The entry into force of the Carbon Border Adjustment Mechanism on January 1 is not occurring in isolation. Its effects extend well beyond traditional heavy industry and are beginning to intersect with the European Union’s renewable energy, battery and broader clean-technology value chains in ways that were insufficiently anticipated during the design phase of the policy. While CBAM is formally targeted at carbon-intensive imports such as steel, cement, aluminium, fertilisers and electricity, its second-order impacts are already rippling through Europe’s industrial ecosystem, including sectors that Brussels has positioned as strategic pillars of the energy transition.
At the core of this interaction lies the material intensity of renewable energy systems themselves. Wind turbines, solar structures, grid infrastructure and battery storage systems are fundamentally metal-heavy assets. Steel, aluminium, copper and, increasingly, specialised alloys are embedded throughout the renewable supply chain. Any policy that raises the cost of these base materials inevitably feeds into the capital expenditure profile of renewable energy projects. For utility-scale solar and onshore wind, where margins are already compressed by auction-based pricing and aggressive tariff assumptions, even modest increases in material costs can materially affect project bankability.
Battery energy storage systems face an even more complex exposure. While lithium, nickel, cobalt and graphite are not yet directly covered by CBAM, the upstream processing of these materials relies heavily on steel, aluminium and energy-intensive industrial inputs. Battery casings, racks, containers, cooling systems and power electronics are all subject to cost inflation driven by carbon pricing on imported intermediate goods. As a result, European battery projects risk becoming more expensive at precisely the moment when policymakers are relying on storage deployment to stabilise grids increasingly dominated by variable renewables.
This interaction is particularly problematic given the structural challenges already facing Europe’s renewable energy sector. After years of cost deflation, the period since 2022 has been characterised by rising equipment prices, higher financing costs and growing grid-connection constraints. CBAM-related cost increases risk reinforcing these pressures. In practice, higher CAPEX for renewables and storage either translates into higher subsidy requirements, lower investor returns or delayed project pipelines. None of these outcomes aligns comfortably with Europe’s decarbonisation targets.
For European manufacturers of renewable equipment, the picture is equally ambivalent. On paper, CBAM should protect EU-based producers of steel, aluminium and other inputs, allowing them to compete more effectively against imports produced under looser environmental regimes. In reality, the mechanism risks creating a circular cost problem. European steelmakers and aluminium producers already face some of the highest energy prices globally. If CBAM raises the cost of imported inputs without materially lowering domestic energy costs, downstream manufacturers of turbines, solar mounting systems, batteries and grid equipment may find themselves squeezed between higher input prices and fiercely competitive global markets.
This is particularly acute in batteries, where Europe is attempting to build a domestic manufacturing base in competition with established Asian players. European gigafactories already struggle with higher electricity costs, more expensive labour and tighter environmental regulation. Any additional increase in the cost of industrial inputs undermines the competitiveness of European battery cells, modules and systems relative to imports from Asia, even when transport costs and tariffs are factored in. In this sense, CBAM risks weakening precisely those strategic industries it is supposed to support indirectly.
The impact on electricity markets adds another layer of complexity. Renewable energy deployment has accelerated the occurrence of negative power prices in several European markets, reflecting periods of oversupply combined with insufficient storage and grid flexibility. At the same time, industrial power demand has become increasingly elastic, with energy-intensive industries curtailing production during high-price periods. CBAM does nothing to address this structural imbalance. On the contrary, by raising costs for industrial producers and potentially accelerating deindustrialisation, it risks reducing stable baseload demand, further destabilising power markets and complicating the business case for both renewables and storage.
Grid infrastructure and balancing assets are also affected. Transmission lines, substations, transformers and battery-based flexibility solutions rely heavily on steel and aluminium, both directly covered by CBAM. Higher costs in these areas translate into higher regulated asset bases for grid operators, ultimately feeding into network tariffs paid by consumers and industry alike. The result is a feedback loop in which policies designed to decarbonise the system contribute to higher electricity costs, which in turn undermine industrial competitiveness and social acceptance of the energy transition.
From an industrial policy perspective, the cumulative effect is troubling. Europe is simultaneously attempting to decarbonise its economy, reshore critical manufacturing, scale renewables, electrify transport and build strategic autonomy in batteries and clean technologies. CBAM, while conceptually coherent in isolation, interacts with these objectives in ways that risk internal contradiction. By increasing costs across interconnected value chains, it may slow investment, reduce deployment rates and deepen Europe’s dependence on imported finished goods rather than strengthening domestic industrial capacity.
The implications extend into financing as well. Investors in renewable energy and storage projects are acutely sensitive to cost stability and regulatory predictability. Uncertainty over CBAM implementation, default emission values and potential future scope expansion adds another layer of regulatory risk. This risk is ultimately priced into the cost of capital, further raising the hurdle rates for projects that are already operating under tight economic constraints.
Taken together, these dynamics suggest that CBAM’s impact on renewable energy, batteries and related industries could prove as consequential as its effect on traditional heavy industry. By raising costs throughout the industrial ecosystem, the mechanism risks undermining Europe’s clean-energy build-out at a critical moment. If the energy transition is to remain economically and politically sustainable, climate policy will need to evolve from a narrow focus on carbon pricing towards a more integrated approach that simultaneously addresses energy costs, industrial competitiveness, grid stability and investment viability.
Without such recalibration, the danger is not merely slower decarbonisation, but a fragmentation of Europe’s industrial base in which both traditional heavy industry and emerging clean-technology sectors struggle to compete globally. In that scenario, CBAM may come to be seen not as a shield for European industry, but as another accelerant of structural economic stress within the very system it was designed to protect.