Authors: Kirsten Bonke Robert McMillan Finbarr Wormwell
The world's first carbon border tax came fully into force on January 1: the European Union's Carbon Border Adjustment Mechanism (CBAM). It is a bold move to tackle climate change via trade policy, but it also creates uncertainty for the renewable energy industry and the (re)insurers and lenders who support it.
The basic aim of the CBAM policy is to ensure that carbon-intensive products and materials, like cement, steel or fertilizers, are subject to the same carbon taxes whether they are produced within the EU or outside it. While this policy is designed to promote sustainability, it introduces complexities for industries reliant on high-carbon materials.
Renewable power is one such industry, with steel and cement required in high quantities for offshore and onshore wind energy projects. Offshore wind generation capacity for Europe is set to increase 410% between 2025 and 20401, and insurers and reinsurers are increasingly stepping up to provide the financial protection that such projects require.
This financial protection comes via policies that cover construction and operational risks, usually forming part of insurers' energy and property business lines. There is also increasing demand for credit, surety and political risk covers for renewable energy projects,2 and these may also be impacted by policies such as CBAM.
What does CBAM mean for European wind projects?
Under CBAM, importers of high-carbon goods into the bloc are obliged to purchase 'certificates' that cover the value of the CO2 emitted during the production of those goods. This is intended to level the playing field between EU producers who are subject to carbon taxes and producers elsewhere, who might not be. The idea is to remove any incentive for EU industries to move production to countries with weaker climate policies.
CBAM does not apply to all imports. It covers certain high-carbon-intensity products and commodities such as iron, steel, cement, aluminum, fertilizers, electricity and hydrogen.
This matters to the wind energy industry, because most of the mass of both offshore and onshore wind turbines consists of steel and cements. Steel forms approximately 70-80% of their total mass. Most of it comes from blast furnace-basic oxygen furnace (BF-BOF) processes, which are particularly high-CO2 processes3. Where steel is used in all of the main components, cement is used in the foundations. This is clearly always relevant to onshore turbines; and for offshore projects it is used both in gravity-based foundations and in the foundations of floating turbines4.
Offshore wind turbines contain substantially more steel than onshore wind turbines. A large onshore wind turbine at 5MW capacity uses about 340 tons of steel, whereas a 15MW offshore wind turbine uses circa 3,250 tons, with around 2,250 tons in the foundations5. This high steel content makes offshore wind projects more vulnerable to fluctuations in steel prices, which will likely be exacerbated by the CBAM.
Quantifying CBAM's exact impact on the wind industry is challenging, as it depends on the origin of the steel, the cement, and the production processes used. However, lobbying groups and researchers have estimated that it could add an additional cost of around EUR1 million per turbine, starting from 20346.
The renewables team at Gallagher Re has analyzed the CBAM price impact on cement and steel for onshore and offshore wind projects. In a worst-case scenario, we estimate that the total installation costs for onshore and offshore wind projects may increase by 3% and 1% respectively in 2026; and rise to 6% and 2% by 2032. While this level of increased cost may appear marginal; it is material and needs to be factored into project finances and risk assessments by insurers.
It is also important to put this into a longer-term context. In the past decade, the wind industry has benefited from tumbling costs, down more than 60% in the past ten years. But in the past two years, project costs have risen again by around 30-40% due to higher interest rates, supply chain bottlenecks and more political uncertainties7. Wind projects in Europe have already been facing construction delays due to supply chain constraints, and so any further cost increases present a challenge for developers.
That said, the wind energy and wider renewables sector in Europe is still a strong growth story. An increase in project costs due to CBAM may slow this growth, but is unlikely to stall the overall momentum. Project numbers and capacities are increasing, and there will be plenty of opportunities for insurers to provide coverage in the sector in the years ahead — not least in credit and surety lines.
Will CBAM drive demand for more credit & surety insurance?
Demand for long-term credit and surety cover for renewable energy projects has grown alongside the renewables industry during the last few years.
According to the Berne Union, demand for long-term products such as Medium and Long-Term Export Credit (MLT), Political Risk insurance (PRI), and Other Cross-Border Credit (OCB) insurance or guarantees for renewable energy projects has experienced 14.8% growth year-on-year. In 2024, new long-term product commitments were USD 5bn higher than the 2019-2023 average, evidencing the ongoing growth of this market8.
In Europe, CBAM may have two opposing impacts on the credit, surety and political risk insurance market. On the one hand, slower growth in renewables could decrease overall demand for these covers. On the other, thinner margins in the sector could mean a greater need for protection against payment defaults as part of the risk management strategies of lenders.
If a project depends upon imported steel, for example, CBAM compliance costs will need to be priced into contract values and passed onto the various stakeholders. This is unlikely to be a marginal issue. During 2024, 27% of the EU's total steel consumption was comprised of imported steel, which represented a historically high level9.
The surety bond market will likely be affected by CBAM too, specifically contract surety bonds, such as advance payment or performance bonds, which must typically be in place before construction commences. Increased project costs are likely to lead to higher contract values, which in turn must be reflected in higher-value surety bonds. By extension, this may mean that insurance companies will require increased capacity from their reinsurers.
Government regulation and stabilization of power markets means renewable operators do not typically have freedom to pass increased costs onto the end-consumer. In this context, CBAM may decrease project companies' margins. This could cause difficulties for project companies in meeting their repayment obligations to lenders. In turn, lenders may adjust repayment schedules, in order to avoid jeopardizing the viability of a project, and reduce the risk of a default.
All else equal, the perceived risk associated with wind power projects is probably increasing. Geopolitics is a contributor to this in the broadest sense, including everything from climate and trade policy to the risk of hostile actions on the high seas.
Against this backdrop, the protection provided by insurance companies, Export Credit Agencies (ECAs), and reinsurers will continue to be critical for the sustained development of the onshore and offshore wind industry. And these (re)insurance market players will need to continue to adapt to a fast-changing regulatory environment in order to meet their customers' demands.
Gallagher Re structures and places reinsurance solutions for surety bonds and MLT credit risks underwritten by both private insurers and ECAs, by leveraging our expertise in the dynamic renewable energy markets. With our tailored approach, we empower clients to navigate complex risks with confidence and unlock new opportunities for growth.
