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From 2026, the EU CBAM will be an essential tool to prevent carbon leakage, but a small share of EU industrial output will remain exposed via exports.
Europe’s trading partners accounting for 40 percent of CBAM-covered exports already price industrial emissions, but the rest goes to countries with little or no carbon price. The Commission is expected to propose a short-term fix by the end of 2025, but a solution is needed in the long term.
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While carbon pricing systems are developing globally, a CBAM export adjustment can provide effective leakage protection in a way that respects global trade rules.
Granting free allocation to installations subject to carbon pricing for verified export shares would help safeguard industrial production. To maintain decarbonisation incentives, such adjustment should decline over time and be conditional on companies’ progress in cutting emissions.
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A credible export adjustment requires robust implementation; this is feasible using tracking tools and building off the existing EU Emission Trading System.
Monitoring and tracing tools for CBAM product exports are already in place or under development, some of the value chains from production to export are short, and solutions for recognising third countries’ carbon prices are advancing.
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Tackling export-related carbon leakage is only one piece of the puzzle:
To drive industrial transformation, ensuring a strong carbon price alongside affordable power is key. Furthermore, the EU should rapidly scale green lead markets both in Europe and internationally to spur the demand that industry needs to invest in climate-neutral production.
Addressing exports under the EU Carbon Border Adjustment Mechanism
Solutions against carbon leakage risks
Summary
This report by Agora Industry and Energiewende proposes a targeted solution for EU exporters under the EU Carbon Border Adjustment Mechanism (CBAM) to ensure that decarbonising companies remain competitive on global markets. Extra-EU CBAM exports constitute 15 percent of the overall EU exports, with steel products making up the largest share. Despite 40 percent of EU CBAM exports going to jurisdictions with equivalent carbon pricing, the majority flows to countries with weak or absent carbon price signals – leaving a small but exposed share of industrial production at risk of export-related carbon leakage.
The think tanks propose compensating exports in the form of emission allowances under the EU Emission Trading System (ETS 1) starting in 2028. The allowances 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 would maintain strong decarbonisation incentives even as industrial producers compete internationally. The administration would be relatively easy: monitoring and tracing exports is feasible using digital tools under development, and the system builds off existing compliance under the ETS. Crucially, solutions for recognising third countries’ carbon prices are advancing, helping to ensure coherence and fairness.
To drive industrial transformation, such a measure must be complemented by policies that ensure a strong and predictable carbon price, affordable clean power through renewables buildout and rapid scaling of green lead markets.
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Addressing exports under CBAM
Addressing exports under CBAM - Solutions against carbon leakage risks
