Carbon Leakage under CBAM and Free Allocation
This report is the final output of a study aimed at supporting the EU’s evolving climate policy by assessing carbon leakage under the EU Carbon Border Adjustment Mechanism (CBAM) and free allocation of allowances within the EU Emissions Trading System (EU ETS).
In light of increasing emphasis on carbon leakage prevention, and industrial competitiveness, this report:
- Provides background on carbon leakage (sections 2.1 and 2.2)
- Provides a comparison of the carbon price and carbon costs in the EU versus other jurisdictions – (section 2.3)
- Reviews the evolution of carbon leakage measures in the EU (section 3.1) as well as carbon leakage approaches and allowance allocation methods in ETSs of other jurisdictions considering Border Carbon Adjustments (BCAs) (section 3.2)
- Presents modelling results for two sectors (chapter 4). An analytical model that explicitly integrates international trade and carbon leakage was developed with a view to:
- Study how free allocation and CBAM address different leakage channels.
- Assess the long-term effects of allocation choices on industrial structure, carbon pricing, and investment signals.
- Analyze downstream carbon leakage through value chains.
- Chapter 5 finally provides a synthesis of the findings on carbon leakage under CBAM and free allocation and provides high-level takeaways.
