Carbon Leakage

Carbon leakage is the phenomenon in which greenhouse gas emissions shift from a region with stricter climate regulation to another with more lenient standards. It typically happens when companies move part of their production, or simply buy from suppliers, in places with less demanding climate policy to avoid the cost of cutting emissions.

Why carbon leakage happens

• Regulatory differences: when a region applies carbon pricing or an emissions trading system, energy-intensive industries may relocate to areas without such costs.
• Competitiveness: manufacturers seek to protect their position in global markets.
• Production costs: cheaper energy or labour where environmental rules are weaker can encourage relocation.

Consequences

• Reduced climate effectiveness: emissions cut in one region can simply reappear elsewhere, so global emissions do not fall.
• Market distortion: firms that stay in regulated regions face a competitive disadvantage against producers not subject to the same costs.
• Harder global goals: leakage undermines the collective effort of the Paris Agreement.

How carbon leakage is addressed

• The Carbon Border Adjustment Mechanism (CBAM), which puts a carbon cost on certain imports based on their embedded emissions. The EU CBAM entered its definitive regime in January 2026, with importers required to surrender certificates for covered goods.
• Free allocation of allowances and other transitional support for exposed sectors under the EU ETS, being phased down as CBAM is phased in.
• International cooperation to align climate policies and reduce regulatory gaps.

Most exposed sectors

Energy-intensive, trade-exposed industries such as steel, cement, aluminium, fertilisers and chemicals face the highest risk of carbon leakage, which is why they are the focus of the EU CBAM.

The role of innovation

Adopting clean technologies and moving toward circular economy models reduces carbon footprints and lowers the risk of leakage. Investment in research and incentives for low-emission solutions support genuine decarbonisation rather than simply exporting emissions.

At Manglai we help companies measure their carbon footprint and prepare their sustainability reporting. Discover how Manglai can help you.