Proposed EU CBAM expansion from raw materials to manufacturing could increase covered imports to $155-430bn

Overview

The report examines the scope, country exposure and product exposure of extending the EU Carbon Border Adjustment Mechanism from upstream materials such as steel, aluminum and cement to autos, machinery, electrical equipment, aerospace and consumer goods. It also incorporates the July 2026 reform of the EU Emissions Trading System to assess cost and competitive implications for overseas exporters and European producers. Its core conclusion is that coverage will expand substantially and make the impact more product-specific, but the pace of cost increases has been delayed and the net benefits for European companies are not unconditional.

Core views

After CBAM entered its paid phase in 2026, the policy focus shifted from implementation details toward closing carbon-leakage loopholes and protecting the competitiveness of European industry. The European Commission presented the first downstream expansion proposal on December 17, 2025, the Council of the EU adopted its negotiating mandate on June 12, 2026, and the European Parliament's Environment Committee approved a broader report on July 7, 2026. All three proposals currently envisage implementation on January 1, 2028; the European Parliament is expected to establish its plenary position in September 2026, followed by trilogue negotiations. All three cover autos and components, industrial machinery, electrical equipment, electric motors, transformers, cables, household appliances, engineering equipment, metal furniture and prefabricated buildings, but the final product scope has yet to be determined. The three proposals differ significantly in the extent of expansion. The European Commission, Council and Parliament would add approximately 180, 380 and 800 six-digit CN codes, respectively, corresponding to approximately $72bn, $150bn and $347bn of additional import exposure. Total imports covered by the EU CBAM would rise from approximately $83bn currently to approximately $155-430bn, an increase of approximately 88%-420% based on 2025 import values. Compared with the Commission version, the Council proposal further specifies tariff lines for auto parts, machinery, electrical equipment and household appliances. The Parliament proposal adds a broader range of passenger vehicles, consumer goods, HVAC equipment, tools and aluminum products. Some entries are proposed at the four-digit level, meaning the final number of six- and eight-digit tariff lines could be higher. Goldman Sachs uses the Council of the EU version as the baseline for its analysis of country and product trade exposure because, in addition to the approximately 180 codes proposed by the Commission, another approximately 190 codes appear in both the Council and Parliament lists. The report believes these overlapping items are more likely to survive trilogue negotiations. Under this baseline, CBAM-covered exports to the EU from China, Turkey, the United States, India and South Korea would be approximately $75bn, $35bn, $18bn, $13bn and $11bn, respectively; compared with the current scope, these represent increases of 361%, 223%, 349%, 87% and 126%. The additional exposure shifts markedly from upstream metals toward higher-value-added manufacturing chains such as machinery, electrical equipment and autos. China's additional exposure comes primarily from $20bn of machinery and mechanical appliances, $18bn of electrical machinery and equipment, $11bn of vehicles and parts, and $5bn of furniture. Turkey's exposure comes mainly from $14bn of vehicles and parts, $5bn of machinery, and $4bn of electrical equipment. The United States' exposure comes mainly from $8bn of machinery, $2bn of electrical equipment, $2bn of vehicles and parts, and $2bn of optical, photographic and medical equipment. If the European Parliament version, which includes the entire CN 8703 passenger-car category, is adopted, China's covered exports would increase by another $53bn to $128bn, US covered exports by $24bn to $41bn, and Turkey's by $21bn to $55bn. Passenger cars therefore constitute the largest scope difference between the Council and Parliament proposals. Concentration at the product level means the investment impact may be more differentiated than at the country level. Based on six-digit CN codes, the top 30 product categories account for approximately 70% of all additional downstream EU imports. The largest new categories include $14bn of electrical converters and rectifiers, $10.5bn of light diesel commercial vehicles, $7.8bn of other auto parts, $7.4bn of aircraft engine and turboprop parts, and $5.4bn of low-voltage insulated cables and wires. China accounts for 62% of EU imports of electrical converters and rectifiers, 78% of metal furniture, 71% of refrigerators and freezers, 69% of automatic washing machines, 79% of electric forklifts and 83% of metal-frame seats. Turkey accounts for 57% of light diesel commercial vehicles, 72% of electric commercial vehicles, 43% of wheels and parts, and 34% of low-voltage insulated cables. Japan accounts for 38% of automotive transmissions, Singapore for 28% of aircraft engine and turboprop parts, the United States for 53% of gas-turbine parts, and Morocco for 35% of steering systems and parts. The report therefore concludes that the impact will be concentrated in specific products and supply-chain links rather than applied uniformly to all exports