EU Carbon Tariff Creates Major Challenges for Chinese Steel Exporters

The system is creating huge new compliance burdens for China’s steel firms, with smaller producers using greener technology often hit hardest

· The European Union's Carbon Border Adjustment Mechanism (CBAM) has entered its implementation phase, requiring exporters to report detailed carbon emissions data for products sold to Europe.

· Chinese steel and aluminum exporters face significant compliance costs, complex paperwork, and uncertainty over future carbon charges.

· Many small and medium-sized Chinese manufacturers lack the systems needed to track and verify emissions data, forcing them to hire consultants and pay additional fees.

· Companies unable to provide verified emissions data must use EU default values, which often result in higher carbon costs and penalties.

· Even environmentally friendly producers using low-carbon technologies, such as electric arc furnaces, can be disadvantaged because their emissions data may not meet EU reporting standards.

· The carbon price under the EU system is much higher than China's domestic carbon market, increasing costs for Chinese exporters.

· Some Chinese exporters are passing compliance costs to European buyers, while others are considering reducing exports to Europe and shifting focus to markets in the Middle East, Southeast Asia, and South America.

· European buyers are also feeling the impact through tighter steel supplies and rising prices.

· Analysts argue that CBAM is increasingly viewed by Chinese firms as a form of trade protectionism rather than purely a climate policy.

· Despite the challenges, CBAM is encouraging larger Chinese steelmakers to invest in greener production methods and better carbon accounting systems.

· The policy may help reduce China's steel overcapacity by forcing smaller, less competitive producers out of the market.

· The EU plans to expand CBAM coverage to more steel- and aluminum-based products from 2028, potentially increasing its impact on global supply chains.

Key Takeaway

While the EU's carbon tariff aims to reduce global emissions, it is creating substantial compliance burdens for Chinese exporters, reshaping trade patterns, accelerating green investments, and adding costs for both suppliers and European buyers.

[ABS News Service/17.06.2026]

As trade tensions between Beijing and Brussels continue to rise, China’s firms in the European Union have been forced to walk a delicate tightrope: expanding their presence in the lucrative market while grappling with heightened regulatory hurdles and rapid geopolitical shifts. In the first part of this three-part series, we look at a new, complex EU carbon tariff system that has business owners scratching their heads.

Neil Miao has been exporting metal hardware to Europe for years. But earlier this year, his purchase orders began arriving with a new document that threatened to throw the deals into disarray.

It was a complex, multi-tabbed spreadsheet demanding row upon row of technical data: from exact factory coordinates to the carbon intensity of upstream materials. Miao’s small company in northern China’s Hebei province had no ability to track – or often even understand – the metrics.

But that did not matter to the firm’s German client. Unless the form was completed, the cargo would not clear European customs, Miao was told.

Miao is among hundreds of thousands of global manufacturers scrambling to adapt to the European Union’s Carbon Border Adjustment Mechanism (CBAM) – a carbon tariff system that entered its implementation phase in January.

The new regime aims to prevent “carbon leakage” by ensuring any products entering the European Union face the same carbon-related costs as domestically made goods. But in China, many producers say the policy is creating mountains of red tape while often failing to achieve its stated goals.

The situation has created a dilemma for China’s steel firms, which dominate global production but are mired in a vicious domestic price war. With many already struggling with squeezed margins and regulatory uncertainty, they are now weighing the costs of compliance against the potential loss of a major export market.

Miao had to bring in outside help to navigate the new rules. “We have absolutely no experience, so we hired an agency to sort it all out,” he said. The decision landed him with a 40,000 yuan (US$5,900) bill before a single product had left the factory.

The CBAM requires manufacturers in six carbon-intensive sectors – cement, iron and steel, aluminium, fertilisers, electricity and hydrogen – to account for every tonne of carbon emissions embedded in their shipments to the EU.

The cost of this carbon then has to be covered through the purchase of certificates, after deducting any carbon fees effectively paid in their country of origin, to match the carbon costs borne by European producers. Though European importers have to purchase the certificates, in practice they often pressure their Chinese suppliers to cover the fees.

