In the first full-scale year of the EU Carbon Border Adjustment Mechanism (CBAM), the common belief that "having K-ETS means we are fine" is only half true. The real level of protection is determined not by possessing a system, but by the actual carbon price paid and the quality of verified data.

As the EU Carbon Border Adjustment Mechanism (CBAM) entered its full operational phase on January 1, 2026, the long-held assumption inside Korean industry that the "K-ETS will largely offset burdens at the EU border" has necessitated a reassessment. According to European Commission guidance, CBAM operated as a transitional phase from October 1, 2023, to December 31, 2025, where there were only reporting obligations for emissions. However, starting in 2026, it transitioned to a cost system in which importers must purchase and surrender certificates.

The core issue is not whether South Korea operates an emissions trading system, but what carbon costs the EU actually recognizes under CBAM. The carbon price deduction principle of CBAM is to adjust based on the carbon price "actually paid" in the country of origin. However, in systems where the proportion of free allocation is high, the carbon costs for which companies actually make cash expenditures are limited, meaning the deduction effect recognized at the border may also be smaller compared to the mere existence of the system.

At this point, the paradox facing South Korean steel becomes stark. South Korea has operated one of the most institutionalized ETS frameworks in Asia, and thanks to this, it is analyzed to be positioned in a relatively lower CBAM burden bracket compared to competing countries. However, due to the high free allocation and low price structure of the K-ETS, there are limits to the "effective carbon price" recognized under CBAM. Consequently, it fails to function as a complete shield at the EU border.

The Transitional Phase Is Over, and Now Is the Time of Costs

The European Commission has defined the CBAM transitional phase as a period for all stakeholders to learn methodologies and data systems. During the transition, importers only had to report embedded emissions, with no obligation to purchase or surrender certificates.

However, the situation changed with the full regime starting on January 1, 2026. EU importers must secure the status of an authorized CBAM declarant, and in principle, if annual cumulative imports exceed 50 tons, they must purchase certificates and surrender a quantity corresponding to the embedded emissions every year. The weight of costs has also become visible. As of April 2026, the first-quarter price of CBAM certificates was set at approximately €75 per ton of CO₂, meaning that the higher the carbon emissions of a product, the faster the EU export costs increase.

According to EU explanations, the single weight threshold of 50 tons per year is a simplification device designed to reduce the administrative burden on small-scale importers. While exempting about 90% of importers, it is engineered to still capture about 99% of the embedded emissions of covered goods. Electricity and hydrogen are excluded from this exemption. Stated conversely, large South Korean conglomerates exporting to the EU in sectors such as steel, aluminum, and fertilizers remain effectively without exception at the center of the regulation.

Currently, the six sectors subject to CBAM are cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen. The European Commission explains that this system is designed to operate in step with the reduction of free allocation under the EU ETS. Therefore, it is more accurate to understand CBAM not as a simple reporting regulation, but as a cost-transfer mechanism intertwined with the restructuring of the domestic ETS.

The Trap of Common Belief: Having K-ETS Does Not Mean Automatic Offsetting

Korean industry has long held expectations that "since South Korea also operates an ETS, it can receive a substantial deduction under the EU CBAM." This expectation itself is not groundless. EU guidance also states that if an importer can prove that carbon has already been paid in a third country during the production process, that amount can be deducted from the CBAM obligation.

The problem is that the criterion for deduction is not "whether the system exists," but "whether the carbon price was actually paid." Allowances received for free are not recognized as actual payments. Therefore, the higher the proportion of free allocation in an ETS, the more mature the system may appear, yet the carbon costs practically borne by exporting companies are inevitably limited.

South Korea is precisely such a case. Domestic allowance prices have been formed at low levels—at times lingering around 10,000 won per ton, which is less than a tenth of the EU allowance price—and the proportion of free allocation is also large. As a result, the extent to which South Korean companies can be recognized for "prices actually paid" under CBAM and receive a deduction becomes smaller compared to the EU ETS level.

Ultimately, "having an ETS" and "being fully protected at the border" do not mean the same thing. South Korean companies may gain a partial buffering effect thanks to the K-ETS and stand in a more advantageous position than competing countries, but it is difficult to expect the EU CBAM to nearly disappear based solely on the current structure.

Steel — South Korea Is Lower Than Competitors, But Not Exempted

This structure is most clearly exposed in the steel sector. South Korea's CBAM-targeted exports to the EU are heavily skewed toward steel, meaning that the single steel sector virtually dictates most of South Korea's CBAM impact. In particular, due to an export structure centered on flat products, institutional shocks are inevitably concentrated.

However, the starting line for South Korean steel is not entirely disadvantageous. According to estimates by international raw materials research firm CRU, the CBAM burden to be imposed on South Korean hot-rolled coil (HRC) is analyzed to be around €22 per ton, placing it in a lower bracket than major competitors such as India (about €83), Vietnam (about €68), Japan (about €50), and China (about €41). This is interpreted as a result of South Korea lowering its burden to a certain extent through adjustment mechanisms with its own carbon pricing system.

