Picture two neighbours sharing a garden wall. One neighbour bans bonfires to keep the air clean. The other has no such rule. So the first neighbour starts carrying their garden waste next door to burn it instead. The smoke is the same, the air is just as dirty – but the first neighbour can claim they have no bonfire emissions. That is carbon leakage: strict climate rules in one jurisdiction simply pushing dirty production to another, with no net benefit for the planet.
Carbon leakage is not a theoretical problem. It is the central competitiveness concern behind the EU’s Emissions Trading System, and it is the reason the EU has introduced the world’s first carbon border tax.
🌿 How Carbon Leakage Happens
Carbon leakage occurs through two main channels.
Production shifting happens when a company relocates manufacturing to a country with weaker or no carbon pricing. If an Irish cement factory faces a carbon cost of EUR 70 per tonne under the EU ETS while a factory in a country with no climate policy faces zero, the economics push production offshore. The emissions do not disappear – they simply move off Ireland’s balance sheet and onto someone else’s.
Import substitution happens when cheaper, more carbon-intensive imports undercut domestic producers who are carrying the cost of climate regulation. A fertiliser plant in the EU paying for its emissions may lose market share to an identical plant in a country without carbon pricing, even if the foreign plant produces more greenhouse gas per tonne of product.
Both routes produce the same outcome: the regulated country loses jobs and industrial output while global emissions stay the same or even increase. This is why carbon leakage has been described as the Achilles’ heel of unilateral climate policy.
🌿 How the EU Tried to Prevent It – Free Allocation
For the first two decades of the EU ETS, the primary tool against carbon leakage was free allocation. Sectors deemed at risk of leakage – including cement, steel, aluminium and fertiliser production – received most of their emission allowances for free instead of having to buy them at auction. This shielded them from the full carbon cost but came at a price: it weakened the incentive to decarbonise and cost EU governments an estimated EUR 331 billion in foregone auction revenue between 2023 and 2033.
Free allocation was always intended as a temporary solution. The EU needed a mechanism that could protect industrial competitiveness while simultaneously tightening the cap and driving real emission reductions. That mechanism is CBAM.
🌿 CBAM: The Carbon Border Adjustment Mechanism
The Carbon Border Adjustment Mechanism, which entered its definitive phase on 1 January 2026, fundamentally changes the EU’s approach to carbon leakage. Instead of shielding domestic producers from carbon costs, CBAM extends those costs to imports.
EU importers of covered goods must now purchase CBAM certificates corresponding to the carbon emissions embedded in their imports, priced to match the EU ETS allowance price. If the exporting country already has its own carbon pricing, that amount can be deducted. The net effect is that a tonne of steel or cement faces the same carbon cost whether it was made in Cork or Calcutta.
🌿 Product Scope
CBAM currently covers six sectors selected for their high emissions intensity and exposure to leakage risk:
- 🌿 Cement
- 🌿 Iron and steel
- 🌿 Aluminium
- 🌿 Fertilisers
- 🌿 Electricity
- 🌿 Hydrogen
The European Commission proposed extending CBAM to 180 additional downstream steel and aluminium products from 2028. Sectors such as chemicals and polymers are under consideration for later phases. When fully phased in, CBAM is expected to cover more than 50% of emissions from ETS-regulated sectors.
🌿 Timeline
The transition from free allocation to CBAM is gradual. Free allowances for CBAM-covered sectors will be phased out between 2026 and 2034, with CBAM certificate obligations ramping up in parallel so that by 2034 imports face the full EU carbon price. The first CBAM certificate purchases begin in February 2027 (covering 2026 imports), with the first annual declaration and certificate surrender due by 30 September 2027. Importers must hold certificates covering at least 50% of their year-to-date embedded emissions at the end of each quarter from 2027 onwards. A de minimis threshold exempts importers bringing in 50 tonnes or less of CBAM goods per year (excluding hydrogen and electricity).
🌿 Why Carbon Leakage Matters for Ireland
Ireland has a particular stake in the carbon leakage debate for several reasons.
Cement is one of Ireland’s most carbon-intensive industries. A significant proportion of cement produced in Ireland is exported, mostly to the UK. With the UK planning its own CBAM from 2027, the interaction between the EU and UK regimes will directly affect Irish cement exporters. The EU has proposed a temporary decarbonisation fund to help exporters who lose free allowances during the transition, but this mechanism covers 2026 and 2027 only.
Fertiliser imports are substantial. Approximately 50% of fertiliser used in Ireland is imported. Under CBAM, the embedded carbon in those imports will carry a cost for the first time, potentially increasing input costs for Irish agriculture – a sector already responsible for 37.7% of national greenhouse gas emissions.
Electricity interconnection with Britain adds complexity. Ireland and the UK share an interconnected electricity grid, and Ireland generally exports electricity to Britain. The treatment of cross-border electricity flows under CBAM and the forthcoming UK CBAM will need careful management to protect security of supply and avoid penalising clean electricity exports. The Celtic Interconnector (700 MW, due spring 2028) will intensify this cross-border dynamic.
In Ireland, the EPA is the designated national competent authority for CBAM, with Revenue (Customs Division) acting as the customs authority. Irish importers exceeding the 50-tonne threshold must apply for authorised CBAM declarant status.
🌿 The WTO Question
Carbon leakage policy sits at the intersection of trade law and climate policy. Critics argue that CBAM functions as a disguised trade barrier, and Russia has already brought a WTO challenge against the mechanism. The EU maintains that CBAM is an environmental measure compatible with WTO rules because it applies the same carbon cost to imports as to domestic production – it levels the playing field rather than tilting it.
The broader trend is toward convergence. As more countries adopt their own carbon pricing – 38 emissions trading systems are now operational worldwide, covering 23% of global emissions – the gap that creates carbon leakage narrows. Countries with their own carbon prices can deduct those costs from CBAM obligations, reducing the effective border charge. In this sense, CBAM is designed not just to protect EU competitiveness but to incentivise other countries to price carbon domestically.
🌿 Frequently Asked Questions
🌿 What is the difference between carbon leakage and carbon offsets?
Carbon leakage is the unintended movement of emissions from a regulated jurisdiction to an unregulated one. Carbon credits (offsets) are voluntary purchases that fund emission reduction projects elsewhere. Leakage is a policy failure; offsetting is a deliberate market mechanism. They are unrelated concepts despite both involving cross-border emission flows.
🌿 How does CBAM affect the price of imported goods?
Importers must purchase certificates at a price linked to the EU ETS allowance price (EUR 60-80 per tonne in 2025). The cost depends on the embedded emissions per unit of product. For example, every 0.1 tCO2e per tonne difference in emissions intensity changes the cost by approximately EUR 9 per tonne of product. Goods from countries with their own carbon pricing pay a reduced amount.
🌿 Does Ireland’s carbon tax count against CBAM?
Ireland’s carbon tax applies to fuel combustion, not to the production of CBAM goods. CBAM operates separately from the national carbon tax. Irish producers of CBAM goods (such as cement) participate in the EU ETS, which is the relevant carbon price for domestic production. The CBAM ensures imports face an equivalent charge.
🌿 Will CBAM be expanded to cover more products?
Yes. The European Commission proposed adding 180 downstream steel and aluminium products from 2028, and sectors such as chemicals and polymers are under consideration. The Commission has committed to a broader review of CBAM legislation, with further expansion possible in later phases.