VK Arora, Kinetics Process Improvements, Inc. (KPI), USA, provides insight into the Carbon Border Adjustment Mechanism (CBAM) and how the economics of hydrogen and electricity will determine the long-term competitiveness of European fertilizer production.
The European fertilizer industry is entering a period of structural transition as rising energy costs, carbon pricing, and growing import dependence reshape the economics of ammonia production. The EU’s Carbon Border Adjustment Mechanism (CBAM) is designed to equalise carbon costs between domestic producers and imports, but ammonia remains fundamentally an energy-intensive commodity.
This article evaluates ammonia competitiveness under the CBAM using scenario-based, landed-cost modelling, comparing European producers with hydrocarbon-advantaged exporters across several production pathways, including conventional ammonia, carbon capture integration, and clean ammonia based on low-carbon hydrogen.
The analysis shows that CBAM narrows the competitiveness gap between domestic production and imports but does not eliminate the structural advantage enjoyed by producers in regions with lower energy costs. Clean ammonia production in Europe becomes economically competitive only when low-carbon hydrogen costs US$2/kg, a level significantly below current expectations for renewable hydrogen costs.
As carbon prices rise under the EU Emissions Trading System (ETS), carbon compliance costs for conventional ammonia production will increase sharply. However, the long-term competitiveness of European ammonia production, and therefore regional fertilizer supply, will ultimately depend on the availability of competitively priced hydrogen and electricity.
A structural turning point
Europe’s ammonia industry is entering a period of structural change driven by three powerful forces: rising carbon costs, persistently high energy prices, and increasing reliance on imports. For decades, European ammonia producers operated competitive plants supported by advanced technology, established infrastructure, and proximity to major fertilizer markets. That balance has shifted significantly over the past decade.
Natural gas prices in Europe remain structurally higher than those in hydrocarbon-advantaged regions such as the US, North Africa, and parts of the Middle East. Industrial electricity prices are also significantly higher. Because ammonia production is fundamentally a hydrogen production business, these energy price differences translate directly into higher production costs for European plants.
At the same time, carbon pricing under the EU ETS has transformed carbon emissions from an environmental metric into a material operating cost. As carbon prices rise and free allowances decline, carbon compliance increasingly affects plant utilisation, operating margins, and long-term investment decisions.
The Carbon Border Adjustment Mechanism (CBAM) extends carbon pricing to imported products by requiring importers to pay for the embedded emissions associated with production outside Europe. While CBAM reduces carbon leakage risks, it does not eliminate the underlying energy cost differences that shape ammonia competitiveness.
EU ammonia production and imports (2023 - 2025)
As shown in Figure 1, Europe has become increasingly dependent on imported ammonia as domestic production has declined due to rising energy costs. The economic question facing the industry is therefore not simply how carbon costs affect production, but whether European plants can transition to low-carbon ammonia production while remaining globally competitive.
EU ammonia imports
Ammonia carbon intensity (CBAM default vs actual)
Carbon pricing and CBAM exposure
Carbon pricing is rapidly becoming a major economic driver for European ammonia producers. Conventional ammonia plants typically emit around 1.8 t of CO2/t of ammonia, creating significant compliance costs under the EU ETS. As illustrated in Figures 4A and 4B, carbon costs rise sharply as free allowances decline and carbon prices increase. For a typical 1600 tpd ammonia plant, annual compliance costs could reach very substantial levels by the early 2030s.
CCBAM carbon cost exposure for ammonia (2026 - 2034)
and annual CBAM compliance cost (1600 tpd ammonia plant)
At this point, carbon costs become comparable to major operating cost components of ammonia production. Carbon exposure, therefore, shifts from a regulatory issue to a central financial factor affecting plant competitiveness and long-term asset value.
The rapid escalation of carbon costs also changes the economics of decarbonisation. If low-carbon hydrogen becomes available near the estimated breakeven level of approximately US$2/kg, the capital required to convert existing ammonia plants to clean production could potentially be recovered within only a few years through avoided carbon compliance costs.
However, current hydrogen price expectations near US$5/kg make such conversions uneconomic. Under these conditions, conventional production combined with carbon compliance remains the least-cost operating strategy in the near term.
CBAM partially reduces the competitiveness gap by applying equivalent carbon costs to imported ammonia. Nevertheless, the mechanism cannot eliminate the structural advantage enjoyed by producers located in regions with significantly lower energy costs.
Scenario framework and methodology
To evaluate how carbon policy interacts with energy economics, a series of scenarios was analysed comparing EU Producers (EUPS) with Hydrocarbon-Advantaged Producers (HAPS).
The analysis focuses on the landed cost of ammonia delivered to European ports, allowing a direct comparison between domestic production and imported ammonia.