from a country. For China, downstream expansion would broaden the affected scope from basic steel and aluminum products to an additional approximately $58bn of exports, increasing the share of China's exports to the EU affected by CBAM from 2.1% to 12.1%. Electrical equipment, machinery and transport equipment contributed 4.9 percentage points to the 8.5% nominal growth in China's exports to the EU in 2025, so broader coverage would pose downside risk to China's continued gains in European market share. However, CBAM charges are calculated on the embedded carbon emissions of steel and aluminum precursors contained in finished goods rather than on the full value of the finished products, so the actual tax burden may represent only a small share of the final export price, except for high-carbon products such as heavy trucks. Goldman Sachs also believes China's cost advantages, improving product quality and capacity to adapt to policy can cushion the impact. After being subject to the EU's 10% base import tariff and manufacturer-specific countervailing duties introduced in October 2024, Chinese battery electric vehicle exports recovered relatively quickly following an initial decline in 2026. Exports of internal-combustion-engine vehicles and plug-in hybrids, which are not subject to the additional battery electric vehicle tariffs, also grew rapidly. Furthermore, China supplies more than 90% by weight of the EU's rare-earth elements. The report therefore expects EU policy to tighten but potentially avoid provoking severe retaliation, with the ultimate impact on Chinese export growth to the EU likely to be relatively moderate. For European companies, downstream expansion would increase the carbon-compliance costs of imported finished goods and could improve the relative competitiveness and pricing flexibility of European domestic producers. Among Buy-rated stocks with more than 40% European revenue exposure, Goldman Sachs highlights BMW, Knorr-Bremse, Nexans, Prysmian, Mercedes-Benz, Volvo, Safran, Airbus, Rational and Rheinmetall as potential beneficiaries, spanning commercial vehicles, auto parts, power equipment, cables, aerospace, industrial machinery and defense supply chains. However, European companies that manufacture outside Europe and then import into the EU would also incur additional charges. European manufacturers also use steel and aluminum subject to CBAM, and the carbon costs of these raw materials may gradually flow through to their own costs. The magnitude of the benefit therefore depends on the incremental CBAM charges on imports, companies' relative cost advantages, the price elasticity of demand and their ability to pass input costs on to customers, rather than simply equating to broader protection. In traditional CBAM sectors, Goldman Sachs continues to believe that CBAM, safeguard measures and EU trade policy are favorable for European steel producers. Although ArcelorMittal retains a Neutral rating, it is viewed as relatively well positioned. In cement, the report continues to prefer Buy-rated Holcim and Heidelberg Materials due to their leading decarbonization investments, lower clinker ratios and stronger access to industrial decarbonization funding. The report's stock screen also indicates that 33 stocks could receive tailwinds from downstream expansion. The July 2026 EU carbon market reform delays rather than eliminates the cost impact of CBAM. The Commission proposed extending the complete phaseout of free allowances for CBAM sectors from 2034 to 2038. In 2030, 59% of allowances would remain free versus 52% under the original proposal, slowing the rise in carbon costs for steel, aluminum and cement during the 2030s. After updating its model, Goldman Sachs estimates that CBAM charges for steel and aluminum exporters in 2034-2037 will be approximately 5%-10% lower than its January 2026 estimates, although high-emission exporting countries such as China and India remain among the most exposed economies. The reform would also reduce the linear reduction factor from the current 4.4% to 3.7% in 2031-2035 and then to 1.7% in 2036-2040, allowing allowance supply to remain sustainable into the 2040s rather than nearing exhaustion around 2040 under the original framework. The slower phaseout of free allowances, lower linear reduction factor and Market Stability Reserve reform collectively ease EU carbon market supply and demand in 2027-2033. Goldman Sachs expects the annual deficit to narrow significantly relative to the original framework, although the market will remain structurally undersupplied. Because CBAM certificate prices are directly linked to EU allowance prices, a looser carbon market could cause future CBAM costs to rise more slowly than previously expected. Implementation still involves significant friction. The European Automobile Manufacturers' Association supports the overall objective of preventing carbon leakage but believes the emissions-tracking burden for complex global supply chains is excessive. It advocates continuing to exclude passenger cars while supporting the inclusion of heavy-duty vehicles, which use more steel and have more localized supply chains. The association recommends postponing implementation from 2028 to 2030, establishing a minimum exemption threshold at the supplier level and simplifying reporting to avoid high compliance costs arising from insufficient capacity among accredited verifiers and the tracking of multi-tier supply chains.

