Export Carbon Leakage: Four Policy Options

Meta Description: German Environment Agency interim report assesses four options to fix CBAM's export gap: export rebates, free allocation on export share, sector-specific CBAM adjustment and more.

Target Keywords: export carbon leakage, CBAM export solution, EU ETS export rebates, CBAM WTO compatibility exports, German Environment Agency CBAM

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The Export Problem CBAM Doesn't Solve

CBAM protects EU producers at the border, but it says nothing about EU exports. Goods produced in the EU still face full carbon costs under the EU ETS, while competing exports from countries with low or no carbon pricing don't. That's "export carbon leakage."

"As long as the CBAM fails to provide WTO-compatible and effective protection for exports and downstream sectors, the DIHK strongly advocates that free allocation should not be phased out." DIHK, CBAM Challenges 2026 (June 2026)

The German Environment Agency (UBA) commissioned an interim report (June 2026) assessing four policy options to address this gap.

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The Four Options

Option	Mechanism
Option 1	Direct export rebates linked to verified carbon costs
Option 2	Additional free allocations to EU ETS 1 operators based on their export share
Option 3	Sector-specific CBAM adjustment
Option 4	Further measures assessed in the full report (four options compared in total)

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Option 1: Direct Export Rebates

Exporters claim financial compensation based on the actual quantity of goods exported and the carbon costs incurred:

• Rebates would be partial and linked to an EU product benchmark, preserving the EU ETS's decarbonisation incentive
• Eligibility could be limited by specific conditions, and conditionality criteria could tie support to investment milestones
• For a benchmark-level plant with a 20% export share, free allocation covers the domestic share while rebates cover the export share. As free allocation declines following the CBAM factor, export rebates increase

"To preserve the decarbonisation incentives inherent in the EU ETS 1, the rebate system would create an EU product benchmark. In this way, rebates would be partial and linked to the benchmark." UBA, "Export Carbon Leakage" interim report (June 2026)

Key trade-off: rebates effectively refund carbon costs on exports, which risks reducing the financial pressure to invest in decarbonisation, but a benchmark-linked design limits this.

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Option 2: Additional Free Allocations on Export Share

Instead of cash rebates, operators receive extra free allowances based on their export share:

• Functionally similar to Option 1 but delivered through the existing ETS allocation machinery
• Extends the free-allocation system rather than replacing it
• Avoids new cash-transfer infrastructure but keeps more free allocation in the system for longer

Trade-off: if export-linked free allocation grows as domestic free allocation phases out, the carbon price signal on exported goods weakens, and the mechanism still needs to avoid WTO export-subsidy concerns.

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What the Report Does and Doesn't Say

• The report does not derive policy recommendations; it identifies pros and cons of each option
• WTO compatibility is outside the scope of the analysis (a critical open question for all options — export rebates can raise prohibited export-subsidy issues under WTO rules)

"This paper does not derive policy recommendations but rather aims to identify pros and cons of the four policy options." UBA, "Export Carbon Leakage" interim report (June 2026)

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Why This Matters Now

The issue is live for three reasons:

1. The CBAM expansion debate: extending CBAM to downstream goods increases pressure for an export solution (the DIHK explicitly calls for export rebates analogous to EU VAT export relief)
2. The ETS revision (July 2026): free allocation's future is being renegotiated, and export protection is a central question
3. The Temporary Decarbonisation Fund: proposed as a WTO-compatible alternative, but it primarily addresses ETS installations, leaving non-ETS exporters uncovered

Timeline context: EU ETS free allocation phases out for CBAM sectors by 2034. Without an export solution, EU exporters face asymmetric carbon costs against non-EU competitors, the exact problem the report is designed to inform.

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Key Takeaways

1. CBAM protects imports but not EU exports. That is the export carbon leakage gap
2. Four options are on the table: export rebates, export-share free allocation, sector-specific CBAM adjustment and a fourth assessed option
3. Rebates would be benchmark-linked and partial to preserve decarbonisation incentives
4. WTO compatibility remains unresolved: outside the report's scope
5. The 2026 ETS revision and CBAM expansion make this decision urgent

Related: How CBAM Affects Your Exports | Reduce CBAM Costs | CBAM Certificate Cost Formula

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Frequently Asked Questions

What is export carbon leakage?

EU producers pay EU ETS carbon costs on goods they export, while competitors in countries with no carbon price don't, creating an incentive to relocate production or lose export markets.

Can the EU rebate carbon costs on exports?

That's the design question under assessment. Rebates are WTO-sensitive (export subsidy rules), so any solution must be benchmark-linked and carefully designed.

When will a solution be adopted?

No decision yet. The interim report (June 2026) informs the debate; the ETS revision (July 2026) and CBAM expansion negotiations are the current vehicles.

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Regulation Status

Field	Value
Last reviewed	2026-08-01
Based on	UBA Climate Change 43/2026 interim report (June 2026), EU ETS Directive 2003/87/EC, Regulation (EU) 2023/956
Applies to	CBAM permanent phase (2026+), ETS revision

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References

• UBA — Export Carbon Leakage: Assessment of different policy options in the context of CBAM (Climate Change 43/2026)
• EU ETS Directive 2003/87/EC
• EU Regulation 2023/956
• DIHK — CBAM Challenges 2026
• European Commission — CBAM

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Last updated: August 2026 | Sources: UBA Climate Change 43/2026 (June 2026, The Climate Desk), DIHK CBAM Challenges 2026