Europe Must Define When Industrial Resilience Overrides Carbon Performance

The European Union is advancing legislation to extend the Carbon Border Adjustment Mechanism’s (CBAM) coverage of steel- and aluminum-intensive products farther down the value chain. At the same time, the European Commission’s proposed Industrial Accelerator Act (IAA) would add low-carbon and Union-origin requirements to selected public procurement and support schemes while using permitting and investment rules to expand European industrial capacity and resilience.

The IAA’s measures are not inherently in conflict with CBAM. Its low-carbon purchasing rules can strengthen the carbon signal created by CBAM, while production brought into Europe would become subject to EU climate rules directly. The central issue is which standard will determine treatment when the objectives diverge. In other words, the decisive test for the EU is how to a foreign producer that supplies a lower-carbon product but cannot satisfy an origin or resilience requirement. That policy hierarchy will influence whether Europe retains a model distinct from the more origin-, localization-, and security-oriented approach now prominent in U.S. economic policy toward China.

The proposed downstream expansion of CBAM retains the carbon-leakage rationale, as it would prevent companies from avoiding carbon costs by importing finished goods containing covered steel or aluminum or by relocating downstream production outside Europe. CBAM would still base an imported product’s liability on its embedded emissions rather than its origin, allowing Chinese and other non-EU producers to reduce that liability through verifiable emissions reductions.

This carbon-based approach is important because decarbonization still shapes EU law and public preferences. In March 2026, the EU adopted a 2040 target requiring a 90 percent reduction in net greenhouse gas emissions from 1990 levels, with at least 85 percentage points achieved through reductions within the EU. The 2025 Eurobarometer survey found that 85 percent of EU citizens considered climate change a serious problem and 81 percent supported climate neutrality by 2050. In addition to all of these, international carbon pricing also continues to expand as more governments develop their own accounting and pricing systems.

CBAM’s relative maturity, combined with the scale of the EU market, gives Europe an early advantage in shaping carbon-accounting rules and determining how carbon costs are recognized in trade. As discussed in an earlier ICAS analysis, CBAM can extend EU rules beyond Europe through the Brussels Effect when access to the European market leads foreign companies or governments to change their MRV, carbon accounting, pricing, or production practices. Exporters without established frameworks of their own may build them around CBAM requirements. The proposed downstream expansion would strengthen the conditions for this effect by bringing more firms and longer segments of global value chains within the reach of EU carbon rules. As CBAM aligns more foreign producers’ practices with it, the expansion increases the potential for EU methods of measuring and pricing carbon to spread beyond Europe.

In comparison, the IAA aims not only to decarbonize industrial demand but also to retain industrial capacity, reduce external dependencies, and strengthen supply resilience. These objectives can complement CBAM through both demand and production to some extent. Low-carbon requirements in publicly supported projects can increase demand for cleaner goods and make the emissions advantage recognized under CBAM more commercially valuable. Faster permitting and new investment rules could also expand low-carbon capacity in Europe by encouraging Chinese and other foreign producers to establish local facilities there, bringing their production under the EU ETS and other internal rules rather than CBAM at the border.

The Commission’s IAA proposal also applies these objectives differently across sectors, revealing where the IAA reinforces CBAM and where it adds an origin condition to carbon-based competition. From 2029, covered procurement and support schemes would require at least 25 percent of the steel used in specified buildings, infrastructure, and vehicles to be low-carbon, without a Union-origin requirement. The Commission explains that a separate proposed trade measure already addresses steel overcapacity, making a European preference unnecessary. The rules for concrete, mortar, and aluminum go further. At least 5 percent of the concrete and mortar and 25 percent of the aluminum used in covered projects would have to be both low-carbon and of Union origin. The IAA is therefore not a single “Made in EU” mechanism.

Nevertheless, that additional origin condition is where the tension with CBAM becomes concrete for foreign producers. Low-carbon aluminum made in China could reduce its CBAM liability in the broader EU market but could not count toward the share reserved for low-carbon Union-origin aluminum in covered public demand. Within that segment, lower emissions would improve the product’s carbon treatment without making it eligible for the reserved demand. If origin requirements extend across more sectors or larger portions of public procurement and support, Chinese producers would face increasing pressure to change not only how they produce but also where they produce. The shift would actually make the policy pressures facing Chinese producers in Europe more similar to those they face in the United States, where localization and supply-chain resilience increasingly shape access to markets.

