ANALYSIS: Importers begin hedging EUAs to shield against CBAM costs

Looming import fees under Europe’s Carbon Border Adjustment Mechanism have prompted exposed importers to start buying EU Allowances in order to hedge against the climate tax, industry sources and analysts have told S&P Global Commodity Insights.

The levy on imports of selected carbon-intensive goods -- including aluminum, cement, electricity, fertilizers, hydrogen, iron, and steel -- commences in January 2026.

“We're already starting to see early hedging from certain industrials. It's a pretty easy decision if you're looking at current EUA prices,” said James Huckstepp, commodity strategist at BNP Paribas.

EUAs have been trading in a Eur65-73/tCO2e range in recent weeks, but analysts forecast this will rise to Eur90-100/tCO2e by 2026/2027.

“You're looking at your exposure at the end of this decade and you're doing that calculation -- how much would it actually cost me to make the investment to decarbonize? And in most cases, that's still a higher price than what we're currently seeing in the market,” Huckstepp said.

CBAM-exposed importers must report on the quantity of imported goods, direct and indirect emissions embedded in them, and any carbon price payable on those emissions. CBAM certificates will then need to be acquired for 2.5% of emissions in 2026, rising to 100% by 2034.

Ideal time to hedge

More companies are expected to start hedging EUAs in the coming months, said Dan Maleski, senior environmental markets advisor at Redshaw Advisors.

“You cannot hedge longer-dated CBAM exposure with CBAM certificates because of the limited validity of the certificates. Therefore, the only way to hedge the longer-dated exposure is by using an EUA because the price of a CBAM certificate is based on underlying EUA prices,” Maleski added.

Hedging interest is coming both from European corporations that import into the bloc, and from countries outside of the EU, such as Turkey, India, China and South Africa in particular, which have material exposure to the mechanism.

The hedging volumes have not started to impact EUA prices yet, but analysts expect to see upside sometime next year.

“If analysts’ projections for higher EUA prices in the coming years are correct, the sooner you hedge, the larger your saving will be. That's why some have already done it, and others are looking to do it as soon as possible,” Maleski said.

Huckstepp said that EUA prices were likely to be closer to Eur100/tCO2e by 2026 than Eur70/tCO2e.

“I think that hedging is going to start coming back into the market, not just as we get closer to CBAM but also with the [fall in interest] rates,” he said.

CBAM certificates

This hedging is basically a strategy used by exporters and importers of CBAM-covered goods to manage their exposure to CBAM certificates.

CBAM certificates will be linked to EU carbon prices, averaged on a weekly basis.

Platts, part of S&P Global Commodity Insights, assessed EUA contracts for December delivery at Eur68.23/tCO2e on Sept. 3.

Analysts at Commodity Insights expect EUAs to rise to Eur92/tCO2e in December.

EUAs averaged Eur79/tCO2e and Eur81/tCO2e in 2023 and 2022, respectively, and analysts at Commodity Insights expect prices to average Eur71/tCO2e this year.

Under the transitional phase of CBAM, which started on Oct. 31 last year, traders only must report on emissions embedded in their imports without paying any financial adjustment.

But this mechanism is to be phased in from 2026 to 2034, in step with the phasing out of free allowances in the EU ETS.