Abstract
The EU’s approach to preventing potential carbon leakage effects of its climate policies is undergoing a fundamental change. A Carbon Border Adjustment Mechanism (CBAM) is being introduced to protect domestic industries from unfair competition with CO₂-intensive imports. In response to mounting political pressure, the European Commission has announced plans to develop a complementary export protection instrument. Such an unprecedented instrument would raise legal concerns and significantly impact trade flows, public budgets, and the EU’s geostrategic position. This article discusses potential design options for a bi-directional EU CBAM. Results of trade simulations indicate that these options could effectively mitigate the adverse effects of the current CBAM mechanism on EU exports. However, this policy entails unintended consequences. This includes a shift of supply away from the internal market, which raises the exposure of EU industries to external trade policies and the competitive pressure on political allies. Moreover, providing an effective level of export protection would incur public support costs amounting to several billion euros per year.