For imported ammonia, the landed cost includes production cost at the exporting facility, marine transport, insurance and logistics charges, and CBAM compliance cost. For European producers, the cost includes production costs (variable and fixed costs) and carbon compliance costs under the EU ETS.
Freight and logistics values used in the analysis represent indicative estimates based on publicly available market information, and are intended for comparative analysis rather than precise transactional pricing.
The study evaluates a base case representing pre-CBAM market conditions, followed by six post-CBAM scenarios reflecting different production and decarbonisation pathways.
In this analysis, clean ammonia refers to ammonia produced using low-carbon hydrogen supplied through the planned European Hydrogen Backbone (EHB) or equivalent infrastructure. Competitiveness assumes hydrogen availability near US$2/kg, the estimated breakeven level required for European production to approach parity with imported ammonia.
The resulting cost differentials are illustrated in Figures 6 - 11, while Figure 12 summarises the comparison across the base case and all post-CBAM scenarios.
Base case: pre-CBAM market structure
The base case represents the ammonia market’s competitiveness before CBAM implementation, when imported and domestic ammonia were subject to fundamentally different carbon cost regimes and no carbon border adjustments were applied.
Under these conditions, both EUPS and HAPS operate conventional grey ammonia plants based on natural-gas reforming and hydrogen production.
Production economics are therefore primarily determined by natural gas prices and plant operating efficiency. Producers located in hydrocarbon-advantaged regions benefit from structurally lower natural gas costs, which translate directly into lower hydrogen and ammonia production costs.
Transportation, insurance, and logistics costs represent a relatively small portion of the total delivered ammonia cost compared with feedstock economics. Consequently, exporters from low-gas-cost regions retain a clear economic advantage in supplying ammonia to European markets.
The resulting cost differential between European production and imported ammonia before the CBAM is illustrated in Figure 12, which serves as the reference point for evaluating the post-CBAM scenarios discussed below.
Landed cost differential of ammonia (EUPS-HAPS)
Post-CBAM scenarios evaluated
Six scenarios were evaluated to assess how carbon pricing and technology choices influence ammonia competitiveness following the implementation of the CBAM. Scenario definitions are summarised in Table 1, while the resulting cost differentials are presented in Figures 6 - 11.
In this analysis, clean ammonia refers to ammonia produced using low-carbon hydrogen supplied through the planned EHB or equivalent hydrogen infrastructure. Competitiveness assumes hydrogen availability near US$2/kg, the estimated breakeven level relative to imported ammonia.
PCCS refers to the capture of CO2 from process syngas streams. Several ammonia producers in the US have already implemented such configurations, including CO2 capture, compression, and pipeline transport for geological sequestration, demonstrating the technical feasibility of this approach.
Case one: grey EUPS vs grey HAPS
Both regions operate conventional ammonia plants; CBAM adds carbon costs, but exporters retain a strong feedstock advantage.
Case one scenario: EUPS grey and Hydrocarbon-Advantaged Producers (HAPS) grey
Case two: grey EUPS vs HAPS with PCCS
Exporters implement pre-combustion CO2 capture from syngas streams with compression and geological sequestration.
Case two scenario: EUPS grey and HAPS PCCS
Case three: clean EUPS vs HAPS with PCCS
European plants convert to clean ammonia using low-carbon hydrogen while exporters apply partial carbon capture.
Case three scenario: EUPS clean and HAPS PCCS
Case four: clean EUPS vs Grey HAPS
Europe transitions to clean ammonia production while exporters remain conventional and incur higher CBAM exposure.
Case four scenario: EUPS clean and HAPS grey
Case five: clean EUPS vs clean HAPS
Both regions adopt clean ammonia production; competitiveness is determined mainly by hydrogen and electricity pricing.
Case five scenario: EUPS clean and HAPS clean
Case six: grey EUPS vs clean HAPS
Exporters convert to clean ammonia while European plants remain grey, strengthening import competitiveness.
Case six scenario: EUPS grey and HAPS clean
Taken together, these scenarios illustrate how carbon pricing, hydrogen economics, and technology pathways interact to shape the evolving competitiveness of European and imported ammonia.
Interpretation of scenario results
The scenario results illustrate how carbon pricing, hydrogen economics, and technology choices influence ammonia competitiveness under CBAM.
Case one
In case one, where both regions operate conventional ammonia plants, CBAM introduces additional carbon costs but does not eliminate the structural cost advantage of HAPS. Lower natural gas prices continue to dominate ammonia economics, allowing exporters to maintain a cost advantage in supplying the European market.
Case two
With case two, exporters implement PCCS. Capturing CO2 from process syngas streams and compressing it for sequestration lowers the carbon intensity of ammonia production and reduces CBAM exposure. Because the underlying natural gas advantage remains unchanged, imports remain competitive.
