How does CBAM prevent carbon leakage?

CBAM places a carbon charge on imported goods equivalent to the domestic carbon price. This removes the cost advantage of producing in unregulated jurisdictions. Importers must purchase CBAM certificates reflecting the embedded emissions of their goods, minus any carbon price already paid in the country of origin.

Which sectors are most at risk of carbon leakage?

Energy-intensive, trade-exposed (EITE) sectors are most at risk: cement, steel, aluminium, chemicals, glass, ceramics, and paper. These sectors face high carbon costs and compete with imports from regions without equivalent carbon pricing. Carbon leakage is less of a concern for services and non-tradeable goods.

Carbon Leakage

Carbon leakage occurs when climate policies in one jurisdiction cause businesses to relocate production or sourcing to regions with weaker carbon regulations, resulting in no net reduction in global emissions.

What is Carbon Leakage?

Carbon leakage is one of the central challenges of unilateral climate policy. If one country imposes a carbon price on domestic industry, companies may move production to countries without equivalent carbon pricing, or buyers may switch to cheaper imports from unregulated jurisdictions. The result is that emissions decrease in the regulated country but increase elsewhere, with no net global benefit.

To address carbon leakage, the EU has introduced the Carbon Border Adjustment Mechanism (CBAM), which places a carbon price on imports of certain carbon-intensive goods (cement, steel, aluminium, fertilisers, electricity, hydrogen). The UK is developing a similar mechanism. The UK ETS also provides free allowances to sectors at risk of carbon leakage.

For businesses, carbon leakage risk affects strategic decisions about production location, supplier selection, and investment in decarbonisation. Companies that proactively reduce emissions may gain a competitive advantage as border carbon adjustments make high-carbon imports more expensive.

Practical Examples

A UK steel manufacturer invests in electric arc furnace technology to reduce emissions, gaining a cost advantage as CBAM makes imported high-carbon steel more expensive.

A cement company receives free UK ETS allowances to protect against carbon leakage, but faces declining free allocation as the government tightens the cap.

A procurement team analyses the carbon leakage risk of switching from a UK supplier to a cheaper overseas supplier in a country without carbon pricing.

How Climatise Helps

Climatise helps organisations assess the carbon intensity of their supply chains and model the impact of carbon border adjustments on procurement costs, supporting informed sourcing decisions.

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