What is Carbon Leakage — and Why It's the Reason CBAM Exists

Carbon leakage occurs when emissions reduction policies in one jurisdiction cause production to shift to countries with weaker regulations, resulting in no net reduction in global emissions. CBAM is the EU's direct response to this problem.

Published April 2026·Last updated April 2026·carbonborderadjustment.co.za

What is Carbon Leakage?

Carbon leakage is one of the most important concepts in international climate policy — and it is the primary reason the EU created CBAM.

The EU ETS and the Carbon Leakage Problem

The EU Emissions Trading System (EU ETS) puts a price on carbon for EU producers. As of 2026, that price is approximately EUR 65 per tonne of CO₂. This means an EU steel producer pays roughly EUR 65 for every tonne of CO₂ emitted in their production process.

A South African steel producer exporting to the EU pays the SA carbon tax — currently R236/tCO₂e, or approximately EUR 12/tCO₂e. This is a significant cost advantage.

Without CBAM, an EU buyer of steel would have a strong financial incentive to import from South Africa rather than buy from a higher-cost EU producer. EU production would decline, EU emissions would fall — but global emissions would not, because SA production (with higher emissions per tonne) would increase to fill the gap.

How CBAM Closes the Carbon Leakage Gap

CBAM closes this gap by requiring EU importers to purchase CBAM certificates for the embedded carbon in imported goods, at the EU ETS price. The net charge is the EU ETS price minus any carbon price already paid in the country of origin.

For a SA steel exporter, this means:

▸EU ETS price: ~EUR 65/tCO₂e
▸SA carbon tax credit: ~EUR 12/tCO₂e
▸Net CBAM charge: ~EUR 53/tCO₂e

This net charge eliminates the carbon cost advantage that SA producers would otherwise have over EU producers.

Carbon Leakage and South Africa's Industrial Sectors

South Africa's most carbon-intensive export sectors — steel, aluminium, ferrochrome, fertilisers, and cement — are all in CBAM's scope. These are also the sectors where the carbon leakage risk is highest, because they are energy-intensive, trade-exposed, and compete directly with EU producers.

What SA Exporters Should Do

SA exporters should not view CBAM as a punishment. It is a structural shift in the economics of carbon-intensive trade. The exporters who adapt fastest — by improving their carbon efficiency, implementing MRV systems, and registering at the Digital Product Passport Registry — will have the lowest CBAM charges and the strongest competitive position.

For a complete CBAM compliance registration pathway, visit the Digital Product Passport Registry.

Frequently Asked Questions

What is carbon leakage in simple terms?

Carbon leakage happens when a country or region introduces a carbon price or emissions regulation, and as a result, companies move their production to countries with no carbon price — or reduce domestic production while imports from high-emission countries increase. The net effect is that global emissions don't fall; they just move. The EU's carbon price (EU ETS) created exactly this risk: EU steel producers faced higher costs than their South African or Chinese competitors, creating an incentive to import rather than produce domestically.

Why is carbon leakage a problem for climate policy?

Carbon leakage undermines the environmental effectiveness of carbon pricing. If EU steel producers cut emissions but EU steel consumption is met by imports from high-emission producers, global CO₂ doesn't fall — it just moves. It also creates an economic problem: EU producers face higher costs than foreign competitors, which is commercially unfair and politically unsustainable. CBAM addresses both problems simultaneously.

How does CBAM prevent carbon leakage?

CBAM prevents carbon leakage by applying the same carbon cost to imported goods that EU producers face under the EU ETS. An EU importer of SA steel must purchase CBAM certificates equivalent to the embedded carbon in that steel, at the EU ETS price. This eliminates the cost advantage that high-emission foreign producers would otherwise have over EU producers. The result is a level playing field based on carbon intensity, not geography.

Is South Africa considered a carbon leakage risk by the EU?

Yes. South Africa's carbon tax (currently R236/tCO₂e) is significantly lower than the EU ETS price (approximately EUR 65/tCO₂e, or roughly R1,300/tCO₂e). This price differential means SA producers have a lower carbon cost than EU producers, which is exactly the condition CBAM is designed to address. SA exporters to the EU will face CBAM charges equal to the difference between the EU ETS price and the SA carbon tax credit.

Does CBAM apply to all countries, or just those with no carbon price?

CBAM applies to all non-EU countries, but the net charge depends on the carbon price already paid in the country of origin. Countries with a carbon price equivalent to the EU ETS price (currently around EUR 65/tCO₂e) would face zero net CBAM charge. Countries with no carbon price would face the full EU ETS price. South Africa, with its carbon tax of R236/tCO₂e (approximately EUR 12/tCO₂e), falls in between — SA exporters receive a partial credit for the SA carbon tax paid, but still face a net CBAM charge for the remaining difference.

Gate 3 — Complete Registration

✓ Gate 1 KYC · ✓ Gate 2 CBAM · Gate 3 DPP →

Digital Product Passport Registry

Complete all three compliance gates — Gate 1 KYC identity verification, Gate 2 CBAM financial authorisation, and Gate 3 Digital Product Passport registration — in one place at the DPP Registry.

Start Three Gates Registration →