Case three
For case three, EUPS convert to clean ammonia using low-carbon hydrogen while exporters apply partial carbon capture. Carbon exposure for European plants is significantly reduced, but competitiveness remains strongly dependent on hydrogen and electricity pricing.
Case four
The scenario in case four shows Europe transitioning to clean ammonia while exporters remain conventional producers. CBAM increases the cost of imported ammonia due to higher carbon exposure, narrowing the cost differential between imports and domestic production.
Case five
In case five, both regions transition to clean ammonia production. Carbon costs largely disappear from the comparison, and competitiveness shifts primarily to the economics of hydrogen and electricity.
Case six
Then in case six, exporters adopt clean ammonia production while European plants remain conventional. In this configuration, exporters benefit from both lower energy costs and reduced carbon exposure, reinforcing the competitiveness of imported ammonia.
The overall comparison shown in Figure 12 highlights a central conclusion: CBAM narrows the cost differential between imported and domestic ammonia but does not eliminate the structural energy advantage of HAPS.
This becomes increasingly important as carbon compliance costs escalate, as illustrated in Figures 4A and 4B. As EU ETS prices rise and free allowances decline after 2030, carbon costs for conventional ammonia production increase sharply. If low-carbon hydrogen becomes available near the estimated breakeven level of approximately US$2/kg, avoided carbon costs could allow the capital required for clean ammonia conversion to be recovered within only a few years.
However, at currently projected hydrogen prices near US$5/kg, clean ammonia conversion remains economically unattractive. The analysis, therefore, confirms that while carbon policy influences competitiveness, the decisive factors remain the cost of hydrogen and the electricity required to produce it.
Hydrogen economics and clean ammonia conversion
Hydrogen pricing ultimately determines whether clean ammonia production in Europe can compete with imports. However, the cost of hydrogen is largely determined by the cost of electricity used to produce it via electrolysis. Current projections for low-carbon hydrogen produced from renewable electrolysis remain near US$5/kg or higher, reflecting both electrolyser capital costs and the high price of electricity in many European markets. At this price level, clean ammonia production becomes significantly more expensive than conventional ammonia production in hydrocarbon-advantaged regions.
The analysis in this article, therefore, evaluates clean ammonia conversion assuming hydrogen availability near US$2/kg, representing the estimated breakeven level required for European production to approach competitiveness with imported ammonia under CBAM. Achieving hydrogen costs at this level would require substantially lower electricity prices than those currently observed in many European markets.
At this breakeven level, the economics change significantly. As illustrated by the carbon cost escalation in Figures 4A and 4B, carbon compliance costs for conventional ammonia production increase rapidly after 2030. Avoided carbon costs could therefore offset a significant portion of the capital investment required to convert existing ammonia plants to clean production.
Engineering and economic studies conducted by Kinetics Process Improvements (KPI) – including full conversion design for a 1600 tpd European ammonia plant, CCS system design, and blue/green hydrogen integration studies – confirm that such transitions are technically feasible but economically dependent on the availability of competitively priced hydrogen and electricity.
Nitrogen cost remains relatively minor in the economics of ammonia production. Hydrogen and electricity costs together dominate the economic viability of clean ammonia production.
The combined effect of higher carbon costs, persistent energy price differentials, and limited near-term hydrogen competitiveness suggests that Europe’s ammonia market is structurally shifting toward greater reliance on imports rather than re-balancing toward domestic production.
Conclusions
This analysis shows that CBAM introduces a meaningful carbon cost signal for ammonia supplies into Europe, but does not fundamentally change global competitiveness. While the mechanism equalises carbon pricing between domestic production and imports, it also increases cost pressure on European producers by phasing out free allocations and exposing underlying structural disadvantages.
As EU ETS prices rise, carbon costs become a major component of ammonia production. CBAM narrows the landed cost differential between European and imported ammonia, but does not eliminate it. Energy price differentials remain the dominant driver of competitiveness across all scenarios, with CBAM tightening rather than resolving the gap for European producers.
The transition to clean ammonia is highly sensitive to hydrogen economics. At current projected hydrogen prices of US$5 - 6/kg, European clean ammonia remains uncompetitive. The analysis indicates a breakeven level near US$2/kg, at which point parity with imports becomes achievable under CBAM.
Rising carbon costs strengthen the case for decarbonisation, but carbon pricing alone is insufficient to drive large-scale transition. Following the structural loss of Russian gas supply, Europe has entered a persistently higher-cost energy regime, resulting in sustained import dependence and periodic plant curtailments. Import volumes have already increased between 2024 and 2025, and this trend is expected to continue. Without access to cost-competitive low-carbon hydrogen and electricity, import dependence is likely to increase further despite CBAM.
Bibliography
VK Arora, “Challenges in Conversion to Clean Ammonia,” N2+Syngas, Barcelona, February 2026.