Plugging the leak: how a CBAM export adjustment can back clean industry
The EU Carbon Border Adjustment Mechanism (CBAM) is crucial to tackling carbon leakage on imports, but a small share of European exports to countries with low or no carbon price remains at risk. Agora proposes a targeted CBAM export adjustment that would shield affected companies, while keeping strong incentives to invest in clean production.
In January 2026, the European Union will start to place a fee on carbon-intensive products entering the bloc through its Carbon Border Adjustment Mechanism (CBAM). In parallel, the free allocation of emission allowances under the EU Emissions Trading System (ETS) will be reduced. As the CBAM only covers imports, an important question remains: how can Europe protect its exporters from carbon leakage while staying on course towards its climate goals?
While CBAM is intended to become the EU’s main tool for levelling the carbon playing field in global trade, a new analysis by Agora Industry and Agora Energiewende shows that a small but important share of exports will remain exposed. About 40 percent of CBAM exports go to jurisdictions with equivalent carbon pricing, but the rest flows to countries where carbon prices are much lower, or entirely absent. The European Commission is expected to propose an interim solution to the issue in December. In this context, Agora suggests introducing an export adjustment mechanism which would help decarbonising companies stay competitive on global markets for the long term.
Designing a tool that keeps decarbonisation incentives strong
A well-designed export adjustment could offer effective leakage protection while respecting global trade rules and maintaining strong incentives for emission reduction and innovation, Agora argues. Rather than offering financial subsidies – approaches likely to spark trade disputes – the think tanks propose compensating exports in the form of emission allowances. Starting in 2028, ETS installations would receive this compensation for the share of production that is verified as exported. Crucially, transfers would decline over time to avoid overcompensation, be linked to the ten percent best performing installations via the ETS benchmarks and be conditional on companies’ progress in reducing emissions. This, the paper argues, would maintain strong decarbonisation incentives even as industrial producers compete internationally.
Such an export adjustment should adhere to core principles: effectiveness, environmental integrity, non-discrimination, proportionality, simplicity and transparency. For example, it should only cover the verified shares of products exported and only compensate the carbon cost difference between the EU and the export destination. Taking into consideration the carbon prices paid in destination markets ensures coherence and fairness, it reduces the support need (and thus cost) to the European taxpayer and promotes cooperation. Administering such a mechanism would be relatively easy, since the EU already collects information on third-country carbon prices in the implementation of the existing CBAM. Finally, export carbon leakage risks should undergo regular reviews, including the option to adjust compensation if risks have changed.
A credible system will ultimately depend on implementation. Many of the tools required for such an adjustment are already in place or being developed. Building off the existing ETS reporting and compliance system ensures simplicity and transparency. Furthermore, digital tracking tools along the value chain are becoming more sophisticated, enabling the tracing of export shares.
Affordable clean power and green markets key to success
Export-related leakage is only one piece of the EU’s broader industrial transformation puzzle, Agora underlines. A strong and predictable carbon price, accelerating renewables deployment to ensure affordable clean energy and de-risking low-carbon investments are essential for Europe’s industrial transformation and competitiveness. Rapidly scaling markets for climate-neutral products is also important. Green lead markets are emerging at home and abroad, but they remain small relative to total demand. Stronger offtake signals are critical to driving innovation and attracting investments in climate-neutral production.
As the EU races to secure its industrial base while meeting climate targets, addressing export leakage risk is crucial. Done right, it can ensure that green industrial products made in Europe remain competitive on global markets – helping to drive the transformation, anchor investments and strengthen the European economy in the years ahead.
The analysis entitled Addressing exports under the EU Carbon Border Adjustment Mechanism: Solutions against carbon leakage risks consisting of 37 slides is available for free download at the link below.
