Europe’s automotive industry faces uphill battle as CBAM deadlines loom

Time is running out for Europe’s automotive industry to prepare for the European Union’s Carbon Border Adjustment Mechanism (CBAM), a regulation expected to substantially reshape supply chains and cost structures by incorporating carbon emissions into the price of imported materials. The automotive sector, a key pillar of the EU economy responsible for around 6% of total employment and 7% of GDP, faces significant exposure due to its reliance on emissions-intensive materials such as steel and aluminum.

While complete automobiles themselves are currently exempt from CBAM, the regulation covers prominent inputs like steel and aluminium used for components including body panels, chassis, frames, and battery enclosures. The CBAM mechanism requires companies to monitor and report the embedded carbon emissions in these imported goods. From January 1, 2026, CBAM enters its definitive phase, mandating comprehensive tracking of emissions for relevant imports throughout the year, followed by the purchase of emission certificates starting February 2027, with the first reporting deadline in August 2027.

The financial implications for automakers could be profound. Modern passenger vehicles contain roughly one tonne of steel and 200 kilograms of aluminum. Given average emissions of about 1.9 tonnes of CO₂ per tonne of steel and an astonishing 15 tonnes of CO₂ per tonne of primary aluminum, the associated costs linked to CBAM could escalate rapidly. Analysts project carbon pricing under the EU Emissions Trading System (ETS) to potentially reach €150 per tonne of CO₂ by 2030, which translates to approximately €300 in CBAM certificate costs per car, assuming the EU’s current import shares of 20% for steel and 54% for aluminum remain steady. For Germany alone, where four million cars were produced in 2024, the cumulative exposure from CBAM purchases could exceed €1.2 billion by 2027.

Importantly, the European Commission aims to expand CBAM’s scope post-2027 to encompass additional categories such as chemicals and plastics, which will inevitably envelop more automotive components. This broadening will only heighten the urgency for automotive manufacturers and component suppliers to establish robust CBAM strategies without delay.

Despite the regulatory timeline advancing, many companies still appear underprepared. The complexity of data required, coupled with the fact that EU regulators have yet to finalise methodologies for emissions value calculations and data verification, presents challenges. However, the scope and purchasing deadlines are already clear, necessitating immediate compliance efforts focused on supply chain transparency and emissions tracking.

Automakers are advised to take a structured approach, beginning with evaluating their supply chains to identify key suppliers and imported goods falling under CBAM. Engaging suppliers, typically the top 50 to 100, is critical for obtaining accurate emissions data, which helps avoid reliance on costly default values and reveals opportunities for decarbonization. Collaboration platforms like Catena-X, an industry network for the European automotive supply chain, enable standardized, secure data exchange and collective knowledge sharing to ease data collection burdens and accelerate compliance.

Technological readiness also forms a cornerstone of CBAM preparedness. Manual data gathering methods such as emails and spreadsheets will soon prove unsustainable and prone to error. Instead, tailored enterprise resource planning (ERP) systems integrating CBAM reporting workflows are essential. Tools like SAP’s Green Token and Green Ledger solutions offer automated, auditable reporting and financial accounting of carbon emissions and certificate management, aligning with established accounting standards such as US GAAP and IFRS.

Amid these regulatory changes, flexibility measures adopted by the EU also bear noting. For instance, as of mid-2025, the Council of the European Union and the European Parliament have approved amendments to allow carmakers to average their CO₂ emissions performance over a three-year window (2025 to 2027), rather than yearly compliance assessments. This policy aims to provide the automotive sector with operational breathing room amid rapid technological shifts, while maintaining climate commitments.

At a broader level, the Organisation for Economic Co-operation and Development (OECD) views CBAM as a strategic move by the EU to levy a carbon price on imports and mitigate carbon leakage risks. This incentive mechanism is designed to not only encourage emission reductions globally but also drive structural changes within supply chains and manufacturing processes, a conclusion echoed by tax and consulting experts from Bloomberg and KPMG who underscore the impending impacts on supply chain costs and production decisions.

In sum, CBAM signals the start of a new era where embedded carbon emissions will carry direct financial consequences for automakers and component manufacturers. To thrive, Europe’s automotive sector must urgently adopt comprehensive data strategies, foster supply chain collaboration, and invest in digital tools that automate compliance and embed sustainability into business operations. Those that succeed will be better positioned to manage rising carbon costs, seize decarbonization opportunities, and maintain competitiveness in a carbon-constrained global market.