What is carbon leakage and why is it a concern under the EU Green Deal?

Carbon leakage refers to companies relocating production to countries with less stringent emission regulations, undermining the EU's climate goals. Under the EU Green Deal, this risks increasing global emissions despite EU efforts, prompting measures like the Carbon Border Adjustment Mechanism (CBAM) to prevent unfair competition and maintain emission reductions.

How does the EU's Carbon Border Adjustment Mechanism (CBAM) address carbon leakage?

CBAM, effective from 2023 with full implementation by 2026, imposes a carbon price on imports of certain goods to the EU, aligning their carbon costs with EU standards. This discourages companies from shifting production abroad to avoid emissions costs, directly targeting carbon leakage by leveling the playing field.

What role does the European Sustainability Reporting Standards (ESRS) play in managing carbon leakage risks?

The ESRS, part of the Corporate Sustainability Reporting Directive (CSRD) effective from 2024, requires companies to disclose detailed environmental impacts, including carbon emissions. Transparent reporting helps identify carbon leakage risks by revealing supply chain emissions, enabling regulators and investors to hold companies accountable.

Why must compliance managers understand carbon leakage in relation to the Corporate Sustainability Due Diligence Directive (CSDDD)?

The CSDDD, expected to be enforced by 2025, mandates companies to identify and mitigate adverse environmental impacts in their supply chains, including carbon leakage. Compliance managers must ensure due diligence processes address risks of production shifting to countries with lax emission rules to avoid legal penalties and reputational damage.

What are the legal implications of carbon leakage for companies under EU regulations?

Companies failing to address carbon leakage risk non-compliance with CBAM, CSRD, and CSDDD, leading to financial penalties, trade restrictions, and reputational harm. For example, CBAM requires accurate carbon cost reporting on imports by 2026, and CSRD mandates sustainability disclosures starting 2024, making proactive carbon leakage management legally essential.

What is Carbon Leakage? | EU Green Deal Glossary

Carbon Leakage is the legal situation where companies relocate production or increase imports from countries with less stringent greenhouse gas emission constraints, resulting in an overall increase or no reduction in global emissions despite stricter climate policies in the European Union.

The concept of Carbon Leakage is central to the EU Green Deal, aiming to ensure that climate action within the EU does not inadvertently cause emissions to shift outside its borders. This term is explicitly addressed in several key EU regulations, including the Carbon Border Adjustment Mechanism (CBAM) Regulation (EU) 2023/956, the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) 2022/2464, and the Corporate Sustainability Due Diligence Directive (CSDDD) Proposal COM(2022) 71 final. Each of these frameworks incorporates measures to mitigate or report on risks related to carbon leakage.

For compliance managers, understanding Carbon Leakage is critical because it directly influences how companies must report emissions, adjust supply chains, and comply with import and production regulations. Misinterpreting this term can lead to non-compliance with EU climate policies, resulting in significant financial penalties and reputational damage.

Specifically, the CBAM Regulation (EU) 2023/956, effective from 1 October 2023 with full financial obligations starting 1 January 2026, imposes a carbon price on imports of certain goods to prevent carbon leakage by equalizing the cost of carbon between domestic and foreign producers. Failure to comply can lead to penalties of up to 5% of annual turnover for non-reporting or under-reporting emissions embedded in imports.

The CSRD and its associated ESRS require companies to disclose their exposure to carbon leakage risks in their sustainability reports, enabling investors and regulators to assess climate-related risks accurately. The CSDDD proposal further extends due diligence obligations to ensure companies identify and mitigate environmental harms, including those related to carbon leakage, across their value chains.

Regulation	Reference to Carbon Leakage	Scope	Key Deadline	Penalty
CBAM Regulation (EU) 2023/956	Defines carbon leakage risk; imposes carbon price on imports	Importers of cement, iron, steel, aluminium, fertilisers, electricity	1 January 2026 (full financial obligations)	Up to 5% of annual turnover for non-compliance
CSRD (Directive 2022/2464) with ESRS	Requires disclosure of carbon leakage exposure in sustainability reports	Large EU companies and non-EU companies operating in EU	1 January 2024 (reporting for FY 2024)	Administrative sanctions per Member State law
CSDDD Proposal COM(2022) 71 final	Mandates due diligence on environmental risks including carbon leakage	Large EU companies and non-EU companies with significant EU presence	Expected adoption in 2024	Fines up to 5% of global turnover possible

Failure to properly address Carbon Leakage can result in:

Financial penalties up to 5% of global or annual turnover depending on the regulation
Mandatory corrective actions and increased regulatory scrutiny
Damage to corporate reputation and investor confidence
Potential exclusion from EU markets under CBAM

Truth Anchor: The Carbon Border Adjustment Mechanism (CBAM) Regulation (EU) 2023/956 was published in the Official Journal of the European Union on 19 June 2023, establishing a carbon price on imports starting 1 October 2023 with full payment obligations from 1 January 2026. Non-compliance penalties can reach up to 5% of annual turnover as per Article 20 of the regulation.

What products are most affected by carbon leakage under EU regulations?

The CBAM Regulation currently targets high-risk sectors such as cement, iron and steel, aluminium, fertilisers, and electricity imports. These sectors are most vulnerable to carbon leakage due to their carbon-intensive production processes.

How does carbon leakage impact my company’s reporting obligations?

Under the CSRD and ESRS, companies must disclose risks related to carbon leakage in their sustainability reports, including how their operations or supply chains might shift emissions outside the EU. This transparency is essential for regulatory compliance and investor relations.

What should I do first to manage carbon leakage risk?

Begin by mapping your supply chain emissions and identifying any production or sourcing in countries with less strict emission constraints. Then, assess your obligations under CBAM and sustainability reporting rules. Using the Carbon Leakage Risk Assessment Tool on eugreendeal.com can help you evaluate your exposure and compliance steps.

Ready to assess your company’s Carbon Leakage risk and compliance status? Use our Carbon Leakage Risk Assessment Tool to get a tailored report on your obligations under the EU Green Deal regulations. This tool guides you step-by-step through data collection, risk evaluation, and compliance planning to avoid costly penalties.