The case for delaying the application of the EU’s carbon border levy to electricity

The inclusion of electricity in CBAM creates more problems than it solves; ways should be found to exempt it.

The European Union is set to introduce in January 2026 a tariff on the carbon emissions associated with imported products. The tariff, or carbon border adjustment mechanism (CBAM), will apply to energy- and carbon-intensive industrial goods including steel, cement and aluminium, and also to the cross-border trade in electricity. In this Analysis, we propose reconsideration of the application of CBAM to the electricity sector, or at least its postponement until 2028. Including electricity from January 2026 risks undermining European electricity market integration and security of energy supply, while the climate benefits are unclear. A delay could form part of a constructive compromise in an ongoing CBAM revision.

The purpose of CBAM is to reduce the risk of ‘carbon leakage’, which occurs when climate policies (in this case carbon pricing) differ across jurisdictions. Theoretically, industrial activity relocates to where climate policy is lax, and then exports goods back into areas with strict climate policies – creating a so-called ‘carbon leak’. Since the introduction of the EU’s emissions trading system (ETS) in 2005, industries deemed at risk of carbon leakage have been granted large amounts of emission permits free of charge to disincentivise their relocation. The primary benefit of CBAM is that it offers an alternative to the allocation of free allowances. Free allowances will be gradually phased-out as CBAM is introduced, finally providing industry with the necessary price signals to make low-carbon investments worthwhile.

A second potential benefit of CBAM is that it can encourage third countries to implement domestic carbon pricing. The tariff rate paid by exporters is calculated net of any domestic carbon pricing instruments. Therefore, exporting countries can recapture some of the tariff revenue – which would accrue to the EU – by implementing their own carbon taxes and thus reducing the export tariff burden on domestic companies. Early evidence suggests that CBAM is encouraging third countries to move toward domestic carbon pricing (Clausing et al, 2024).

However, it is not clear that the application of CBAM, as currently designed, to the electricity trade will deliver on either front. Electricity is unique among the goods included under CBAM. The EU trades electricity with a handful of neighbouring countries (Figure 1), which are connected by existing infrastructure. It is impossible to physically track the source of electrons as they move through copper grids in the same way that it is theoretically possible to track a tonne of steel. Imperfect assumptions will therefore be needed to attribute carbon emission values to trade flows. Generally, exports of electricity are correlated with periods of excess supply, which are increasingly correlated with periods of abundant renewable electricity generation.

Figure 1: Average electricity grid emissions and annual electricity trade (2024)

^{Source: Bruegel based on Ember, ENTSO-E via Energy Charts and REE. Note: the central labels show the annual emissions intensity, measured in g/kWh, of electricity generation in each regional bloc. Arrows show the trade in electricity. The largest region, EU + Norway, comprises the internal electricity market inside CBAM. The trading partners affected by CBAM are the United Kingdom, Morocco, Western Balkans, Ukraine/Moldova and Turkey.} 

The argument for a delay

Addressing potential carbon leakage in the electricity sector is problematic for two reasons. First, there is no obvious risk of carbon leakage. The free allowances issued to electricity producers under the ETS were already phased out in 2013 – implying that electricity is not considered by the European Commission to be a sector at serious risk of carbon leakage.

Second, the current legislation is not targeted enough. Unless very specific and hard-to-fulfil conditions apply, the regulation establishing CBAM (Regulation (EU) 2023/956) proposes that default carbon emission values be applied. These default values are calculated according to the average CO₂ intensity of electricity produced from fossil fuels according to a trailing five-year average. Using a five-year annual average of fossil-produced electricity is problematic because electricity is exported when prices on one grid are lower than another, which happens typically when renewable output is high. A trailing five-year average is further problematic because electricity grids are evolving rapidly. For example, the UK shut down its last coal plant in 2024, yet its electricity exports would be treated as though they were still produced from coal. 