For Chinese companies, this policy hierarchy changes the available response. In the broader market governed by CBAM, firms can improve their competitive position by adopting cleaner technologies, changing their energy mix, lowering embedded emissions, and strengthening MRV. Where origin or resilience becomes a binding condition, those changes may no longer be enough to secure protected public demand. Firms may also need to localize production, source more inputs within Europe, establish local partnerships, or leave that segment of demand. Local production and European sourcing may help a product meet a Union-origin requirement, while a local partnership may affect which company bids for the contract. Under the Commission’s proposal, the relevant public procurement procedures would also exclude tenders submitted by operators owned or controlled by entities established in countries without an agreement with the EU guaranteeing such access. A Chinese company seeking to bid directly could therefore manufacture a qualifying product in Europe and still remain ineligible, meaning that the policy response may extend from changing how and where goods are produced to addressing who owns or controls the bidding entity.

A similar problem appears beyond climate policy. The IAA’s investment rules would operate alongside the EU’s existing Foreign Subsidies Regulation (FSR), which scrutinizes whether foreign state support distorts competition in the Single Market. The two instruments address different problems and can therefore be complementary in principle. Yet complementarity in regulatory purpose does not guarantee coherence in application. A foreign investor may restructure an investment to meet the IAA’s localization and European value-added requirements while still facing FSR scrutiny over the financing or state support that helped make that investment possible. In some cases, the behavior encouraged by one framework may therefore create new exposure under another. Result in a fragmented compliance environment in which separately rational rules can produce inconsistent incentives when they overlap. 

Union-origin requirement would not necessarily mean that European rulemaking power had disappeared. Once a foreign company manufactures inside the EU, European influence operates through the ETS and other internal law rather than through CBAM. What changes is the route of that influence. The EU moves from shaping the emissions of production abroad through market access to regulating production located within Europe. The relevant policy question is how Europe should balance cross-border, performance-based influence with more direct control over production at home.

That boundary will also determine how far EU policy converges with the U.S. approach to China. Current U.S. policy explicitly connects foreign investment, supply chains, domestic industrial capacity, and national and economic resilience. The America First Investment Policy encourages allied capital to support U.S. jobs and growth while directing stricter treatment toward PRC-linked investment in strategic sectors. USTR’s 2026 investigations into structural excess capacity likewise describe reshoring critical supply chains and protecting the U.S. industrial base as central objectives. The IAA’s emphasis on dependency, resilience, and origin indicates convergence in how Washington and Brussels define the problem, but it does not make their approaches identical. The EU still gives measurable carbon performance an independent role and varies its requirements by sector. European preference may also conflict with U.S. industrial objectives: the USTR investigations cover the EU as well as China, and the IAA would not treat U.S. content as equivalent to Union origin under every instrument. Europe and the United States may align in identifying risks associated with Chinese supply dominance while still competing for investment and disagreeing over which supply chains deserve preferential treatment.

The EU does not need to choose between CBAM and IAA, but it does need a clear policy hierarchy. Carbon performance should remain the broadly applicable baseline across trade and industrial demand, and low-carbon conditions in procurement and support schemes should reinforce that baseline. IAA’s Origin, localization, and resilience requirements should be added only where policymakers can demonstrate an economic-resilience risk and explain why a less exclusionary measure would not provide adequate protection. Labeling an industry strategic or linking it to the green transition should not by itself be sufficient. The difference between the proposed steel and aluminum rules offers a useful starting point, but the same test should govern future extensions and delegated measures.

How Europe draws this boundary will affect the incentives across the economic relationship among the United States, China, and the EU. It will determine whether Chinese producers can preserve competitiveness mainly through decarbonization or must also reorganize production and supply chains, how far U.S. and EU resilience practices converge, and whether Europe retains an independent model between open market access and a broad use of economic-security restrictions. CBAM can remain the carbon-based foundation while the IAA provides an additional tool for specific resilience risks. The decisive test is not whether the IAA expands, but which objective sets the policy boundary when decarbonization, European industrial capacity, and economic resilience point in different directions.