Carbon leakage threatens EU climate goals and Irish industrial competitiveness. Here's how CBAM, free allowances, and se...
Carbon leakage is the inconvenient arithmetic of climate policy: tighten emissions rules in the EU, and energy-intensive industries shift production — and their emissions — to jurisdictions with no such rules. The result is worse global outcomes dressed up as EU progress. CBAM is Brussels' attempt to fix this. Irish manufacturers need to understand what it changes, what it doesn't, and how the transition from free allowances will unfold.
The EU ETS puts a price on carbon inside the EU. A steel plant in Limerick pays for its CO₂. A steel plant in Turkey does not. If Irish steel costs more because of carbon pricing, buyers switch to Turkish steel. The EU's emissions go down on paper; global emissions stay the same or rise. That's carbon leakage.
The European Commission has long tried to prevent this through free allowance allocation — essentially handing the most emissions-intensive sectors allowances at no cost. It works as a subsidy, but it blunts the price signal. If you're not paying for carbon, you're not innovating to reduce it.
Phase 4 of the EU ETS (2021–2030) began reducing free allocations. CBAM was announced in 2021 specifically to allow more aggressive removal of free allowances without triggering mass industrial flight.
The Carbon Border Adjustment Mechanism imposes a carbon cost on imports of steel, cement, aluminium, fertilisers, electricity, and hydrogen from non-EU countries that lack equivalent carbon pricing. The logic: if imports face the same carbon cost as EU production, free allowances are no longer needed as protection.
CBAM entered its transitional phase in October 2023 — reporting obligations only. Full pricing mechanism kicks in from January 2026. By 2034, free allocations to CBAM-covered sectors will be phased out entirely.
For Irish manufacturers, the immediate impact is limited if they're exporting into the EU or competing against EU imports. The larger risk is upstream: Irish producers sourcing CBAM-covered materials (steel, aluminium) will face higher input costs as those sectors lose free allowances.
Construction and infrastructure. Irish building materials supply chains are steel and cement-heavy. Both sectors are CBAM-covered. Cost of steel in Irish construction will rise as UK and other non-EU suppliers face CBAM charges.
Food and agri-processing. Fertiliser is CBAM-covered. Irish agriculture consumes significant volumes of imported nitrogen fertiliser. CBAM will increase input costs for Irish tillage and intensive livestock operations unless domestic supply chains adapt.
Pharmaceutical manufacturing. Ireland's pharma sector is energy-intensive but its direct emissions are relatively low per unit of output. CBAM as currently scoped has limited direct impact, but indirect exposure through electricity and process inputs remains.
Aluminium and metals processing. Secondary aluminium smelting at Aughinish, Askeaton (Irish Aluminium) is directly within CBAM scope. The CBAM charge applies to imported alumina and aluminium inputs — this is the kind of operation where detailed CBAM compliance work is already underway.
This is the number Irish manufacturers should be tracking:
Any manufacturer currently relying on free ETS allowances as a competitive buffer needs a decarbonisation plan on a 2026–2030 timeline. Waiting until 2030 to plan is waiting until you have a problem.
CBAM covers hard-goods industries. It does not, yet, cover:
For these sectors, free allowances are still the primary protection mechanism. The Commission has signalled it intends to expand CBAM scope, but timelines are uncertain.
The European Commission's own modelling estimates that full CBAM implementation will add approximately 30–40 euros per tonne of CO₂ embedded in imports for covered sectors by 2030. For steel, that's roughly €25–35 per tonne of finished steel at current carbon prices. Marginal but not negligible at scale.
Irish Steel's competitive position depends on how its suppliers are priced. EU-produced steel from decarbonising mills (H2-based DRI, electric arc) will absorb lower CBAM impacts than blast-furnace imports from coal-heavy grids. Sourcing decisions need to factor this in from now.
CBAM is not the only lever. The EU's Green Deal Industrial Plan and the Net Zero Industry Act (2023) created additional policy scaffolding:
Important Projects of Common European Interest (IPCEIs): State aid-cleared consortium projects for hydrogen, batteries, and semiconductors. Irish IDA has been active in hydrogen IPCEI. These allow member states to co-fund decarbonisation capex without triggering state aid complaints.
Innovation Fund: Funded by EU ETS auction revenues (roughly €38 billion by 2030). Open to large industrial decarbonisation projects. Several Irish projects at feasibility stage.
Contracts for Difference (CfDs) for green hydrogen: The EU Hydrogen Bank has piloted CfDs for green hydrogen producers. Ireland's offshore wind capacity makes green hydrogen a credible industrial feedstock option, but cost curves remain challenging at 2024 prices.
The trajectory is clear even if the pace is uncertain. Carbon pricing will increase. Free allowance subsidies will shrink. CBAM will extend its sectoral coverage. The manufacturers who navigate this best will be those who:
Carbon policy is no longer a background cost. It is a capital allocation question.
Michael English is a technology entrepreneur and writer focused on blockchain infrastructure, carbon markets, and enterprise technology. He co-founded IMPT (impt.io), a carbon credit tokenisation platform, and BMIC (bmic.ai). Based in Ireland.