Europe’s efforts to secure lithium, cobalt, graphite and rare-earth supply chains are increasingly focused on domestic processing and recycling, but most of these materials remain outside the EU’s Carbon Border Adjustment Mechanism (CBAM). As strategic projects advance, their commercial viability depends on processing performance, energy costs, customer contracts and public support rather than direct carbon-border charges on competing imports.
The policy distinction is significant for materials used in batteries, clean technologies and defence. The EU’s Critical Raw Materials Act (CRMA) seeks to reduce strategic dependence by strengthening extraction, processing and recycling within Europe, while CBAM’s current coverage is based on carbon-leakage exposure in sectors linked to the EU Emissions Trading System (EU ETS), rather than the strategic importance of individual minerals.
Strategic Project Designation Does Not Extend CBAM Coverage
The European Commission’s second list of CRMA strategic projects, announced in October 2026, brought the total number of designated projects to 106. The portfolio covers materials including lithium, cobalt, graphite, nickel, manganese, rare earths, magnesium, tungsten and silicon.
Despite their strategic status, lithium carbonate and lithium hydroxide, cobalt products, graphite and separated rare-earth products are not covered by CBAM simply because they are critical raw materials. The mechanism therefore does not currently provide direct border-carbon protection for most of these supply chains.
For investors, the distinction separates strategic policy support from the carbon-cost treatment of imports. CRMA designation can strengthen a project’s position and support efforts to accelerate permitting, but it does not automatically offset differences between European carbon costs and those borne by overseas competitors.
Lithium and Cobalt Depend on Downstream Conversion
Lithium illustrates why extraction alone does not capture the full value of a critical-material supply chain. A project may include a mine and concentrator, but battery manufacturers require lithium carbonate or hydroxide that meets defined purity specifications. Chemical conversion is therefore a central part of the industrial process.
Conversion facilities need reagents, heat, electricity, water, waste-management systems and detailed quality control. Their performance depends on recovery rates, reagent prices, energy costs and consistency of feedstock. Without CBAM charges on imported lithium chemicals, European converters must compete primarily through production costs, supply security, proximity to customers and policy support.
Cobalt faces a related challenge. Europe has limited primary supply and relies significantly on international mining and refining networks. Strategic exposure concerns not only the origin of mined cobalt but also the location of refining into products suitable for cathode manufacturing, superalloys and other industrial applications.
A European refinery operating under EU energy and environmental requirements may have a lower emissions profile than an overseas competitor. However, that emissions difference is not currently reflected in a CBAM charge on cobalt imports.
Graphite Processing Brings Electricity and Heat Into Focus
Graphite requires several processing stages before it can be used as a battery anode material. Natural graphite concentrate must be purified, shaped, classified and coated to produce active anode material. Synthetic graphite involves high-temperature processing and can be particularly energy intensive.
Electricity and heat consequently have a substantial influence on production costs and carbon footprints. Yet graphite remains outside the current CBAM framework, leaving European projects to establish competitive processing capacity while facing established Asian suppliers.
For developers, the challenge is to secure suitable feedstock, demonstrate reliable product quality and control energy costs without relying on direct carbon-border protection. The strategic objective of building European or allied processing chains does not itself remove the commercial pressures associated with competing against established producers.
Rare-Earth Imports Remain Concentrated
The EU’s exposure to external rare-earth supply is illustrated by Eurostat data for 2025. The bloc imported approximately 15,100 tonnes of rare-earth elements, an increase of 17.1% compared with 2024.
China accounted for 46.8% of imports by weight, followed by Russia at 25.9% and Malaysia at 23.1%. Together, the three countries supplied nearly the entire volume of EU imports.
Mining is only one part of the supply-chain challenge. Rare-earth separation is technically demanding because the elements have similar chemical properties. Commercial production can involve concentrate cracking, solvent extraction, oxide production, metalmaking and magnet manufacturing.
Consequently, opening a European mine does not necessarily eliminate reliance on external processing or magnet production. CBAM does not currently address this dependency directly. Strategic projects, public financing, long-term customer contracts and industrial partnerships play a more immediate role in developing alternative supply chains.
Processing Technology Becomes a Central Financing Risk
For lenders, conventional commodity-price forecasts are insufficient to establish whether a critical-material project is financeable. A lithium or rare-earth development can encounter difficulties even when long-term demand appears strong if its conversion plant fails to meet product specifications, reagent costs increase, recovery rates deteriorate or customers qualify competing suppliers first.
Technology risk is particularly relevant where European projects use flowsheets that have not yet been demonstrated at commercial scale, are adapted to lower-grade or unconventional feedstock, or are designed to meet stricter environmental requirements.
Banks and equity investors therefore need independent engineering assessments covering mass balances, pilot-plant data, recoveries, impurities, reagent consumption, residue management and production ramp-up assumptions. These factors determine whether a proposed process can deliver the volumes and quality required by industrial customers.
Low-Carbon Electricity and Offtake Contracts Support Bankability
Power procurement can influence both production economics and the emissions intensity of critical materials. A reliable supply of low-carbon electricity can reduce a product’s footprint even when CBAM does not apply, potentially improving access to automotive, battery and technology customers that impose emissions criteria on suppliers.
Electricity therefore has a potential commercial value beyond its direct operating cost. Projects able to demonstrate lower-carbon production may benefit from customer procurement requirements before any formal carbon-border obligation is introduced for the relevant material.
Offtake arrangements can be equally important. European buyers increasingly value local or diversified supply because geopolitical disruptions can impose costs greater than a modest price premium. Long-term contracts incorporating floor prices, prepayments, strategic investment or take-or-pay provisions can translate that supply-security value into more predictable cash flow for financing.
Policy Changes and Future Carbon-Border Scope
The regulatory environment remains exposed to developments in international trade. Export controls imposed by dominant producing or processing countries can quickly alter the strategic value of alternative supply chains. Potential European responses include stockpiling, procurement rules, state aid and additional trade measures, but these possibilities must be distinguished from legislation already adopted.
Future CBAM expansion could bring greater attention to critical materials if European processing installations face significant EU ETS-related costs while competing with carbon-intensive imports. Policymakers may then examine whether the existing product scope creates carbon-leakage risks, particularly where production is energy intensive and the material is strategically important.
As of October 2026, however, lithium, cobalt, graphite and separated rare-earth products remain outside the current CBAM framework. Their European investment case is therefore driven principally by industrial security, processing capability, energy economics, customer qualification and financing arrangements.
Projects will need to combine proven metallurgy, secure feedstock, competitively priced low-carbon energy, qualified buyers and financing capable of withstanding commodity-market cycles. Strategic designation can support development, but it cannot substitute for commercially competitive processing.