However, this "relative advantage" must not be mistaken for an "exemption." A burden of about €22 per ton is a figure from the early phase where free allocations are maintained almost intact. As free allocations are phased out step-by-step, the absolute cost levied on the same product increases rapidly. In other words, the task for South Korean steel is to defend its "advantage over competing countries" while preparing for the absolute cost surges that will accumulate in the later stages.

The Cost Curve Steepens Around 2030, Not 2026

The most frequent misunderstanding made by companies encountering CBAM for the first time is the judgment that "the impact will be limited because the burden in the first year is not large." However, looking at the shape of the cost curve, the actual burden steepens as it moves toward the later stages.

The EU aligned the phased introduction of CBAM with the gradual phase-out of free allocation under the EU ETS. The rate at which free allocation is phased out—meaning the rate at which CBAM applies—starts at 2.5% in 2026, moves to 5% in 2027, 10% in 2028, 22.5% in 2029, 48.5% in 2030, 61% in 2031, 73.5% in 2032, and 86% in 2033, before reaching 100% in 2034. The fact that the application rate in 2026 is a mere 2.5% can paradoxically obscure the essence of the system.

In particular, the transition period from 2029 to 2030 is the steepest single-year increase in the entire schedule, with the application rate more than doubling in a single year from 22.5% to 48.5%. Furthermore, because CBAM certificate prices are linked to EU ETS auction prices, any future rise in EU carbon prices will be directly transferred to CBAM costs. This is why building financial models based on early-year costs structurally underestimates medium-term risks.

Practically speaking, procuring low-carbon raw materials, improving production processes, securing verified emissions data for each supplier, and redesigning client contracts usually require lead times of several years. Therefore, responding to the cost spikes around 2030 requires preparations to begin as early as 2026.

Data Is a Pricing Variable, Not Just a Regulation

Under the CBAM regime, the accuracy of emissions data is not simply a matter of reporting quality, but a pricing variable that dictates actual costs. The number of certificates is calculated using either verified measured emissions or default values set by the EU, and an intentional cost gap exists between the two.

The EU applies a certain surcharge to default values compared to national averages, and this surcharge width is designed to grow larger over time. This means that failing to present measured verification data and relying on default values puts a company at a disadvantage. In industries like steel where differences in carbon intensity by process and manufacturing method are large, this difference directly leads to a difference in the number of certificates. Therefore, ESG and carbon management departments need to prioritize building data systems over mere declarations.

The Blind Spot Is Expanding Beyond Raw Materials to Downstream

CBAM risks are unlikely to remain confined solely to the current scope centered on the six raw materials. The European Commission proposed measures in December 2005 to expand the scope of application to downstream (intermediate and finished) products of steel and aluminum, and discussions are underway to implement them starting in 2028. However, as of 2026, this is still at the stage of legislative and detailed design, and regulations have not yet been finalized.

Nevertheless, the policy direction itself is clear. If CBAM stops only at the raw material stage, the possibility of circumventing imports through processed goods remains. Therefore, the Commission and stakeholders view downstream expansion as a key supplementary device.

For South Korean companies, the implication of this change is clear. It is a signal that this is no longer merely an issue for steelmakers. Exporters of processed goods, parts, and finished products are also reaching a point where they must manage upstream embedded emissions data and carbon price burdens within their supply chains at the contracting and procurement stages.

What South Korean Companies Must Read Is Not "System Ownership," but "Effective Recognized Price"

Synthesizing all these facts, South Korean companies' CBAM strategies must not start from the question, "Are we also an ETS country?" A more critical question is, "How much of the carbon price actually paid can we create and prove in a form the EU can recognize?" and "How much can we report using verified measured emissions rather than default values?"

Particularly in industries with high export proportions and heavy carbon intensity like steel, the net CBAM burden is dictated by the free allocation structure and process data levels rather than the mere existence of the K-ETS. The fact that South Korea is in a lower burden bracket than competitor nations is a clear advantage. However, this is closer to the result of an initial phase where low current application rates and adjustment mechanisms intersect, rather than a sign of a mature system. Whether this advantage will be maintained even in the phase where free allocations are substantially reduced remains a separate question.

Consequently, the tasks for South Korean steel and manufacturing are twofold. One is domestic institutional improvement, such as reforming the K-ETS, expanding paid allocations, and strengthening carbon price signals. The other is building emissions data, product-level carbon costs, and long-term procurement strategies at the corporate level that can withstand EU verification right away.

The message delivered to South Korea by the first full-scale year of CBAM is simple. The mere fact of introducing an emissions trading system does not grant automatic protection at the EU border; the real level of protection is determined by the actual carbon price paid and the quality of verifiable emissions data. The difference between companies that understand this paradox early and those that do not is highly likely to become increasingly evident on income statements around 2030 and beyond, as the reduction of free allocations deepens.