Export Carbon Leakage: Assessment of different policy options in the context of CBAM
The Carbon Border Adjustment Mechanism (CBAM) levels carbon costs between EU and imported products but does not address export carbon leakage. As free allocation under the EU ETS is phased out, EU exporters face rising carbon costs, potentially reducing competitiveness in markets with weaker climate policies. This paper develops an assessment framework based on five criteria and applies it to four policy options: export rebates, export-linked free allocations, (sub)sectorspecific adjustments to the free allocation phase-out, and targeted decarbonisation support. The analysis highlights trade-offs between leakage protection, decarbonisation incentives, targeting, financing, and administrative complexity, which are unique to each option.
The EU Carbon Border Adjustment Mechanism (CBAM) applies the same carbon price to the embedded emissions of selected products imported into the EU market as charged in the EU Emissions Trading System 1 (EU ETS 1). It thereby creates a level playing field in that respect between domestic EU production and imports from third countries. However, CBAM does not address the competitive disadvantage faced by EU producers when exporting to markets with lower or no carbon pricing. As CBAM progressively replaces the free allocation of allowances under the EU ETS 1, EU producers will increasingly bear carbon costs on their entire output, including the share destined for export. This creates a risk of export carbon leakage: EU products may lose market share in third-country markets to competitors operating under less ambitious climate policies, potentially leading to net increase in global emissions.
This paper develops an assessment framework and applies it to four distinct policy options designed to address export carbon leakage in the context of CBAM. It comprises five key criteria: the degree of protection against carbon leakage it provides, the extent to which it preserves decarbonisation incentives, the precision with which it targets the relevant actors, its financing requirements, and its administrative complexity.
The four options assessed are: direct export rebates linked to verified carbon costs (Option 1); additional free allocations granted to EU ETS 1 operators based on their export share (Option 2); a sector-specific adjustment to the CBAM phase-out trajectory for free allocations (Option 3); and direct financing of decarbonisation investments in export-oriented sectors, for instance through Carbon Contracts for Difference (Option 4).
This paper does not derive policy recommendations but rather aims to identify pros and cons of each Option. It finds that no single option is clearly superior across all criteria. Options 1 to 3 offer more immediate carbon leakage protection but tend to weaken decarbonisation incentives unless robust conditionality criteria are imposed. Option 4 most effectively preserves the carbon price signal and supports structural industrial transformation, but entails higher financing needs and provides only delayed leakage protection. A sequenced combination of options may offer a path forward, securing effective short-term protection while preserving long term decarbonisation incentives.
