EU proposes new measures to shield exporters from carbon leakage

The European Commission will implement new measures to protect EU industries from carbon leakage risks in sectors covered by the Carbon Border Adjustment Mechanism, it confirmed July 2.

The Commission has also proposed using CBAM revenues to compensate domestic producers at risk of losing market share to cheaper imports from countries with weaker climate policies. The support scheme aims to maintain EU industrial competitiveness as the bloc phases out free carbon allowances under its Emissions Trading System.

The proposals, which will be made by end-2025, aim to ensure "equal treatment for all goods, whether produced and sold in the EU, imported into the EU or exported," the EC said.

These policies would complement CBAM's existing framework, which covers six carbon-intensive sectors -- cement, iron and steel, aluminum, fertilizers, electricity, and hydrogen.

By addressing the export side of carbon leakage, Brussels wants to prevent EU producers from losing market share to competitors in countries with less stringent climate policies.

This scheme would be in place for an initially defined period and then will be reviewed after the new 2026 ETS reform is approved, according to the EC.

Carbon leakage occurs when production shifts from regions with strict climate policies to those with weaker environmental standards, potentially undermining global emissions reduction efforts while disadvantaging compliant producers.

The phenomenon has been a key concern for EU policymakers as they implement increasingly ambitious climate targets.

CBAM revenues

The proposals would allow affected producers to receive compensation proportional to the reduction of free allowances, but tied to deliverables on long-term decarbonization, according to EC documents.

The scheme represents a significant shift in how Brussels plans to recycle CBAM revenues while addressing industry concerns about losing market share to competitors in countries with weaker climate policies.

“The scope will need to be established based on objective criteria. This scheme would be in place for an initially defined period with a review in 2027,” the EC said in a document titled ‘Delivering on the Clean Industrial Deal I’.

A high-level dialogue will be organized to consult affected sectors on the plans in advance of the formal proposal, taking into account specific national circumstances.

The move addresses a key concern for EU industrial sectors facing rising carbon costs while competing against imports from countries with weaker climate policies. Free allowances under the EU Emissions Trading System are being gradually phased out, with the process set to complete by 2034 for CBAM-covered sectors.

Industrial competitiveness

In early 2026, the Commission is also expected to decide whether to extend the scope of CBAM to other sectors under the EU ETS at risk of carbon leakage, with a proposal for these changes expected in the fourth quarter of 2025.

The move highlights tensions in the EU's shifting political landscape between environmental ambition and economic pragmatism, as policymakers test whether CBAM can deliver climate benefits without undermining industrial competitiveness.

The aim of CBAM is to level the playing field for EU companies, as most exporting countries either do not have a carbon price as high as that of the EU ETS or lack a price on emissions altogether.

Carbon permits in Europe are currently around eight times more expensive than compliance prices in China, the world's industrial powerhouse.

Platts, part of S&P Global Commodity Insights, assessed EU Allowances for December 2025 at Eur70.80/mtCO2e ($83.22/mtCO2e) July 1. This compares with China's compliance emission allowance, or CEA, which was valued at Yuan 73.01/mtCO2e ($10.18/mtCO2e) June 20, according to the Shanghai Environment and Energy Exchange.