Background

With the implementation of the carbon border adjustment mechanism (CBAM), certain energy-intensive EU industries exposed to a high risk of carbon leakage will gradually lose their free allowances granted under the EU emissions trading system (ETS). The CBAM is likely to lead to their exports becoming more expensive as carbon costs increase, thus negatively impacting their competitiveness outside the EU.

European Commission proposal

Manufacturers that file an application in 2028 could be granted support (equivalent to the value of the lost free allowances) in 2029, based on their production of eligible aluminium, fertiliser, iron and steel goods (listed in the annex to the proposal) in 2026 and 2027. The fund would be financed with 25 % of Member States' revenue from the sale of CBAM certificates. Member States could request inclusion of other goods or sectors depending on national circumstances. Access to funding is contingent on the implementation of mandatory energy audit recommendations (with exceptions). Proof of export is not required.

A permanent solution under the EU ETS?

The proposal was presented as a temporary fix for exporters, while awaiting a permanent export solution to be integrated in the EU ETS. The 17 July 2026 proposal to revise the EU ETS Directive would extend the timeline for the gradual phase-out of free allowances for CBAM-covered sectors, moving the deadline from 2034 to 2038. It drew criticism for not proposing a permanent solution for carbon-intensive EU exports.

European Parliament position

The file was referred to the Committee on the Environment, Climate and Food Safety (ENVI) which adopted its final report on 6 July (59 in favour, 16 against, 6 abstentions), following the vote on rapporteur Pascal Canfin's draft report of 7 April 2026. The committee report introduces key changes to the Commission's proposal, including extending its scope and linking support to actual exports of the eligible goods. The amendments seek to reduce the risk of increased carbon costs of goods for export downstream in the value chain. To this end, the steel and iron category was expanded with 57 codes, mostly finished and specialised components. Two new categories, cement and cereals, were proposed to offset additional CBAM-linked costs, e.g. the addition of export-oriented cereals, such as wheat and barley, exposed to fertiliser cost increases upstream. Six combined nomenclature (CN) codes were added to the fertiliser category, and 13 to the aluminium category. The report aims to speed up the disbursement of support, proposing a two-call structure to allow early support by the end of 2027, while also shortening procedural timelines. Rather than returning excess funds to Member States, the report proposes channelling any such funds towards the EU's international climate finance obligations.

First-reading report: 2025/0418(COD); Committee responsible: ENVI; Rapporteur: Pascal Canfin (Renew, France). For further information see our 'EU Legislation in Progress' briefing.