EU unveils plans to compensate domestic exporters with CBAM revenues — here’s what it means

The European Union (EU) plans to compensate its steel, aluminium, cement and other industrial producers of goods covered under the EU Carbon Border Adjustment Mechanism (EU CBAM) for potential losses in global markets as it phases out ‘free allowances’ under its carbon pricing system, the EU Emissions Trading System (EU ETS). The proposal claims to address ‘carbon leakage’ — a situation where companies might relocate production to other countries to avoid higher carbon costs, thereby shifting emissions rather than reducing them.

Why is the EU proposing compensation?

Currently, the EU ETS requires companies to pay for the greenhouse gases they emit. However, to protect EU industries from losing competitiveness to foreign firms not subject to such pricing, the EU has been distributing ‘free allowances’, effectively exempting certain sectors from paying carbon costs.

These allowances are now being phased out as part of new policy measures. At the same time, the CBAM is being rolled out, requiring importers to pay for the carbon emissions embedded in specific goods (such as iron and steel, aluminium, fertilisers, electricity, hydrogen and cement) imported into the EU. This is intended to create a level playing field.

However, CBAM does not apply to EU exports. This means EU producers selling goods abroad could face higher costs than competitors in countries without carbon pricing regimes.

To address this risk, the EU is proposing to use revenues collected from CBAM to compensate EU exporters. Estimated compensation in 2026 stands at EUR 70 million, with CBAM revenues projected to reach EUR 1.5 billion by 2028.

This proposal is part of the EU’s Clean Industrial Deal, an initiative aimed at boosting EU industrial competitiveness, promoting decarbonisation and ‘reindustrialising’ the region. The European Commission plans to table the proposal by the end of 2025, alongside measures to extend CBAM to downstream goods and prevent circumvention of the policy by importers.

However, the plan may run afoul of WTO rules, which generally prohibit export subsidies. Legal challenges are likely. The Russian Federation has already initiated dispute proceedings at the WTO, arguing that CBAM violates the General Agreement on Tariffs and Trade (GATT) 1994; the Agreement on Import Licensing Procedures; and the Agreement on Subsidies and Countervailing Measures.

As a purported climate measure, CBAM is also facing resistance at the United Nations Framework Convention on Climate Change (UNFCCC), where developing countries have called for formal discussions on ‘unilateral trade measures’. They argue such mechanisms could increase the cost of climate action, hinder the efforts of developing countries and contradict the principles of multilateral cooperation under the UNFCCC, the Kyoto Protocol and the Paris Agreement.

Estimated impact and the leakage question

A 2021 European Commission study estimated that EU exports could decline by 6.8 per cent by value by 2030 if 50 per cent of free allowances are phased out — mainly due to competitiveness losses.

Exports currently account for 24 per cent of EU iron and steel production and 17 per cent of aluminium production. However, a significant portion of these exports go to countries with their own carbon pricing (such as the United Kingdom, Switzerland and Norway) — including 40 per cent of aluminium, 20 per cent of iron and steel and 39 per cent of cement exports — thereby mitigating carbon leakage concerns for these markets.

Green goals, grey trade-offs

From CBAM to exporter compensation, the EU’s climate pricing architecture seems to need a growing list of patches to keep it afloat. The compensation proposal undermines the EU’s climate ambition by dulling the incentive for exporting industries to decarbonise and strengthens the perception that CBAM is more a protectionist measure than a climate tool.

The policy also reflects how the EU prioritises industrial competitiveness when it conflicts with climate goals. Are its trading partners allowed the same flexibility when they are expected to align with green conditions to access EU markets?

More than this, however, the proposal means that funds collected from exporting countries (like India, China, etc) through CBAM would be recycled to support EU industries exporting goods back to these or other countries. This creates a loop where economic resources from developing countries effectively subsidise EU producers and fund Europe’s industrial competitiveness.