European energy-intensive industries are urging EU governments to keep carbon-leakage safeguards in place as the Carbon Border Adjustment Mechanism (CBAM) moves into its definitive phase. Industry groups say that reducing free EU ETS allowances without an effective export solution could expose European manufacturers to carbon costs that competitors in third-country markets do not face.
The discussion centres on a structural difference between the EU’s two carbon-protection tools. CBAM is intended to align carbon costs between European production and covered imports, but it does not automatically compensate EU manufacturers when they sell products abroad. As a result, exporters may face an additional gap between domestic carbon costs and those faced by foreign competitors.
CBAM aligns import costs but not export-side competition
Industry representatives describe the risk as export-side carbon leakage for sectors that must absorb ETS costs while competing internationally. They point to steel, aluminium, cement and fertiliser as particularly exposed because these products are traded in global markets. In such markets, manufacturers may have limited ability to pass higher production costs on to customers.
The link between CBAM and the gradual withdrawal of free ETS allowances is part of the policy rationale. The approach is based on the idea that European producers should need less protection against carbon leakage once competing imports face equivalent carbon costs at the EU border. Industry groups argue this addresses competition within Europe while leaving exports outside the bloc uncovered.
Free allowance reductions raise concerns for exporters
As free allocations decline, exporters could experience a growing difference between their domestic carbon costs and those of international competitors. The concern is that reducing existing safeguards before an effective export solution is established could weaken investment incentives for energy-intensive production in Europe. Manufacturers selling into global commodity markets may also struggle to recover higher carbon costs through product prices.
The issue is tied to differences in overseas carbon-pricing systems. Where suppliers outside the EU operate under less stringent carbon pricing, European exporters could face a competitive disadvantage tied to their ETS obligations. The policy debate therefore extends beyond import treatment to whether additional measures are needed for European producers competing in third-country markets.
Potential export measures face trade and subsidy constraints
Any additional export-protection mechanism would need assessment against international trade rules. An export rebate directly linked to carbon costs could be challenged as a subsidy under those frameworks. No new export-compensation system has been adopted, and existing ETS rules continue to govern free-allocation arrangements.
Industry calls focus on possible future policy changes rather than an existing new measure. The central question raised is how the EU could maintain incentives for domestic decarbonisation while limiting competitive disadvantages faced by European manufacturers in export markets. Export treatment is described as distinct from CBAM’s import-side function, with the two not treated as equivalent under current arrangements.
Investment planning depends on sales geography and ETS exposure
The uncertainty affects capital-intensive projects in steel, aluminium, fertilisers, cement and other energy-intensive sectors. A steelmaker evaluating a multibillion-euro low-carbon production project would need to consider whether operating costs can be recovered across both European sales and exports. If overseas competitors do not face equivalent charges, investment economics for lower-carbon production could weaken.
Financiers are expected to examine how EU ETS liabilities interact with CBAM protection alongside where companies sell their products. A firm selling almost exclusively within the EU may benefit more directly from CBAM’s protection against covered imports than a manufacturer relying heavily on customers outside the bloc. These differences can affect long-term cash-flow assumptions and assessments of project viability as free allowances decline.
Western Balkans producers weigh CBAM exposure and third-country competition
The debate also applies to Serbia, Montenegro and the wider Western Balkans region. Industrial producers there 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 additional protection for European exports were introduced, Western Balkan producers’ relative position could change in markets outside the bloc.
If no such mechanism is introduced, differences in carbon costs could influence where energy-intensive investment is located, including in neighbouring markets with lower carbon costs and access to European customers. The effects link carbon pricing with industrial policy, investment location and cross-border trade. Regional producers’ competitive position depends not only on emissions and costs but also on how EU policy treats manufacturers selling within and beyond Europe.
Carbon exposure influences valuations, lending and deal due diligence
The export-side issue can also affect mergers and acquisitions, corporate valuations and lending decisions. Banks and investors assessing steel, aluminium and fertiliser businesses are described as needing to consider both emissions intensity and where products are sold. A high-emitting producer with substantial exposure to EU customers has a different risk profile from a lower-emission producer that relies heavily on exports outside the bloc.
Future EU ETS price levels, reductions in free allowances, electricity costs and access to low-carbon energy can alter business economics. Mergers and acquisitions due diligence may therefore require scenario analysis covering different ETS price levels, changes in free allocation and variations in domestic versus export sales. These factors can influence expected cash flows and financial returns tied to decarbonisation investments.
As CBAM advances, European industry groups are pressing for the export competitiveness question to be addressed alongside CBAM’s established role protecting the EU market from carbon-intensive imports. They say current rules remain unchanged while the debate increasingly focuses on how European manufacturers manage rising domestic carbon costs when competing internationally.