In China, the vast majority of affected exports are in the iron, steel and aluminium industries.

“In practical terms, CBAM has shifted from a climate policy tool to a tool for trade protectionism,” said Shen Xinyi, a senior adviser at the Centre for Research on Energy and Clean Air, a Finland-based think tank.

“Chinese companies are all very concerned, but many have no clear strategy on how best to manage the costs arising from it.”

For exporters, the most damaging aspect of the CBAM is the uncertainty it creates, Shen noted. Unlike traditional fixed tariffs, companies do not know how much they will have to pay upfront. The price of CBAM certificates is tied to fluctuations of the European carbon market, and the total liability will not be finalised until the reporting period ends.

The data provided also has to be verified by a third party recognised by EU accreditation bodies, which adds an additional layer of administrative uncertainty and cost.

The ambiguity is creating a sharp divide in China’s steel industry. While the nation’s industrial giants are scaling up their carbon accounting and green infrastructure, smaller enterprises like Miao’s – which do not have the resources to invest in their own emissions tracking – are being hit the hardest.

The system also appears to have an unintended consequence – punishing some companies that are making genuine efforts to decarbonise. Richard Lin, who leads a Hong Kong government-backed project to help companies navigate the CBAM, said he has seen this happen first-hand.

Lin recounted a visit to a factory in southern China, where the manufacturer was sourcing scrap-based steel from electric arc furnaces, a process that slashes carbon emissions by around 60 to 80 per cent compared with traditional coal-reliant blast furnaces.

But the supplier was unable to produce the verified, granular data required by Brussels, and so the factory was forced to report using the EU’s default values.

These benchmarks are pegged to the average emission intensity of the exporting nation – a significant hurdle for carbon-heavy producers like China, India and Brazil – and carry a punitive mark-up that begins at 10 per cent this year and rises to 30 per cent by 2028.

“Under default values, that producer risks being treated no better than – and, in some cases, worse than – a blast furnace operator,” said Lin, who is also a former national vice-chairman of the carbon markets working group at the European Union Chamber of Commerce in China.

“Companies are being penalised not for being dirty, but for not speaking the EU’s reporting language,” he said. “[Many of them] have been decarbonising for years, but their monitoring systems weren’t built to EU specifications.”

Shen similarly noted that Chinese electric arc furnace steelmakers – which make up around 10 per cent of the country’s total steel production – are disadvantaged in this regulatory process.

To shield the lower-carbon technology from compliance costs at home, Beijing exempted electric arc furnace plants from China’s national emissions trading system. However, this omission has now left them without the rigorous carbon accounting systems demanded by European buyers.

As a result, the CBAM is “not encouraging Chinese electric arc furnace steelmakers to [sell] to the EU” despite being well-intentioned, Shen said.

Because they are excluded from the domestic carbon market, electric arc furnace plants also miss out on claiming CBAM deductions for local carbon fees. But that deduction would only offer minimal relief anyway, given the steep price gap between the two regimes.

EU certificate prices – set quarterly this year before shifting to a weekly schedule starting in 2027 – stood at €75.36 (US$87.60) per tonne of carbon dioxide for the first three months of the year. Meanwhile, carbon allowances in China trade at around 80 yuan per tonne – just over 10 per cent of the European price.

And while the CBAM includes an exemption for shipments under 50 tonnes, the threshold is measured cumulatively at the importer’s end over the calendar year, rather than on the exporter’s side.

“It protects almost no one on the production floor,” Lin said. “They cannot control it, predict it, or plan around it. What they can predict is that any EU customer may demand full CBAM-compliant data at any point.”

One exporter based in eastern China’s Shandong province, surnamed Zhang, said she had recently faced just such a demand, despite the fact her client had only put in a single order for just over 20 tonnes of steel products.

“It’s absurd, it’s just one shipping container,” she said. “And we’re already the n-th tier distributor, so there’s no way to get hold of the factory [for the required data].”

Because her firm rarely deals with European clients, Zhang said they had no plans to change their normal business operations to chase down the metrics. Instead, they would pass the compliance penalties back onto the European buyer.

