Those calling for “exports protection” under the Carbon Border Adjustment Mechanism (CBAM) seem to forget that the EU should support its cleanest producers rather than maintaining the dirty status quo and dumping polluting products on other countries.
As much of Europe gasps for air through summer heatwaves, EU climate action is stalling just at the time it needs to accelerate.
To stay on track with its 2040 and 2050 goals, the bloc must reduce emissions across its entire economy, especially in the sectors which are lagging behind. This means phasing out free pollution allowances going to the steel, cement and chemical industries, strengthening carbon pricing, and ensuring that the EU’s climate policies lead to real emission reduction by those industries in Europe.
The Carbon Border Adjustment Mechanism (CBAM) is meant to replace the EU’s outdated ‘carbon leakage’ measures, which are meant to protect EU industry from the risk that polluting activities will simply shift to parts of the world with weaker environmental protections. This concept has, over the past two decades, allowed heavy industrial polluters to avoid paying for their massive emissions – a cost that is borne by the rest of society.
Leaky solutions
In early July, the European Commission unveiled its proposed plan to implement the Clean Industrial Deal, which touched upon the treatment of exports under CBAM. The plan confirms that a legislative proposal for compensating affected producers “proportionally to the phasing out of the free allowances” will be tabled before the end of 2025. Moreover, the Commission stated that this compensating measure will be funded through CBAM revenue, which is only forecast to be around €1.5 billion per year, but is expected to increase with higher carbon prices and broader sectoral coverage.
With the proposal, the Commission will also present a new, updated analysis assessing the risks of carbon leakage for exporters of goods covered by CBAM. This focus on “risk” as opposed to “evidence” of carbon leakage is problematic, as it could lead to overcompensation based on inflating the risks of relocation due to climate-related costs.
Another problematic element is the notion that CBAM revenue should be reinvested to support the competitiveness of EU producers. This causes issues both on potential incompatibility with World Trade Organisation (WTO) rules and certainly on the fairness of such a measure. Directing a levy paid by non-EU producers to subsidise EU producers, especially when it comes to poorer countries, is unfair and counterproductive.
Secondly, the idea of compensating polluters, ingrained in the EU ETS’s system of free allowances and indirect cost compensation, is creeping into CBAM legislation, at a time when the EU is meant to scrap it. Different solutions must be found in order not to continue to reward those who pollute the most and subsidise them to pollute in Europe and export their polluting output to other parts of the world.
Phantom menace
It’s essential to contextualise how exports are actually affected by the EU carbon pricing framework.
While exports have been pushed to the forefront of the CBAM debate, the actual share of production affected is relatively limited. In 2023, exports of CBAM-covered goods represented a small fraction of total production: 18% for iron and steel, 15% for fertilisers, 7% for cement, and only 3% for aluminium.
Beyond that, it’s important to note that CBAM goods represent a tiny portion of the EU’s overall trade. In 2020 CBAM sectors accounted for just 0.8% of the EU’s gross value added (GVA), and 2.6% of EU exports to the rest of the world, according to the Commission’s own assessment. This means that 97.4% of EU exports are not affected by CBAM in its current format. In the European Commission’s own words, “overall, the CBAM has limited effects on exports”.
When the monetary value of exports is considered, the risk appears slightly higher. For example, in 2023, aluminum exports represented 3% of the sector’s output but generated 17% of revenue. However, a significant share of aluminum exports are directed to countries that already apply a carbon price or are setting up an emissions trading system. One third of aluminum exports from the EU go to the United Kingdom and Switzerland: the former applies a carbon price comparable to that of the EU ETS, and in 2027 will kick off its own CBAM, and the latter is linked to the EU ETS.
In general, a very consistent amount of CBAM exports go to countries that already price carbon or plan to: from the aforementioned UK and Switzerland, to Norway (which is part of the EU ETS), to the announcements of new carbon markets in Turkey, Mexico, Brazil.
These figures put the scale of the competitiveness risk back into perspective. With a relatively small share of EU exports and economic activity affected, blanket subsidies under the guise of “export solutions” would open the door to serious risks, including undermining the environmental integrity of the CBAM, prolonging carbon pollution subsidies, and clashing with WTO rules.
Making polluters pay
EU producers should pay for their emissions to ensure the polluter pays principle is applied and the environmental and societal costs of pollution are internalised. As the bloc’s economy moves toward climate neutrality, there is a mandate to phase out nearly all industrial emissions (as the ETS ceiling on emissions declines to zero in 2039).
If EU producers are held to such standards for products they sell in the EU, subsidising the same or even more polluting materials meant for exports means undermining the transition of other countries. Ironically, it would also reverse the long-standing practice of rich countries exporting their pollution, since the goods would go abroad while the pollution would stay at home. In addition, it would be highly counterproductive to allow exporters to sell their most CO2 intensive products and dump this outside of the EU’s borders, similarly to what already happens with waste.
Exempting exporters from the EU ETS carries the risk of seriously undermining the environmental integrity of the EU carbon pricing framework, and sending a counterproductive signal to countries importing EU products.
CBAM rebates for exporters would void the price signal provided by the EU ETS, and, as mentioned above, could conflict with WTO rules. An increase in ETS free allowances to cover the share of exported goods would similarly undermine the effectiveness of the EU carbon market. There is longstanding evidence that sectors receiving these freebies have not decreased their emissions in line with the Paris Agreement.
Future-proofing EU industry
The export of CBAM goods poses a much more limited competitiveness risk than the current debate suggests. To add to this, CBAM will be phased in very slowly. In 2026, the share of free ETS allowances will only decrease to 97.5% of emissions against the ETS benchmarks, and will go down to 50% only in 2030 – meaning that the heavy polluters will not pay for the majority of their emissions for at least five years. Conversely, each year the free allocation system disadvantages governments and citizens by foregoing tens of billions in annual revenue (€40 billion in 2023 alone) that could be reinvested in climate action.
In this context, the role of exports under CBAM deserves exploring more targeted solutions.
Policymakers should consider a few key principles and criteria to favour real solutions for CBAM exports that do not damage the environmental integrity of EU carbon pricing.
Any support measures should be based on a realistic estimate of carbon leakage risks, contribute to the EU’s climate goals and follow their timelines, and sidestep incentives for EU companies to continue with business as usual. This means investing in enabling, through means other than CBAM revenue, these exporting companies to roll out cleaner production methods that protect the climate and enhance the bloc’s industrial competitiveness by creating and tapping into new markets.
Expand existing solutions
Practically, what does this mean?
This is an opportunity to provide direct financial support explicitly targeted at fostering innovation in export-driven sectors, providing assistance for clean technologies while indirectly decreasing the pressure they could face in international trade flows. Such support could also translate in prioritising exporters in competitive bidding and grants for subsidies aimed at reducing emissions. Member states as well as existing EU funding programmes can be equipped to support these companies and technologies thanks to the hundreds of billions that will be unlocked through the phase-out of the free allocation system.
Finally, the long-term solution is ensuring that more economies globally put a price on emissions, through carbon markets or taxation. There is mounting evidence that CBAM is driving national climate plans and carbon pricing strategies in countries exporting to the EU. Succumbing to blunt and untargeted export rebates would undermine these efforts.
In the heated debate on exports that risks undermining the very foundation of the CBAM, one question remains unanswered: for how long can EU policymakers shield heavily polluting productions from paying the fair price for their emissions?
Even if the final products are sold abroad, the pollution created remains the responsibility of European industries and they must pay for it. Export rebates do not solve this problem; they simply export it.
