The primary objective of the EU’s Carbon Border Mechanism is to prevent carbon leakage, i.e. the transfer of production to countries with less stringent climate regulations. Currently, the mechanism only covers direct emissions for iron, steel and aluminium, but the European Commission has considered extending the scheme to cover indirect emissions from the electricity used in the production of these products. This research project analyses the impacts of the planned extension and its coordination with indirect cost support from emissions trading.
The study simulates different policy options, examining the combined effects of CBAM payments and current compensation payments. The scenarios are used to investigate how the CBAM extension and the withdrawal of support affect the risk of carbon leakage, i.e. the transfer of production outside the EU. A special focus is on the direction of trade flows in a situation where free allocation from emissions trading is gradually phased out.
