In a recent TIME interview, top EU climate official Wopke Hoekstra speaks in-depth about climate policies and business support. He emphasizes that EU policymakers should make sure the bloc’s climate policies do not hurt EU producers’ competitiveness. Top areas of concern for Hoekstra include electric vehicles infrastructure and EU’s competition with China in clean energy manufacturing. These are all valid issues. Equally as pressing–though not mentioned in this particular article–is how EU business may be impacted by the EU carbon border adjustment mechanism (CBAM).
The EU CBAM will start collecting import taxes on goods across several sectors from 2026, mirroring what EU producers pay for emissions certificates under the bloc’s carbon pricing policy, an emissions trading system (ETS). To protect its competitiveness, the EU will phase out the ETS’s free emissions allowances given to carbon-intensive industries and replace them with the CBAM.
However, the EU CBAM does not include export rebates, which deviates from a model carbon border adjustment. Well-designed carbon border adjustments should include import taxes, export rebates, and domestic carbon prices. Carbon border adjustments would level the playing field between domestic and foreign producers in both imports and exports. Foreign and domestic producers who sell to American consumers are subject to the carbon price. In contrast, domestic and foreign producers who sell to foreign markets are not subject to the price.
Without export rebates, the EU CBAM would risk undermining the bloc’s climate goals and hurting EU producers’ competitiveness in foreign markets. In Hoekstra’s words, “Everyone loses if they either go bust or leave our continent—and certainly the climate won’t win from that either.”
When the ETS free emissions allowances are entirely phased out, some covered businesses might have incentives to relocate their manufacturing facilities to another country with less stringent environmental policies (a practice known as “carbon leakage”). Rather than paying for the EU carbon price and finding ways to decarbonize, they generate emissions elsewhere.
It would also harm the EU’s economy and competitiveness when some businesses move to other countries, which would lead to job losses and a decline in tax revenue. The European Commission’s impact assessment study of the CBAM concluded that not providing export rebates to businesses would lead to a loss of 6.8% of its export market.
Unless there is a uniform global carbon price, which is extremely difficult to achieve, countries would need to balance economic growth, industry competitiveness, and international trade when designing and implementing climate policies. EU’s policymakers should consider Hoekstra’s suggestion to ensure EU producers stay competitive under climate policies, including the EU CBAM. Adding export rebates to the policy would be good for both achieving the bloc’s climate goals and maintaining its economic competitiveness.