Today in Strasbourg, commissioners Séjourné and Hoekstra presented a funding mechanism to bolster against the remaining carbon leakage risk for EU ETS producers not accounted for by CBAM. The phase in of CBAM corresponds with a phase out of free allocation, gradually increasing the exposure of EU industry to rising carbon costs. The EU’s carbon border adjustment levels the playing field domestically but fails to protect EU competitiveness in global markets in the same way that free allocation does. Under the rapidly approaching implementation of CBAM, EU exports will be under a growing pressure from carbon costs that the Commission’s proposal intends to ease. The new instrument, dubbed the Temporary Decarbonisation Fund (TDF), will draw from CBAM revenues to financially support export exposed EU industry.
The Temporary Decarbonisation Fund (TDF) is stop-gap and will apply only in 2028 and 2029. This corresponds to carbon leakage risk in 2026 and 2027. The Omnibus simplification of CBAM rules delayed purchasing of CBAM certificates until 2027. As such, full CBAM revenues for 2026 and 2027 will only be available from late 2027. Based on this, the distribution of TDF funding will take place ex-post.
Revenues from the sale of CBAM certificates go to the general budgets of member states (‘own funds’). This fund plans to reassign 25% of these revenues to support decarbonisation of export-oriented industry deemed to still have a high risk of carbon leakage.
The eligibility criteria for this fund is expected to build on the current methodology used to determine the Carbon Leakage List (CLL). The CLL assesses the combined degree of trade exposure and emissions exposure, establishing an indicator above which sectors and products are determined to be at risk. The Temporary Decarbonisation Fund will build on this indicator, also allowing for additional flexibility for different circumstances of products within individual member states.
Conditionality, as applied through the distribution of free allocation, will also apply to support from the TDF. Implementation of energy audits and climate neutrality plans will be required, though recipients have the flexibility to “invest their support in projects that suit their individual situation.”
As with all steps of CBAM up to this point, the implementation requires further legislation and rule-setting. The Commission outlines the supplementary legislation needed to make the Fund operational. These include:
Calculation for each member state’s contribution to the TDF
Implementation of the fund itself, including reporting and monitoring
Establishing an indicator to determine the remaining risk of carbon leakage
Establish a list of goods on the basis of the carbon leakage indicator
The conditions that installations must meet to receive support from the TDF
Procedures to apply for funding
While this proposal answers a lot of questions about how export leakage will be addressed, it also prompts further discussion of how the rules will be set and who/which products will be on and off the eligibility list.
Additionally, this proposal puts forward a stop-gap solution to export leakage risk. The TDF is only set up for operation for the years 2028 and 2029, addressing the carbon leakage risk for the years 2026 and 2027. The Commission states that a more permanent solution will be addressed “in the context of the scheduled review of the EU ETS” that is coming in Q3 2026. This leaves the door wide open to a range of policy options, not least the continuation of free allocation to account for exports. This is likely the biggest question mark when it comes to the introduction of the new Fund, as extending free allocation would likely be supported by industry, though the usefulness of additional free allocation might be undermined as the cap approaches zero and the volume available for free allocation dwindles.
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