies.

One of the most vocal early objectors, somewhat unexpectedly, was Qatar. Qatar is a massive natural gas exporter, and one of the primary derivatives of natural gas is ammonia-based fertilizer. Qatar's pushback was sharp enough that at points it was effectively threatening to redirect its trade flows away from Europe entirely.

The Climate Club Dynamic

As it became clear that CBAM was going ahead regardless, a more productive conversation emerged: could other major economies develop their own equivalent mechanisms? The US began discussing a domestic carbon border adjustment. Japan floated a similar idea. The logic is straightforward — if Europe charges a carbon tax on American or Japanese exports, shouldn't those countries capture equivalent revenue on European exports into their markets?

In practice, this is moving slowly. In the US, the political environment makes it likely to require multiple administrations before something meaningful is enacted. But the more interesting development is what's happening in countries most affected by CBAM: the emergence or acceleration of their own domestic emissions trading schemes.

China's Strategic Response

China's response is the most strategically interesting piece of this whole picture.

The logic China is working through is roughly this: CBAM calculates how much Chinese exporters would owe in certificates by taking the difference between what they would have paid under EU carbon pricing and what they actually paid domestically. If China raises its own domestic carbon price across the relevant sectors, it captures that revenue itself rather than surrendering it to Brussels. The incentive to develop a robust internal ETS is therefore direct and financial.

What makes this particularly fascinating is the knock-on effect. When China applies a carbon pricing mechanism to steel, for example, it doesn't just apply it to steel destined for Europe — it applies it to the entire domestic sector, which happens to be the world's largest steel producer and exporter. If China effectively carbon taxes its own steel industry, the decarbonisation implications ripple across global steel production.

And then there's the second-order move. China has spent the last 20 years perfecting a specific industrial strategy: identify a lynchpin sector, find the enabling technology for where that sector is going over the next 30 years, and carpet-bomb that technology with capital until a handful of dominant global players emerge. We've seen this work in electric vehicles — BYD is the most visible result. We've seen it work in battery technology and in solar panels, where a space that 20 years ago had genuine technological diversity is now almost entirely Chinese. We've seen the early stages of it in electrolysers for hydrogen.

The obvious extension is green steel. China produces most of the world's steel. If China decides that the greenest steel in the world should be Chinese steel, the next question is: what technology decarbonises steel production? China's playbook would be to identify that technology — whether hydrogen-based direct reduction, electric arc furnaces, or something else — and make sure the dominant global suppliers of that technology are also Chinese. At that point, any country wanting to compete on green steel effectively needs to import Chinese technology to do it.

CBAM may inadvertently accelerate exactly this dynamic.

Europe's Uncomfortable Position

The irony here is significant. Europe has led the regulatory charge on decarbonising heavy industry and has created the incentive structures that should have fostered disruptive innovation. But Europe has repeatedly failed to build the industrial juggernauts needed to capture the advantage its own regulation creates.

H2 Green Steel — which was supposed to be one of the flagship success stories of European green steel — is in serious financial difficulty. Northvolt, the European battery champion, has effectively collapsed. Time and again, Europe sets the regulatory framework, creates the demand signal, and then watches as China scales the resulting technology.

This is the deeper challenge that CBAM will not, by itself, resolve.

Implementation Challenges

Setting strategy aside, there are two significant practical challenges to work through on implementation.

Data, verification, and audit. As with much of European sustainability regulation, CBAM was designed with meticulous legislative detail and rather less thought given to who would actually do the work. The assumption seems to have been that a cottage industry of vendors, consultants, and solution providers would emerge to fill the gap — which is broadly what happened with CSRD, at the cost of several years, significant capital, and considerable chaos. The same is likely to unfold here. Supply chain traceability for CBAM is genuinely complex. Third-party assurance — which requires someone to physically or digitally audit the factories actually making the goods — is an open problem. This first year of implementation should be thought of as a trial run: the first pancake, to be expected to be imperfect, and discarded in favour of better attempts.

Whether the tax actually achieves its purpose. The core goal of CBAM is to level the playing field between producers who pay carbon costs and those who don't, while incentivising decarbonisation across the board. But the numbers don't fully support the thesis, at least in steel. By full phase-out in 2034, CBAM is estimated to add approximately €100 to €130 per tonne to the cost of regular steel. The current green steel premium, however, is €200 to €300 per tonne. CBAM closes roughly half that gap — meaningful, but not enough to make green steel cost-competitive on its own. H2 Green Steel's financial difficulties are at least partly explained by this arithmetic.

What CBAM may achieve is iterative innovation at the margins: more electric arc furnaces, which can reduce natural gas consumption by 50 to 60% and shift demand toward renewable electricity; more recycled content in steel production. These are real gains, but they're incremental. The step-change technologies — the kind that create new industrial categories — don't appear to be the primary beneficiaries of CBAM as currently designed.

Summary

CBAM is now in implementation. The political debate has largely settled, though the omnibus process has taken some categories of companies out of scope at the margins. The US equivalent looks likely to take considerably longer than initially hoped. Smaller producing nations — minor fertilizer producers, smaller aluminium exporters — will likely be collateral casualties of a mechanism primarily aimed at large industrial exporters.

The two things most worth watching going forward:

First, China's ETS development and how China deploys the industrial strategy playbook toward green steel and the enabling technologies behind it. This could be one of the most consequential industrial developments of the next decade.

Second, whether Europe can solve both the implementation infrastructure problem — making verification, audit, and data management more robust than the CSRD rollout — and the deeper strategic problem of ensuring that CBAM revenues and the competitive incentives it creates actually catalyse disruptive innovation at scale, rather than simply being captured elsewhere.

The history of the last 20 years suggests the latter is the harder challenge by far.

That's it for this episode. If you liked it, feel free to check out our back catalogue — and as always, a follow is very much appreciated. It's the best way to stay up to date and helps the podcast's performance considerably.

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