EU should consider including export rebates in its carbon border adjustments

In a recent interview with TIME, Wopke Hoekstra, Europe’s top climate official, talks in-depth about climate policies and business support. He stresses that EU policymakers should ensure that the bloc’s climate policies do not harm the competitiveness of European producers. Hoekstra’s main areas of concern include electric vehicle infrastructure and the EU’s competition with China in clean energy production. These are all valid questions. Equally urgent – ​​although not mentioned in this article – is how EU businesses could be affected by the EU Carbon Border Adjustment Mechanism (CBAM).

The EU CBAM will start collecting import taxes on goods in several sectors from 2026, similar to what EU producers pay for emission certificates under the bloc’s carbon pricing policy, an Emissions Trading System (ETS). To protect its competitiveness, the EU will phase out free ETS emissions allowances granted to carbon-intensive industries and replace them with CBAM.

However, the EU CBAM does not include export rebates, which deviates from a carbon border adjustment model. Well-designed border carbon adjustments should include import taxes, export rebates, and domestic carbon prices. Carbon border adjustments would level the playing field between domestic and foreign producers, both in imports and exports. Foreign and domestic producers who sell to U.S. consumers are subject to the carbon price. On the other hand, domestic and foreign producers who sell in foreign markets are not subject to the price.

Without export rebates, the EU’s CBAM would risk undermining the bloc’s climate goals and harming the competitiveness of European producers in foreign markets. In Hoekstra’s words: “Everyone loses if they go bankrupt or leave our continent – ​​and the climate certainly won’t gain either. »

When free ETS emissions allowances are phased out entirely, some covered companies may have an incentive to relocate their manufacturing facilities to another country with less stringent environmental policies (a practice known as “carbon leakage”). Rather than paying the European carbon price and finding ways to decarbonize, they are generating emissions elsewhere.

The relocation of some companies to other countries would also harm the EU economy and competitiveness, leading to job losses and lower tax revenues. The CBAM impact assessment study carried out by the European Commission concluded that not providing export rebates to companies would result in a loss of 6.8% of its export market.

Unless there is a uniform global carbon price, which is extremely difficult to achieve, countries will need to balance economic growth, industrial competitiveness and international trade when designing and implementing climate policies. EU policymakers should consider Hoekstra’s suggestion to ensure European producers remain competitive under climate policies, including the EU CBAM. Adding export rebates to this policy would be beneficial both for achieving the bloc’s climate goals and maintaining its economic competitiveness.