The EU’s carbon border adjustment mechanism (CBAM), is supposed to safeguard the competitiveness of European industry — particularly carbon-intensive sectors such as steel, aluminium and fertilisers.
Since 1 January 2026, companies importing those products have had to pay an extra tariff corresponding to the carbon price for equivalent goods within the EU, in a bid to avoid unfair competition from jurisdictions with laxer climate policies.
Yet some, including leading MEPs, say the CBAM job is only half-done, because the tax does nothing for EU producers who export the same goods.
A proposed fix for that problem is due within weeks, but it will have to wrestle with entrenched industry interests, tricky global trade rules and a parallel — highly controversial — reform of the EU’s emissions trading system (ETS) carbon market.
A missing pillar
Until CBAM fully beds in, the Commission is providing European producers with free carbon allowances to offset the cost impact of ETS. Under current rules, they will progressively receive fewer and fewer free permits — and none at all from 2034 onwards.
Industries that export CBAM-covered products to destinations outside the EU will also lose the allowances. They have to pay for the costs of ETS, without enjoying any CBAM-style protection in their overseas markets — implying, they say, a resulting decline in competitiveness.
Without a mechanism to aid those exporters, “there is a real risk of production and emissions moving outside Europe rather than being reduced globally”, said Axel Eggert, director-general of steel lobby Eurofer.
Until that’s done, some say the carbon border levy is unfinished business.
“The CBAM mechanism must have two pillars: one pillar ensuring a ‘level playing field’ on the domestic market and one pillar ensuring it for exports,” MEP Pascal Canfin told Contexte in late March. He is the Renew group’s negotiator on current legislative plans to extend the border levy.
In its original 2021 impact assessment, the Commission estimated that introducing CBAM without a solution for exporters would result in them losing 6.8% of market share. In 2018, exports accounted for 22% by value of European steel and iron production, 18% for aluminium, and 14% for fertilisers, says the ERCST think tank.
A wooden leg
For the first two years of the CBAM, the Commission has proposed a temporary decarbonisation fund. Worth approximately €300 million a year, it’s meant to offset the cost impact of the free allowance phase-out, for EU goods whose production could relocate outside the bloc.
Under the Commission’s plans, exporters of CBAM-covered goods from the EU could be among those eligible, as long as they show they’re decarbonising. But so could other producers targeting the European market, and not all CBAM products are eligible.
As such, the proposed Fund has met with little enthusiasm.
“It’s a sticking-plaster on a wooden leg,” said one lobbyist.
The Aegis alliance, which represents the manufacturing industry, wants to extend it further. “The Fund should primarily compensate EU exporters of CBAM‑covered goods,” it said.
Canfin, the rapporteur on the Fund, agrees, and has proposed amendments accordingly.
Other industry associations, such as Eurofer and European Aluminium, are campaigning for a long-term solution that would reverse the abolition of free allowances for exports, or offer an equivalent rebate within ETS.
Don’t mention the exports
The word “export” doesn’t appear anywhere in the legal proposal for the Fund. That’s no coincidence. If it looked like the measure was designed to prop up the international competitiveness of EU industry, that might be deemed an export subsidy, frowned on by the World Trade Organization (WTO).
In any case, the Fund hasn’t yet seen the light of day. Member states are wary, as it would be financed by 25% of the CBAM revenues they collect, over which they’d lose control. Several diplomatic sources told Contexte that Council negotiations on the issue have stalled. Before deciding, capitals are apparently waiting to see the permanent proposal for exporters, which the Commission has promised to unveil in a 15 July ETS review.
Climate Commissioner Wopke Hoekstra pledged as much last December, saying the issue of exports would be resolved via “additional free allowances” — without specifying eligibility.
When questioned on this subject by Contexte on 12 June, Hoekstra said that, if the Commission provides flexibility for companies to change and compete, “it is also fair that we then ask that they make investments in a cleaner future on European soil”.
That suggests the Commission is considering making free allowances, at least partly, conditional on investment to cut emissions — perhaps by borrowing from the rules of the temporary decarbonisation fund.
That’s unlikely to placate those most directly affected, who would prefer to continue receiving the permits without strings attached.
“Free allowances are neither a cash handout nor a financing instrument: they are a tool to combat carbon leakage,” said Emanuele Manigrassi, director of climate change and energy at European Aluminium, referring to the risk that emissions-heavy production will transfer overseas.
Director-General of Fertilizers Europe Antoine Hoxha said: “Rather than imposing conditions, we should create a market for decarbonised products. That is the long-term solution.”
The Commission’s Industrial Accelerator Act, presented on 4 March, seeks to create demand for such low-carbon European production via lead markets.
A Trojan horse
Leon de Graaf, chair of the Business for CBAM Coalition, fears creating a “massive loophole”, where free allowances are sold in exchange for “very vague decarbonisation commitments”.
NGOs, too, view the option with suspicion.
“The export solution cannot be the Trojan horse, to then have free allowances back in the system for CBAM sectors,” said Francesco Lombardi Stocchetti of Bellona.
Any changes to free allowances should be accompanied by significant safeguards, so as not to put the carbon price signal at risk, Lombardi Stocchetti said. In particular, it should target exports alone, not all production, he added.
Squaring those restrictions with WTO rules isn’t simple. ERCST proposes what it calls “non-tradable export adjustment certificates”, which can be converted into carbon allowances for companies falling under the ETS.
Exporters would declare the embedded emissions in their CBAM goods sold outside the EU, and would then receive certificates based on emission reference levels defined via the benchmark values of the ETS.
Yet none of these solutions addresses the specific problems faced by European exporters of products located further down the value chain. They don’t get free ETS allowances — but do, thanks to the CBAM levy, face higher prices on the goods they use as inputs.
