EU plans to prevent carbon leakage through extension of the CBAM scope and support for EU exporters

The Carbon Border Adjustment Mechanism (CBAM) imposes a carbon cost on imports of selected goods - cement, fertilisers, iron and steel, aluminium, electricity, and hydrogen -based on the greenhouse gas emissions associated with their production. The CBAM and the EU Emissions Trading System (EU ETS) are designed to be complementary, with the revised EU ETS applying to goods produced and traded within the EU, and the CBAM applying to goods imported into the EU. The aim of the CBAM is to prevent so-called “carbon leakage”, that is, the relocation of energy-intensive production from the EU to jurisdictions with lower greenhouse gas regulation, or a shift by EU buyers toward imports from third countries with weaker climate policies.

Consultation on the extension of the CBAM scope

The European Commission has launched a public consultation and call for evidence on extending the scope of the CBAM to include certain downstream products. The objective is to further reduce the risk of carbon leakage and introduce anti-circumvention measures targeting practices intended to avoid CBAM financial obligations.

In the Call for Evidence for an impact assessment, the Commission is seeking views on the following:

• Extension of the CBAM’s scope to address the risk of carbon leakage shifting to later stages of the supply chain. The selection of downstream products would rely on criteria analogous to those that guided the initial scope, namely: the risk of carbon leakage (which depends on tradability and carbon cost), the relevance of embedded emissions, and technical feasibility.
• Additional measures to prevent circumvention of the CBAM. For example, the Commission has identified situations where companies may seek to avoid CBAM obligations by making minor alterations to covered goods outside the EU, thereby classifying the resulting downstream products as outside the CBAM’s scope and avoiding the financial adjustment. To address this, several options are being considered, such as introducing additional reporting requirements relating to production technology and product composition.
• Rules for calculating emissions from electricity. The current calculation of emissions for electricity under the CBAM relies on default values based on fossil fuel generation. The Commission notes that, while this methodology matches the EU’s price-setting mechanism, it limits recognition of decarbonisation efforts in non-EU countries. Although importers may use actual emissions instead of default values, many stakeholders report that conditions - particularly those governing power purchase agreements (PPAs), network congestion, and capacity nomination - are difficult or impossible to meet, weakening incentives for non-EU countries to decarbonise. The Commission is considering several options, including changing the default value for emissions factors, clarifying the use of various types of PPAs, simplifying requirements for demonstrating physical network congestion, and clarifying the approach to capacity nomination when using actual emissions values.

The consultation closes on 26 August 2025. The Commission plans to adopt a proposal for a Regulation in the fourth quarter of 2025.

Plan to support EU exporters

In its Communication on Delivering the Clean Industrial Deal I, published on 2 July 2026, the Commission announced planned measures to support EU companies exporting goods to foreign markets where competitors do not face equivalent carbon costs. The Commission confirmed these plans alongside its proposal for a new EU 2040 climate target, which will require significantly greater investment from heavy industry in the coming decade.

The Commission observes that, since the introduction of the EU ETS, the risk of carbon leakage has been addressed by allocating free allowances to sectors deemed most exposed to this risk. These free allowances for EU ETS installations producing CBAM-covered goods will be phased out between 2026 and 2034, in parallel with the gradual phase-in of CBAM financial obligations for imports.

The Commission intends to propose using revenues generated by the CBAM to support exporters. This would allow affected producers to receive compensation proportionate to the phase-out of free allowances, subject to progress on long-term decarbonisation. This scheme would be introduced for a defined initial period, with a review in 2027, after approval of the 2026 EU ETS reform.

The proposal is expected by the end of 2025, alongside the proposal to extend the CBAM’s scope as outlined above.

CBAM simplification (Omnibus I)

Separately, as part of the first Omnibus simplification package published on 26 February 2025, the Commission has proposed certain changes to the CBAM, including the introduction of a new de minimis mass threshold of up to 50 tonnes per importer per year. On 18 June 2025, the European Parliament and the Council reached a political agreement on these amendments.

For more information on:

• the CBAM, see our previous client briefing. 
• the CBAM simplification (Omnibus 1), see our previous blog posts here and here.
• other Omnibuses, see our Omnibus Tracker.