The European Union (EU) has announced plans to use revenues from its Carbon Border Adjustment Mechanism (CBAM) to compensate domestic exporters. The proposal is part of a broader effort to protect European industries from competitiveness losses as the bloc phases out “free allowances” under its Emissions Trading System (EU ETS). But the plan has sparked debates around climate ambition, trade fairness, and legal risks.

Why Is the EU Offering Compensation?

Under the EU ETS, companies must pay for the greenhouse gases they emit. To shield industries like steel, aluminium, and cement from foreign competitors not subject to such pricing, the EU has so far provided “free allowances,” effectively reducing their carbon costs. However, these allowances are now being phased out.

Simultaneously, CBAM is being rolled out to require importers to pay for the embedded carbon emissions in certain goods entering the EU. The mechanism is designed to level the playing field and discourage “carbon leakage,” where companies relocate production to countries with looser climate regulations.

However, CBAM currently applies only to imports, not exports. This leaves EU producers selling abroad at a potential disadvantage compared to competitors in countries without carbon pricing regimes. To address this, the European Commission proposes redirecting CBAM revenues to support EU exporters, with an estimated €70 million earmarked for compensation in 2026. Revenues from CBAM could rise to €1.5 billion by 2028.

The move forms part of the EU’s Clean Industrial Deal, an initiative aimed at enhancing industrial competitiveness and accelerating decarbonization.

Read More: The EU Has ‘Fixed’ ESG Reporting. Here Is How

Legal and Global Trade Concerns

While intended to support EU industries, the proposal risks violating World Trade Organization (WTO) rules, which prohibit most export subsidies. Legal challenges are already surfacing. Russia has lodged a complaint at the WTO, arguing CBAM breaches multiple trade agreements, including GATT 1994 and the Agreement on Subsidies and Countervailing Measures.

At the same time, developing countries have voiced concerns at the United Nations Framework Convention on Climate Change (UNFCCC). They argue unilateral trade measures like CBAM could burden their economies, raise the cost of climate action, and undermine global cooperation under the Paris Agreement.

Will the Plan Work?

A European Commission study in 2021 estimated EU exports could decline by 6.8% by value by 2030 if 50% of free allowances are removed. Exports currently make up 24% of EU iron and steel production and 17% of aluminium output. However, a substantial share of these exports goes to countries already enforcing carbon pricing, such as the UK, Switzerland, and Norway, reducing carbon leakage risks in these markets.

Critics argue that compensating exporters may blunt incentives for industries to decarbonize and could reinforce perceptions of CBAM as a protectionist tool rather than a climate policy. Some warn it creates a feedback loop where funds collected from developing countries through CBAM are used to subsidise EU producers exporting goods back into global markets.

Also Read: Understanding Carbon Accounting: A Practical Guide for 2025

Looking Ahead

The European Commission plans to table the compensation proposal by the end of 2025, alongside measures to extend CBAM coverage to downstream goods and prevent circumvention by importers.

As the EU seeks to balance industrial competitiveness with climate goals, its latest plan highlights the trade-offs in implementing ambitious environmental policies within a globalised economy.

Follow more news and views via our Investors and Featured Articles sections, and stay updated on top ESG events to attend in 2025 for industry insights and networking.

Source: DownToEarth