Carbon Leakage Due to EU Climate Policy? An Overview

• Carbon leakage exists but is limited: Studies show that around 10–30% of emis-sions reduced by EU climate policy are shifted abroad. However, the majority of emission reductions remain effective globally, meaning the policy is overall still effective.
• Little evidence for a “green paradox”: The concern that climate policy may trigger a short-term increase in emissions is not supported by empirical evidence. In-stead, firms often reduce investments in fossil fuels, which tends to lower emis-sions.
• EU uses instruments to address competitiveness concerns: These include free allocation of emission allowances and the Carbon Border Adjustment Mechanism (CBAM), which prices imports based on their emissions. The goal is to reduce leakage and ensure a level playing field.
• Effectiveness depends on policy design: The current CBAM covers only a limited number of sectors and therefore has a relatively small impact on global emissions. Expanding it to more sectors could significantly increase emission re-ductions.
• Climate policy generates additional benefits: Beyond reducing emissions, it fosters innovation, improves air quality, and strengthens energy security and geopolitical independence. These co-benefits increase the overall value of such policies.

Kiel Institute Expert