European producers and traders of urea are preparing for the phase-in of the EU's Carbon Border Adjustment Mechanism (CBAM) in early 2026. While EU producers expect their market share to rise, questions about the implementation, pricing, and oversight remain, leading to uncertainty among agricultural urea traders. The European AdBlue market is also weighing the possible impact.
Under CBAM, which was passed by the EU in May 2023, urea importers will have to buy certificates to cover the carbon emitted during production wherever the plant is located. In the UK, the government confirmed its CBAM application on fertilizers and other commodities from 1 January 2027.
CBAM is aimed at creating a level playing field for imports to the EU and the UK, while nudging non-EU countries towards climate action. European producers of urea currently have to contend with lower margins because their production cost is higher than that of non-EU manufacturers since the introduction of the EU Emissions Trading System (EU ETS). European producers are therefore at a disadvantage.
The transition period in the EU for CBAM began on 31 October and will last until 31 January 2026. During this time, urea importers must provide quarterly reports on their imports and the carbon emitted during production. In February 2026, the phase-in for CBAM will begin. After that point, importers must buy enough CBAM certificates to cover at least 80pc of embedded carbon each quarter.
Urea imports will therefore become more expensive in 2026.
The exact increase in fertilizer prices, including urea, will depend on the cost of CBAM certificates, which in turn will be based on the weekly average price for EU ETS allowances. EU ETS certificates are currently priced at €66/t CO2 but are due to rise in the future.
Calculating an exact price for CBAM certificates is difficult, Argus was told by affected parties. But estimates range anywhere from average indications of €10-20/t or even up to €80-100/t for imported urea. Higher prices will inevitably be passed on to the end-user. However, if one assumes that CBAM will add €10-20/t on the price of agricultural grade urea, then the estimates suggest that the cost of a loaf of bread will rise by €0.10-0.50, which is negligible, a European fertilizer wholesaler suggested.
Given the uncertainty of CBAM's effect on pricing, some suppliers are cautious about trading too far into the future. Agricultural buyers purchase product in advance of the key application seasons, but importers often attempt to time purchasing around dips in international prices.
European producers welcome CBAM
European urea producers have welcomed the introduction of CBAM. They have sold automotive grade urea (AGU) at a premium to imports for several years, and as a result, they have lost market share.
Norwegian fertilizer producer Yara said in its third-quarter results that it plans to only progress projects with the highest returns and concrete potential margins, driven by firm regulatory changes like the EU ETS and CBAM. The ETS and CBAM policies are likely to lift urea prices in Europe, and this would trigger increased nitrate fertilizer and NPK margins for Yara, if upgraded from low-carbon ammonia, according to the producer.
Some traders expect AGU imports to fall with the phase-in of CBAM, and domestic producers' market shares to increase again. However, the European market relies on imports for both agricultural and automotive grade urea so heavily that a lasting, significant drop in imports seems unlikely, analysts said. "Fertilizer import quantities, including agricultural grade urea, will not be negatively affected by CBAM as importers will absorb the new costs, as those that are subject to duties have done so previously," a German trader said.
There is, for example, not nearly enough prilled or granular urea production in Europe to cover demand, making imports impossible to avoid. In 2023, the EU 27 imported just over 5mn t of urea from just the top three non-EU suppliers — Egypt, Algeria and Russia — with an additional 6.3mn t from both within the EU and outside.
Urea imports in January-August 2024 were 7.2mn t, down by 8pc from 7.8mn t in the first eight months of 2023. During this period imports from Egypt, Russia and Algeria accounted for almost 51pc.
Furthermore, European urea traders have expressed concerns that it may be difficult for authorities to check carbon emissions at plants outside the EU, and that potential loopholes could allow foreign product to enter the market at discounted rates. There are also questions surrounding how the EU will regulate issuing CBAM certificates. Importers will not have to buy CBAM certificates, for example, if the producer has already paid a carbon price in the country of origin.
Impact on AGU and Europe's AdBlue market
The European AdBlue market might also feel the effects of the CBAM. AdBlue is produced by mixing AGU with deionised water.
While most AdBlue in Europe is produced by primary producers using domestic urea, there are an increasing number of so-called diluters, which import competitively priced urea, and then offer AdBlue at a discount. If the price gap between domestic and foreign urea is closed, diluters might be forced to increase their prices as well.
AdBlue traders in Germany and the Netherlands suggest that a narrowing price gap between these secondary producers and primary ones could affect the former's market share. The market share has been growing steadily in the past few years. That growth might be halted or even partially reversed once CBAM comes into effect.
According to Argus calculations, AGU consumption in Europe will continue to rise until 2027, in line with the projected growth in AdBlue demand (see graph). AGU imports, similarly, are expected to grow until 2029, peaking at about 85,000 t/yr.
