Current and future protection against carbon leakage in the European Emissions Trading System

With the Fit for 55 package, the European Commission has proposed a comprehensive reform of the European Emissions Trading System and the introduction of a Carbon Border Adjustment Mechanism (CBAM). A key element of this is the switch of carbon leakage protection from free allocation and electricity price compensation to CO2 pricing of imported goods and greater support for technological innovation in the CBAM sectors (aluminum, cement, electricity, fertilizer, iron, steel, and hydrogen). Whether this new approach will be able to prevail in the face of the immense subsidy approach through the Inflation Reduction Act in the US remains to be seen.