Carbon leakage: preventing firms from avoiding emissions rules
A carbon levy on imported goods aims to stop companies moving outside the EU to avoid emissions standards, a practice known as carbon leakage.
The EU has made commitments to reduce its carbon emissions. At the same time, it wants to protect its economy, keeping quality jobs and production chains at home.
Between 20% and 30% of global CO2 emissions are linked to international trade and emissions from EU imports have risen, undermining its climate efforts.
What is carbon leakage?
Carbon leakage is the shifting of greenhouse-gas-emitting industries outside the EU to avoid tighter standards.
How can the EU prevent carbon leakage?
The EU's efforts to reduce its carbon footprint under the European Green Deal and to become sustainably resilient and climate neutral by 2050 could be undermined by less climate-ambitious countries. To mitigate this, the European Commission proposed a Carbon Border Adjustment Mechanism (CBAM) in July 2021, which would apply a carbon levy on imports of certain carbon-intensive goods from outside the EU.
This mechanism is also part of a series of laws adopted under the Fit for 55 in 2030 package to deliver on the European Climate Law, through a decrease in greenhouse gas emissions of at least 55% by 2030 compared to 1990 levels.
How does the European carbon levy work?
If products come from countries with less ambitious rules than the EU, the levy is applied, ensuring imports are not cheaper than the equivalent EU product.
Given the risk of more polluting sectors relocating production to countries with looser greenhouse gas emission constraints, carbon pricing is seen as an essential complement to the existing EU carbon allowances system, the EU's emissions trading system (ETS).
Existing carbon pricing measures in the EU: the ETS
Under the current ETS, which provides financial incentives to cut emissions, power plants and industries need to hold a permit for each tonne of CO2 they produce. The price of those permits is driven by demand and supply.
Economic crises affect demand for permits and make it decrease, which leads to a drop in prices, discouraging companies from investing in green technologies. In order to solve this issue, the EU has reformed ETS - as part of the Fit for 55 package.
Carbon Border Adjustment Mechanism rules
Parliament adopted the rules for the Carbon Border Adjustment Mechanism in April 2023. After adoption by the Council, the legislation entered into force in late 2023.
It covers goods from energy-intensive industries such as iron, steel, cement, aluminium, fertilisers and hydrogen. In early 2026, the Commission will assess whether to extend its scope to other sectors at risk of carbon leakage.
The CBAM applies to direct emissions - greenhouse gases emitted from the time of production of goods until the import of those goods into the EU.
Who pays the levy?
Importers have to pay any difference between the carbon price paid in the country of production and the price of the EU’s ETS carbon allowances. They have to report on a quarterly basis the direct and indirect emissions from goods imported during the previous quarter as well as any carbon price paid abroad.
Simplified rules
In order to simplify the EU carbon leakage instrument, Parliament adopted in September 2025 a proposal exempting companies that import small quantities of carbon-intensive goods. If a company’s annual imports are associated with no more than 50 tonnes of CO2 emissions, the company will not have to comply with CBAM requirements.
The vast majority of importers (90%), small businesses in particular, only import small quantities of such goods and they should benefit from the reduced administrative burden.
This exemption should not have a major impact on the environmental objectives of the carbon levy, as 99% of the total CO2 emissions from imports of steel, aluminium, cement, fertilisers and other goods would still be covered by the rules.
The rules on imports still covered by the legislation are also simplified, including the process of getting authorisation as an importer of goods covered by the rules, the calculation of emissions and the financial liability of authorised importers.
When will the new carbon levy apply?
The length of the transition period and the full phase in of the CBAM is linked to the phasing out of free allowances under the ETS so will be gradually introduced between 2026 and 2034.
More on reducing emissions
- Study: carbon emissions pricing
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World Bank: pricing carbon
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Procedure file
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- Carbon Border Adjustment Mechanism: text adopted by MEPs
- Study: EU Carbon Border Adjustment Mechanism's implications for climate and competitiveness (March 2023)
- At a glance: EU Carbon Border Adjustment Mechanism (April 2023)
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Council infographic on the EU Carbon Border Adjustment Mechanism
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- At a glance: simplifying and strengthening CBAM (May 2025)
