The European Union is planning to phase out free ETS allowances for CBAM-covered industries by 2034, according to research published by Swedish research institute SNS. The study examines how replacing free allocation under the EU Emissions Trading System (ETS) with CBAM could affect industrial output and carbon leakage prevention. It reports that the shift could reduce industrial production while delivering only limited improvement in carbon leakage outcomes.
Economists Christoph Böhringer and Knut Einar Rosendahl conducted the analysis by comparing economic effects across 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 research focuses on how carbon costs are applied under different policy designs.
CBAM-linked costs and changes for steel production
The study describes free ETS allowances as providing partial compensation for carbon costs incurred by European industrial installations. It links this compensation to competitive positioning in domestic and international markets. Under CBAM, the mechanism instead concentrates on carbon-related costs associated with covered imports entering the EU.
SNS simulations estimate that Swedish energy-intensive industrial production would decline by 1.3% under a fully implemented CBAM. In the same comparison framework, production would contract by 0.6% under free allocation, relative to a hypothetical scenario without climate policy. The figures are modelled comparisons between policy scenarios rather than forecasts of actual production volumes.
The report says the iron and steel results show a larger divergence between policy options. In its model, Swedish steel output rises modestly under free allocation but falls by 1.7% under CBAM. The study also notes that Sweden’s relatively low-carbon electricity supply and comparatively clean industrial processes do not necessarily offset the loss of free allowances when steelmakers compete in export markets.
For the rest of Europe, researchers estimate energy-intensive industrial output would contract by 2.6% under CBAM compared with 1.3% under free allocation. The analysis distinguishes between sector-level outcomes and broader economic effects from the policy transition. It frames these differences as arising from how carbon pricing interacts with production costs and market conditions.
Welfare effects versus sector pressure
The SNS study reports a different outcome when assessing overall economic welfare rather than sector-specific production changes. It finds that replacing free allowances with CBAM could improve overall economic welfare even as production in energy-intensive sectors declines. The research attributes this pattern to changes in international terms of trade rather than increased industrial production.
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 study presents these figures as results from its comparative modelling approach.
The findings also separate aggregate economic performance from individual manufacturing sector impacts. Even if total climate-policy costs decrease, the report says pressure can still increase for steelmakers, aluminium producers and other energy-intensive manufacturers competing against lower-cost international suppliers. This distinction is presented as central to interpreting the transition outcomes.
Carbon leakage prevention under alternative policy designs
The EU’s carbon border policy aims to prevent carbon leakage, defined as emissions reductions within the bloc being offset by increased emissions elsewhere where climate policies are less stringent. Under SNS’s modelling, replacing free allowances with CBAM reduces carbon leakage only slightly. The model places the leakage rate at 16.9% under free allocation and 16.0% under CBAM.
The study estimates that without either mechanism, carbon leakage would reach 28.5%. It reports that differences between CBAM and free allocation suggest import-based carbon adjustments alone may not remove relocation of emissions-intensive production. Energy prices, manufacturing costs and international trade patterns are cited as factors influencing where production takes place.
The researchers say the results raise questions for policymakers about whether CBAM, in its current design, can both maintain industrial competitiveness and achieve intended reductions in carbon leakage. They frame this issue around how protective effects differ between import adjustments and compensation for exporters facing carbon-related production costs outside the EU market.
Treatment of indirect emissions and export compensation options
The study identifies accounting for indirect emissions from electricity consumption as one area that could be adjusted within CBAM implementation. It states that 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 report says this adjustment is relevant where electricity-related emissions differ significantly between competing producers, with potential effects depending on final accounting methodology.
The research also examines export rebates or other compensation mechanisms for carbon costs incurred by European manufacturers selling outside the EU. In its simulations, combining CBAM with export compensation reduces the estimated carbon leakage rate to 10.6%. It notes that introducing such measures would raise issues related to international trade rules, restrictions on subsidies and EU climate legislation design.
Implications for non-EU steel suppliers 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 described as playing an increasingly important role in determining carbon-related costs of covered steel imports into the EU market.
The study says non-EU manufacturers’ commercial position when supplying European customers depends increasingly on verified emissions data, production efficiency and access to lower-carbon electricity. It also highlights a distinction between protecting the EU market against imports with higher embedded emissions and preserving European producers’ ability to compete internationally.
The report states that 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. It extends this point to downstream steel and aluminium manufacturers whose competitiveness depends on input prices, electricity costs and emissions intensity of purchased materials.
The SNS study further notes that extending CBAM coverage to additional downstream products could address some competitive distortions while adding requirements related to embedded emissions, precursor materials and verification processes. It links these interactions—product coverage, emissions accounting and withdrawal of free allowances—to ongoing EU planning toward a planned 2034 phase-out.
The research concludes that CBAM could affect competitiveness of imports and domestic producers within the EU market while changing how European carbon pricing operates economically. For steelmakers and other energy-intensive manufacturers, it says modelled outcomes centre on relationships between carbon pricing, production costs and access to international markets as the EU changes its industrial emissions framework.