European energy-intensive industries are urging EU governments to preserve carbon-leakage safeguards as the Carbon Border Adjustment Mechanism (CBAM) moves into its definitive phase. Industry groups say that cutting free EU Emissions Trading System (ETS) allowances without an export-focused solution could expose European manufacturers to carbon costs that competitors in third-country markets do not face.
The discussion centers on a structural difference between the EU’s two carbon-protection tools. CBAM is intended to align carbon costs between EU production and covered imports, but it does not automatically offset carbon costs for EU firms selling products abroad. As a result, manufacturers may face an export-side carbon-leakage risk when they must absorb ETS costs while competing internationally.
CBAM aligns import costs but not export pricing
Industry representatives point to the limits of CBAM on the export side. They argue that the mechanism addresses competition within the EU, where covered imports face equivalent carbon costs at the border. However, it does not compensate EU producers when they sell outside the bloc against rivals operating under lower or no equivalent carbon pricing.
The sectors highlighted as most exposed include steel, aluminium, cement and fertiliser. These industries trade in global markets, where producers may have limited ability to pass additional production costs on to customers. The concern is linked to how ETS liabilities interact with sales outside the EU when CBAM coverage applies only to imports.
Free ETS allowance reductions tied to CBAM
A gradual withdrawal of free ETS allowances is linked to the introduction of CBAM. The policy rationale described by industry is that European producers should need less protection against carbon leakage once competing imports face equivalent carbon costs at the EU border. Industry groups say this logic covers intra-EU competition but leaves exporters without a comparable safeguard.
As free allocations decline, exporters could face a growing gap between their domestic carbon costs and those of international competitors. Industry representatives warn that reducing existing safeguards before an effective export solution is established could weaken investment incentives for energy-intensive production in Europe. They also note that manufacturers selling into global commodity markets may struggle to recover higher carbon costs through product prices.
Export measures raise trade and subsidy considerations
The debate has broadened beyond import treatment to whether additional measures are needed for European producers competing in third-country markets. Any new export-protection mechanism would need assessment against international trade rules. An export rebate directly linked to carbon costs could face legal challenges if it is treated as a subsidy.
No new export-compensation system has been adopted, and the existing ETS framework continues to govern free-allocation rules. Industry calls therefore relate to potential future policy changes rather than a measure already in force. The central question raised is how the EU could maintain incentives for domestic decarbonisation while limiting competitive disadvantages for exports.
Within the current framework, exports are treated differently from CBAM’s import-side function. The two issues cannot be treated as equivalent under the existing rules, according to the dispute described by industry groups. This distinction underpins concerns about how declining free allocations may affect manufacturers’ positions in overseas markets.
Investment and financing depend on sales geography
The uncertainty has implications for capital-intensive projects across 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 through both European sales and exports. The issue is whether overseas competitors face equivalent charges or different carbon-cost conditions.
If EU manufacturers continue to bear full carbon costs in international markets while competing producers do not face equivalent charges, investment economics for lower-carbon production could weaken. Financiers are also expected to examine relationships between ETS liabilities, CBAM protection and where companies sell their products geographically. A firm selling almost exclusively within the EU may benefit more directly from CBAM’s protection against covered imports than a producer dependent on customers outside the bloc.
These differences can affect long-term cash-flow assumptions and assessments of project viability. The source material links these evaluations to declining free allowances as well as changes in carbon prices and electricity costs influencing operating expenditure. It also points to how access to low-carbon energy can alter business economics over time.
Western Balkans producers face shifting competitive conditions
The export-side issue is also relevant for Serbia, Montenegro and the wider Western Balkans region. Industrial producers there primarily encounter CBAM as an import-side measure when goods enter the EU market. At the same time, they may compete directly with European manufacturers in third countries.
If additional protection were introduced for European exports, Western Balkan producers’ relative competitive 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 competitive position of regional producers would depend not only on emissions and costs but also on how EU policy treats manufacturers selling within and beyond Europe.
Carbon exposure affects valuations, lending and deal scrutiny
The export-side question could also influence mergers and acquisitions, corporate valuations and lending decisions. Banks and investors assessing steel, aluminium and fertiliser businesses are expected to consider both emissions intensity and where products are sold. A high-emitting producer with substantial exposure to EU customers would have a different risk profile from a lower-emission manufacturer relying heavily on exports outside the bloc.
Future EU ETS price developments, reductions in free allowances, electricity costs and access to low-carbon energy can all change business economics over time. 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 returns tied to decarbonisation investments.
As CBAM advances, European industry groups are pressing for export competitiveness concerns to be addressed alongside CBAM’s established role protecting the EU market from carbon-intensive imports. The rules described as currently applicable remain unchanged, while the debate increasingly focuses on how European manufacturers manage rising domestic carbon costs while competing internationally.