The European Union’s shift from free emissions allowances to the Carbon Border Adjustment Mechanism (CBAM) could affect the competitiveness of European steelmakers in international markets, according to research published by Swedish research institute SNS. The study reports that replacing free allocation under the EU Emissions Trading System (ETS) with CBAM could reduce industrial output while improving carbon leakage prevention only to a limited extent.
Economists Christoph Böhringer and Knut Einar Rosendahl compared the economic effects of alternative climate policy arrangements. Their results challenge the assumption that charging carbon costs on imports would provide energy-intensive industries with protection equivalent to the existing free allowance system.
The findings are linked to the EU plan to phase out free ETS allowances for CBAM-covered industries by 2034. While CBAM applies carbon-related costs to covered goods entering the EU, it does not provide equivalent compensation to EU manufacturers exporting to markets where competing producers may face lower carbon costs.
CBAM and projected changes in energy-intensive production
Free ETS allowances currently provide partial compensation for carbon costs incurred by European industrial installations, supporting competition in domestic and international markets. Under CBAM, the mechanism focuses on carbon costs associated with covered imports, which leaves European exporters exposed to production costs that may not be matched by competitors abroad.
In SNS simulations, Swedish energy-intensive industrial production would decline by 1.3% under a fully implemented CBAM. The same comparison shows a 0.6% contraction under free allocation, using a hypothetical scenario without climate policy as the reference point.
The model results show a larger effect in iron and steel. Swedish steel output is estimated to increase modestly under free allocation but fall by 1.7% under CBAM.
The study notes that Sweden’s relatively low-carbon electricity supply and comparatively clean industrial production processes would not necessarily offset the loss of free allowances when steelmakers compete in export markets. For the rest of Europe, energy-intensive industrial output is estimated to contract by 2.6% under CBAM versus 1.3% under free allocation.
The researchers describe these figures as modelled comparisons between policy scenarios rather than forecasts of actual production volumes.
Welfare effects contrasted with sector-level pressure
The study reports a different outcome when assessing broader economic effects of replacing free allowances with CBAM. It says overall economic welfare could improve even as production in energy-intensive sectors declines.
For Sweden, the estimated economic cost of climate policy falls from approximately 0.05% of real income under free allocation to almost zero under CBAM. Across the rest of Europe, the corresponding cost decreases from 0.25% to 0.17%.
The researchers attribute these improvements largely to more favourable international terms of trade rather than expansion in industrial production. They also distinguish aggregate economic performance from outcomes for individual manufacturing sectors.
A reduction in the overall economic cost of climate policy may still increase pressure on steelmakers, aluminium producers and other energy-intensive manufacturers competing against lower-cost international suppliers.
Carbon leakage estimates under alternative arrangements
The EU’s carbon border policy aims to prevent carbon leakage, defined as emissions reductions within the bloc being offset by increased production and emissions elsewhere with less stringent climate policies. SNS estimates that replacing free allowances with CBAM would reduce carbon leakage only slightly.
The model places the carbon leakage rate at 16.9% under free allocation and 16.0% under CBAM. Without either mechanism, the estimated leakage rate rises to 28.5%.
The difference between the two protective arrangements indicates that import carbon adjustments alone may not eliminate relocation of emissions-intensive industrial production. The study points to ongoing influence from differences in energy prices, manufacturing costs and international trade patterns on where production takes place.
Treatment of indirect electricity emissions and export compensation
The researchers identify accounting for indirect emissions from electricity consumption as one potential adjustment area. Extending CBAM accounting to cover electricity-related emissions for industrial products where these are not currently included could change relative outcomes for manufacturers using different electricity sources.
For Swedish energy-intensive industry, incorporating indirect electricity emissions into the model reduces the estimated production decline under CBAM from 1.3% to 1.0%. The adjustment is described as relevant for producers whose electricity-related emissions differ significantly from those of competitors.
The study also examines export rebates or other compensation for carbon costs incurred by European manufacturers selling products outside the EU. In simulations combining CBAM with export compensation, the estimated carbon leakage rate falls to 10.6%.
The researchers note that introducing such measures would raise issues related to international trade rules, restrictions on subsidies and how EU climate legislation is designed.
Implications for non-EU steel supply and downstream coverage
The transition has implications for steel producers supplying the EU from the Western Balkans, Türkiye and other neighbouring industrial economies. As free allowances are phased out, CBAM is expected to play an increasingly important role in determining carbon-related costs of covered steel imports.
The research highlights that for non-EU manufacturers, verified emissions data, production efficiency and access to lower-carbon electricity are becoming important factors when supplying European customers. It also distinguishes between protecting the EU market against imports with higher embedded emissions and preserving European producers’ ability to compete internationally.
A mechanism affecting costs of goods entering the bloc does not automatically compensate European manufacturers for carbon costs associated with exports to third-country markets. The issue extends to downstream steel and aluminium manufacturers, where competitiveness depends on input prices, electricity costs and emissions intensity of purchased materials.
Regulatory scope as the 2034 phase-out approaches
The study says extending CBAM to additional downstream products could address some competitive distortions but would also introduce further requirements concerning embedded emissions, precursor materials and verification. It frames this interaction between product coverage, emissions accounting and withdrawal of free allowances as an ongoing element as the EU moves toward its planned 2034 phase-out.
SNS research indicates that CBAM may improve economic efficiency of European carbon pricing and affect competitiveness of imports and domestic producers within the EU market without automatically reproducing export protection provided by free ETS allocation. For steelmakers and other energy-intensive manufacturers, modelled outcomes centre on links between carbon pricing, production costs and access to international markets as EU industrial emissions rules change.