Analysis framework

The report first compares the three downstream expansion proposals from the European Commission, Council and Parliament and their legislative timetable. It then uses the Council proposal, which has a relatively high degree of overlap among the three parties, as the baseline and employs six-digit CN-code trade data from the World Bank's WITS database to estimate country and product exposure. The report subsequently maps trade concentration to manufacturing supply chains and European equities, assessing potential beneficiaries based on European revenue exposure, ratings, production footprints, input costs and cost pass-through capacity. Finally, the Carbonomics team updates its EU ETS and CBAM cost models using the free-allocation phaseout path, linear reduction factor, Market Stability Reserve and changes in allowance supply and demand.

Methodology notes

• Industry/Sector Analysis FrameworkUpstream, Midstream and Downstream Industry-Chain Transmission

  CBAM expansion from upstream raw materials to downstream manufacturing chains

  The report analyzes how carbon costs enter import prices along the chain from inputs such as steel and aluminum through autos and industrial components to finished products, while also examining higher raw-material costs for European manufacturers and their ability to pass costs on to customers.

• Industry/Sector Analysis FrameworkSupply-demand framework

  EU ETS allowance supply and demand and CBAM certificate pricing

  By examining the effects of free allowances, the linear reduction factor and the Market Stability Reserve on carbon-allowance supply and demand, the report assesses EU ETS tightness and the cost path of CBAM certificates linked to it.

• Event Games and Behavioral FinanceEvent-driven analysis

  Analysis of EU legislative proposals and the trilogue negotiation path

  The report compares the product lists of the Commission, Council and Parliament, uses overlapping items to infer the scope more likely to enter the final proposal, and identifies policy milestones around the Parliament's plenary position and subsequent trilogue negotiations.

• (Out-of-Vocabulary Method)

  Scenario analysis of trade exposure using six-digit CN codes

  The report aggregates EU import values by product code and applies each of the three expansion lists to estimate the incremental covered value and proportion by country and product. Due to data availability constraints, the calculations use six-digit codes, while parts of the formal proposals may be implemented at the eight-digit level.

• Competition and Strategy FrameworkMoat / competitive advantage

  Cost leadership, product quality and capacity to adapt to policy

  When assessing the impact on Chinese exports, the report views cost advantages, product upgrading, the ability to adjust the export product mix and China's position as a key rare-earth supplier as competitive factors that can cushion tighter trade policy.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• BMWG.DE, KBX.DE, NEXS.PA, PRY.MI, MBGN.DE, VOLVB.ST, SAF.PA, AIR.PA, RAAG.DE, RHMG.DE

  All are Goldman Sachs Buy-rated potential beneficiaries of downstream CBAM expansion with more than 40% European revenue exposure.

  Strengths

  They cover proposed expansion areas such as commercial vehicles, auto parts, cables, electrical infrastructure, aerospace, machinery and defense and may benefit from import protection and greater pricing flexibility.

  Weaknesses

  Some European companies manufacture outside Europe and import into the EU, so they may still incur CBAM charges; they must also absorb the carbon costs of steel and aluminum.

  Comparison

  The report uses European revenue exposure above 40% and a Goldman Sachs Buy rating as its key screening criteria.

  Risks

  Actual benefits depend on the final product scope, CBAM costs on imports, companies' production footprints, demand elasticity and cost pass-through capacity.

• Holcim (HOLN.S), Heidelberg Materials (HEIG.DE)

  Goldman Sachs continues to identify both companies as better-positioned CBAM beneficiaries in the cement sector, with Buy ratings on both.

  Strengths

  Leading decarbonization investments, lower clinker ratios and stronger access to industrial decarbonization funding.

  Comparison

  The report believes the two companies are best positioned among cement companies under the evolving EU ETS and CBAM framework.

  Risks

  The delayed phaseout of free allowances and a looser carbon market could slow the emergence of protective effects and cost differentials.

• ArcelorMittal (MT.AS)

  The report believes it can continue to benefit from CBAM, safeguard measures and the EU's increasingly protective steel trade framework.

  Strengths

  Viewed as relatively well positioned under Europe's steel trade protection framework.

  Weaknesses

  Rated Neutral by Goldman Sachs.

  Comparison

  The report provides no new quantitative peer-comparison conclusion.

  Risks

  CBAM costs and protective effects depend on the EU ETS free-allocation phaseout path, carbon prices and final policy implementation.

