The EU's Carbon Border Adjustment Mechanism (CBAM) could provide less protection to European energy-intensive industries than the existing system of free emissions allowances, particularly for export-oriented steel producers, according to a new report published by Swedish research organization SNS.
The report, prepared by economists Christoph Böhringer and Knut Einar Rosendahl, examines the economic and industrial effects of gradually replacing free allowances under the EU Emissions Trading System (ETS) with CBAM, which is scheduled to be fully phased in by 2034.
According to the researchers, free emissions allowances help offset carbon costs for European producers selling both domestically and internationally, while CBAM imposes carbon costs on imports without providing equivalent protection for EU exports. As a result, the transition could weaken the competitiveness of European heavy industry in markets outside the EU.
Swedish steel production could decline by 1.7 percent under CBAM
Sweden was identified as a particularly notable example, given its relatively low-carbon steel industry, which rely heavily on low-carbon electricity and export a significant share of their production. Based on the researchers' simulations, the production loss for Swedish heavy industry would increase from 0.6 percent under free allowances to 1.3 percent under CBAM, compared with a scenario without climate policy.
The impact would be particularly pronounced in the iron and steel sector, where a slight production increase under free allowances would turn into a 1.7 percent decline under CBAM. A similar pattern is projected for the rest of Europe, where heavy industrial production would decline by 2.6 percent under CBAM, compared with a 1.3 percent reduction under free allowances.
However, the researchers indicated that CBAM could deliver greater benefits for the wider economy through improved terms of trade. In Sweden, the economic cost of climate policy would decline from approximately 0.05 percent of real income under free allowances to almost zero under CBAM. For the rest of Europe, the corresponding cost would decrease from 0.25 percent to 0.17 percent.
CBAM offers limited improvement in preventing carbon leakage
Regarding carbon leakage, the researchers found that replacing free allowances with CBAM would produce only a limited improvement. The share of European emissions reductions offset by increased emissions elsewhere would decline from 16.9 percent under free allocation to 16.0 percent under CBAM. Without either mechanism, the carbon leakage rate would reach 28.5 percent. The researchers emphasized that CBAM alone cannot eliminate carbon leakage, particularly through global energy markets, and that the mechanism currently targets less than two percent of global emissions.
They also examined potential changes to CBAM's design. Including indirect emissions from electricity consumption, known as Scope 2 emissions, could improve the mechanism's effectiveness and provide additional benefits to producers using low-carbon electricity. For Swedish heavy industry, this would reduce the estimated production loss under CBAM from 1.3 percent to one percent.
Export rebates could strengthen protection for European steelmakers
The researchers further suggested that introducing export rebates to compensate European producers for their carbon costs could restore much of the protection currently provided by free allowances. According to their simulations, combining CBAM with export rebates could reduce the carbon leakage rate to 10.6 percent, although such measures could raise legal concerns regarding export subsidies.
They also highlighted the regulatory challenges associated with extending CBAM further downstream, particularly for industries purchasing emissions-intensive materials and for imported finished goods containing embedded carbon emissions. According to the report, policymakers will need to balance the competitiveness of European heavy industry with broader economic benefits when determining the future design of CBAM, including the treatment of indirect emissions and potential measures to protect EU exports.
