European energy-intensive industries are calling on EU governments to maintain carbon-leakage safeguards as the Carbon Border Adjustment Mechanism (CBAM) advances into its definitive phase. Industry groups warn that reducing free emissions allowances without an effective solution for exports could leave European manufacturers facing carbon costs that competitors in third-country markets do not bear.
The dispute concerns a structural difference between the EU’s two principal carbon-protection instruments. CBAM is designed to align carbon costs between European production and covered imports, but it does not automatically compensate EU manufacturers when they sell products abroad against competitors facing lower or no equivalent carbon prices.
This creates an export-side carbon-leakage risk for industries that must absorb EU Emissions Trading System (ETS) costs while competing in international markets. Steel, aluminium, cement and fertiliser producers are particularly exposed because their products trade in global markets where manufacturers may have limited ability to pass additional production costs on to customers.
Free allowance reductions leave exporters exposed
The gradual withdrawal of free EU ETS allowances is linked to the introduction of CBAM. The policy rationale is that European producers should require less protection against carbon leakage once competing imports face equivalent carbon costs at the EU border.
Industry representatives argue that this approach addresses competition within Europe but does not resolve the position of EU manufacturers selling outside the bloc. As free allocations decline, exporters could face a growing difference between their domestic carbon costs and those of international competitors.
The concern is that reducing existing safeguards before establishing an effective export solution could weaken the investment incentives for energy-intensive production in Europe. Manufacturers selling into global commodity markets may be unable to recover higher carbon costs through prices, particularly where overseas suppliers operate under less stringent carbon-pricing systems.
The policy debate is consequently extending beyond the treatment of imports to whether additional measures are needed for European producers competing in third-country markets.
Export compensation raises trade and subsidy questions
Any additional export-protection mechanism would have to be assessed against international trade rules. An export rebate directly linked to carbon costs could face legal challenges on the grounds that it constitutes a subsidy.
No new export-compensation system has been adopted, and the existing ETS framework continues to govern free-allocation rules. The industry’s calls therefore concern potential future policy changes rather than a new measure already in force.
The central issue is how the EU could maintain incentives for domestic decarbonisation while limiting the competitive disadvantage faced by European manufacturers in export markets. The treatment of exports remains distinct from CBAM’s import-side function, and the two issues cannot be treated as equivalent under the current framework.
Industrial investment depends on exposure to export markets
The uncertainty has implications for capital-intensive projects in steel, aluminium, fertilisers, cement and other energy-intensive sectors. A steelmaker evaluating a multibillion-euro low-carbon production project must consider whether the resulting operating costs can be recovered across both European sales and exports.
If European manufacturers continue to face full carbon costs in overseas markets while competing producers do not face equivalent charges, the economics of investment in lower-carbon production could weaken.
Financiers are also likely to examine the relationship between EU ETS liabilities, CBAM protection and the geographic distribution of sales when assessing industrial projects. A company selling almost exclusively within the EU may benefit more directly from the protection CBAM provides against covered imports than a manufacturer that depends heavily on customers outside the bloc.
These differences can affect long-term cash-flow assumptions and assessments of project viability, particularly as free allowances decline and carbon prices and electricity costs influence operating expenditure.
Western Balkan producers face a changing competitive landscape
The debate is also relevant to Serbia, Montenegro and the wider Western Balkans. Industrial producers in the region primarily encounter CBAM as an import-side measure when their goods enter the EU market, but they may also compete directly with European manufacturers in third countries.
If the EU introduces additional protection for European exports, the relative competitive position of Western Balkan producers could change in markets outside the bloc. If no such mechanism is introduced, differences in carbon costs could also influence where energy-intensive investment is located, including in neighbouring markets with lower carbon costs and access to European customers.
These potential effects connect carbon pricing with industrial policy, investment location and cross-border trade. The competitive position of regional producers depends not only on their emissions and costs but also on how EU policy treats manufacturers selling within and beyond the European market.
Carbon exposure enters corporate valuations and lending decisions
The export-side issue could also influence mergers and acquisitions, corporate valuations and lending. Banks and investors assessing steel, aluminium and fertiliser businesses need to consider both emissions intensity and the destinations of their products.
A high-emitting producer with substantial exposure to EU customers has a different risk profile from a lower-emission manufacturer that relies heavily on exports to markets outside the bloc. Future carbon prices, the reduction of free allowances, electricity costs and access to low-carbon energy can all alter the economics of these businesses.
Mergers and acquisitions due diligence may therefore require scenario analysis covering different EU ETS price levels, changes in free allocation and variations in domestic and export sales. These factors can influence expected cash flows and the financial returns associated with decarbonisation investments.
As CBAM advances, European industry groups are pressing for the export competitiveness question to be addressed alongside the mechanism’s established role in protecting the EU market from carbon-intensive imports. The current rules remain unchanged, but the debate increasingly concerns how European manufacturers can manage rising domestic carbon costs while competing in international markets.