Key data

• Current value of CBAM-covered importsApproximately US$83bnAnnual coverage before expansion
• Value of covered imports after expansionApproximately US$155-430bnEstimated under the three latest expansion proposals, up 88%-420% from the current level; summarized in the title as US$150-430bn
• Proposed additional six-digit CN codesApproximately 180/380/800Corresponding respectively to the European Commission, Council of the EU and European Parliament proposals
• Additional import exposureUS$72bn/US$150bn/US$347bnCorresponding respectively to the Commission, Council and Parliament proposals
• Proposed implementation dateJanuary 1, 2028Currently envisaged by all three proposals; the European Automobile Manufacturers' Association recommends postponement until 2030
• China exposure under the Council proposalUS$75bn, +361%Compared with the current CBAM scope
• Turkey exposure under the Council proposalUS$35bn, +223%Compared with the current CBAM scope
• US exposure under the Council proposalUS$18bn, +349%Compared with the current CBAM scope
• India and South Korea exposure under the Council proposalUS$13bn/+87%; US$11bn/+126%Covered export values and increases versus the current scope for India and South Korea, respectively
• Share of Chinese exports affectedRises from 2.1% to 12.1%Downstream expansion would additionally affect approximately US$58bn of Chinese exports to the EU
• Share of top 30 additional downstream product categoriesApproximately 70%Of all EU imports of downstream goods covered by the expansion
• Largest additional product categoriesUS$14.0bn/US$10.5bn/US$7.8bn/US$7.4bn/US$5.4bnElectrical converters and rectifiers, light diesel commercial vehicles, other auto parts, aircraft engine and turboprop parts, and low-voltage insulated cables and wires, respectively
• Complete phaseout date for free allowances2038Postponed by four years from the original 2034 schedule
• Share of free allowances in 203059%52% under the original proposal
• Adjustment to CBAM charges for steel and aluminum exportersApproximately 5%-10% lowerFor 2034-2037, compared with Goldman Sachs' January 2026 estimates
• Linear reduction factorFalls from 4.4% to 3.7%, then to 1.7%Currently 4.4%; 3.7% in 2031-2035 and 1.7% in 2036-2040
• Potential European downstream beneficiary stocks33Number of stocks identified in the report's stock screen as potential beneficiaries of CBAM expansion
• China's share of EU rare-earth suppliesMore than 90%By weight, viewed by the report as a factor cushioning the impact of trade policy

Impact & implications

The report believes CBAM's impact will expand from steel, aluminum and cement to global manufacturing supply chains and shift from broad country risk toward specific product and company risks. Overseas exporters will face additional carbon charges and emissions accounting and verification requirements. European domestic producers may gain protection as imports become less competitive, but their steel and aluminum input costs will also rise. EU ETS reform delays cost increases during the 2030s, making the short- to medium-term impact weaker than previously estimated, while leaving the long-term direction unchanged.

Risks

• The final expansion scope still depends on the European Parliament's position, trilogue negotiations and subsequent technical guidance, so current estimates may change with the product list.
• Tracking emissions through multi-tier supply chains for passenger cars and complex auto parts could create significant administrative and compliance costs.
• Accredited verifiers may face capacity constraints, prompting the European Automobile Manufacturers' Association to advocate delayed implementation.
• European companies will also face higher carbon costs for steel and aluminum inputs; if these cannot be passed on to customers, import protection may not translate into net benefits.
• European companies that manufacture outside Europe and import products back into the EU may likewise incur additional CBAM charges.
• Broader tariff coverage could pose downside risk to China's continued gains in European market share, although the report believes cost advantages and product-adjustment capacity can provide a cushion.

What to watch

• Monitor the European Parliament's plenary position expected in September 2026 and the final product scope determined by subsequent trilogue negotiations.
• Monitor whether passenger-car code CN 8703 enters the final proposal, as this is the largest trade-exposure difference between the Council and Parliament versions.
• Monitor whether the formal implementation date remains January 1, 2028 or the proposed postponement to 2030 by the European Automobile Manufacturers' Association is adopted.
• Monitor the final provisions on the phaseout of free allowances, the linear reduction factor and Market Stability Reserve reform during the EU legislative process.
• Monitor EUA prices and their transmission to CBAM certificate prices and the actual charges incurred by steel and aluminum exporters.
• Monitor supply-chain emissions verification rules, minimum supplier exemption thresholds and the implementation capacity of accredited verifiers.