Balancing the Cost of Carbon Across EU Companies
CBAM should also help manage carbon leakage—when lower emissions in one area counterproductively lead to higher output elsewhere. Another is cross-border resource shuffling, as companies shift carbon-intensive product shipments to countries with weaker climate rules. This is why the tax is focused on industries where such risks are highest, namely cement, iron, steel, fertilizer, aluminum, hydrogen and electricity.
Beyond leveling the competitive playing field, we believe CBAM tariffs will offer new insights into company profitability. For one, we can already codify CBAM’s expected financial hit to certain industries. It can also inform active investors of how companies are adapting to greener production methods, which increasingly factor into assessing corporate strength.
For example, we believe companies with carbon-efficient output methods will face lower long-term carbon costs—an advantage as carbon prices are expected to soar over the next three years. Lower-emitting companies also tend to have more predictable cash flows and less perceived long-term financial risk among lenders, which potentially gives them easier access to low-interest green-financing options than high-carbon producers.
CBAM’s Projected Impact on Earnings
In the lead up to CBAM, we modeled its potential earnings impact on domestic-leaning and importer firms across two of the heaviest carbon-producing industries: steel and cement. Steel markets have started to price in the impact of both CBAM and tighter supply of free allowances. We’ve drilled down considerably further, modelling the levy’s financial hit on specific companies—and their individual plants—using orbiting satellite emissions data, EU allowance projections and geospatial mapping of local carbon emissions exposure. For example, we project a Turkish steelmaker will see a €300 million CBAM cost in the next four years, compelling it to invest some €2.8 billion in hydrogen injection, massive solar power expansion and low-combustion biochar production to avoid the tax.
Our research also isolated the financial impact of the shrinking supply of free allowances, which will be particularly hard felt by domestic producers subject to domestic carbon costs. We project, for instance, that one EU-based global steel distributor with over 33 production sites faces a €5.5 billion hit over the next six years. But producers like it that invest in low-carbon processes sooner should see future production costs shrink, which helps keep them competitive toward zero-emissions by 2050.
Our analysis of cement makers offers similar insights into strong versus weak corporate outlooks under CBAM, given carbon emissions are these companies’ top expense. In our view, EU cement makers are well positioned for the transition, with most already using low-emitting manufacturing processes compared to overseas peers. Their decarbonization strategies should also drive sustainable pricing power, which, along with lower future operating costs, can lead to organic growth in market share, in our view.
CBAM should be impactful, but it’s a work in progress and subject to change as data emerge on its broader effects. Regulators have suggested they may adjust or exempt tariffs where they believe they would do more harm than good, such as raising fertilizer prices to the extent they threaten the region’s food security.
Carbon Compliance as a Financial Driver
We believe CBAM is more than a border tax. It’s a strong financial signal that separates companies with credible decarbonization strategies from those facing rising carbon‑compliance costs.
As carbon prices climb and free allowances disappear, we believe firms with credible transition efforts will gain cost advantages and resiliency. In our view, this could change how investors view the competitive landscape as carbon efficiency rapidly becomes a core driver of long‑term profitability.
The authors would like to thank Peter Hojsteen-Ljungbeck, ESG Data Research Analyst, and Rachel Hughes, Investments Rotational Associate at AB, for their significant contributions to the research behind this blog.