Miao, the Hebei-based export manager, is taking a similar approach. Bolstered by a substantial order exceeding US$100,000, he intends to pass both his third-party agency fees and the estimated carbon costs on to his German client.

But in an industry marred by intense price wars, not every company can afford to pass these costs on. China – which produces around half of the world’s steel – has been battling a supply glut and rock-bottom prices ever since its property sector sank into a deep slump a few years ago.

Some exporters are now considering delaying on shipments to the EU entirely.

“We cannot raise prices as clients won’t foot the bill, so we will wait and see for now,” said Jerry Jiao, who runs a small steel trading firm in southern China’s Guangdong province.

While the larger upstream mills he works with can provide some emissions metrics, securing the required third-party verifiable data remains an uphill battle for his many smaller suppliers, who are generally relying on default values.

Jiao has already watched his European orders – mainly concentrated in Germany and Italy – drop over the last few months, driven by buyers who are afraid of running into administrative complications at customs.

“If exporting to Europe becomes unviable in the short term, we will have to consider shifting our market focus to regions such as the Middle East,” Jiao said. Another option is doubling down on the Southeast Asian and South American markets, which currently form the backbone of the firm’s business, he added.

European buyers are already beginning to feel the sting, as the CBAM causes supplies to tighten and puts upward pressure on prices.

The CBAM’s grip on the steel industry makes it challenging for European businesses to drive down production costs, warned Bert Verdyck, chief technology officer at German wind turbine provider ZF Wind Power.

Speaking at the WindEurope expo in April, Verdyck said the CBAM had a “misalignment” with the EU’s proposed Industrial Accelerator Act, which aims to accelerate decarbonisation and strengthen the competitiveness of European manufacturing.

For years, European manufacturers have benefited from having access to exceptionally cheap Chinese steel, with prices falling as producers look to offload their excess capacity abroad.

While China’s output has dipped in recent months due to government pressure to rein in “involutionary” competition, overall supply still vastly outpaces domestic demand. The core steel businesses of China’s major producers saw profits plummet 85.6 per cent year on year in the first quarter, according to the China Iron and Steel Association.

Yet, Shen said the CBAM could inadvertently help Beijing solve its “involution” crisis, allowing Chinese steelmakers to raise prices.

As smaller players struggle to cope with the extra administrative and financial burdens that come with establishing carbon accounting systems, many could be forced to exit the market, according to Shen.

“Maybe this is not very fair … but this might benefit the Chinese overcapacity problem,” she said.

With fewer players crowding the market, major producers would have more ability to invest in decarbonising infrastructure and accounting systems. Indeed, some of them have already started shifting away from traditional, high-emission manufacturing processes.

For instance, industry giant Baowu Steel Group brought China’s first million-tonne-scale, near-zero carbon steel production line fully operational late last year. Located in Guangdong province, the plant uses hydrogen to produce direct reduced iron, a method that saves up to 3.14 million tonnes of carbon dioxide emissions annually.

Pressure from the EU has also played a “very significant” role in driving the development of China’s domestic emissions trading system – which only expanded last year to cover the cement, steel and aluminium industries – said Shen.

The EU’s policies have other silver linings, too. Some Chinese companies have already pre-emptively raised their prices to navigate a different EU trade tool: the tariff-rate quota system, which imposes a levy on steel imports above a certain amount.

The move has boosted some firms’ profit margins, which could help them absorb the additional costs imposed by the CBAM, Shen noted.

That extra wiggle room will be especially crucial as Brussels prepares to cast a much wider net. The European Commission has proposed expanding the CBAM to encompass 180 steel- and aluminium-intensive downstream products, including machinery and appliances, starting in 2028.

If the CBAM is to successfully regulate these finished goods, however, the EU will need to give factories in developing nations a longer runway to adapt, according to Lin, the Hong Kong-based adviser.

“Otherwise, you penalise supply chain complexity rather than carbon intensity,” Lin said, adding that such complexity is sometimes pursued for efficiency gains, which can include energy efficiency and lower carbon footprints.

“Penalising that complexity undermines the very outcomes that CBAM claims to incentivise.”