Modelling for the UK specifically suggests that applying CBAM risks reducing EU imports of clean electricity from the UK, perversely leading to a net increase in carbon emissions of around 1.5 – 2.5 MtCO₂ annually across the UK and EU (AFRY, 2024). Linkage of the UK ETS with the EU’s can address this issue but will take time, adding to the case for a delay.

Conversely, countries on the EU’s eastern borders, as well as Morocco to the south, have higher average CO₂ intensities of electricity generation than the EU (Figure 1). Countries to the east form the Energy Community under which they make commitments to adopt, implement and enforce certain EU related energy rules. Modelling estimates suggest the impact of CBAM to be a net reduction of two MtCO₂ or 0.4 percent of European (EU and Energy Community) power-sector emissions (Figure 2). 

Figure 2: Electricity sector emissions for EU and Energy Community with/without CBAM

^{Source: Green Deal Ukraїna scenario modelling for 2026 (Nies et al, 2025).}

While the impact of CBAM on net carbon emissions is geographically heterogenous and complicated, the reduction in overall trade flows is more obvious. For example, Ukraine and the Western Balkans will face implied export penalties of €70 to €80 per megawatt-hour of electricity. This will significantly reduce trade with the EU. CBAM introduction could reduce Ukraine’s electricity exports to the EU by more than 60 percent compared to a scenario without CBAM (from six TWh to 2.5 TWh) (Figure 3).

Figure 3: Ukraine electricity exports, imports and transit flows with/without CBAM

^{Source: Green Deal Ukraїna scenario modelling for 2026 (Nies et al, 2025)}

Additional trade barriers on the EU’s eastern borders would slow electricity market integration. Falling average electricity prices, lower market values for renewables and increased price volatility would also reduce incentives to invest in renewable assets in these countries. Moreover, the Western Balkans is an important transit region for intra-European electricity trading. The export of solar power from Greece to other EU countries, for example, could also be affected by CBAM. The policy goal of integrating Energy Community countries into the EU’s internal energy market is strategically more important than addressing carbon leakage and arguably in the long-run more important from a climate perspective too. 

From a pure carbon-leakage perspective, the inclusion of electricity into CBAM is, therefore, hard to justify. The second benefit of CBAM is that it may encourage third countries to adopt their own carbon pricing. To realise this, however, a reform is needed. A CBAM exemption for the electricity sectors of third countries (Article 2.7 of the CBAM regulation) is available under certain conditions, including electricity market coupling and the introduction of an ETS with an equivalent price to the EU ETS by 2030. CBAM will begin in January 2026, and coupling the electricity markets of Energy Community countries is unlikely before 2028 at the earliest, which means that an exemption for electricity cannot be secured before that date under current rules.

Cutting or reforming

In our view, the potential gains from including electricity in CBAM are limited, compared to the frictions it will create. The cleanest solution would be for the EU to follow the lead of the UK, which does not plan to include electricity in its own CBAM, and thus to drop electricity from its sectoral coverage. Deepening a shared European system of smooth electricity trade is fundamentally important for domestic climate and competitiveness goals. 

Failing this, the inclusion of electricity should be reformed. First, a five-year trailing average of fossil-produced electricity to calculate levies is not fit for purpose. These values should be substituted for average grid emission factors calculated on an hourly or 15-minute basis, administered by the European Network of Transmission System Operators for Electricity (ENTSO-E) and national transmission system operators. Second, the application of CBAM to electricity should be delayed until 2028 to avoid disruption to the electricity trade and to give more time for the introduction of domestic carbon pricing and the coupling of electricity markets. Third, the period until 2028 should be used to obtain more evidence about the extent of the risk of carbon leakage in the electricity sector.

CBAM is a landmark of Europe’s climate leadership. But unless rules are refined for the electricity sector, it risks undermining European electricity market integration and security of supply. For Energy Community countries, the EU has paved the road for electricity market coupling. It should not put in place a roadblock now.

Source : Bruegel