Carbon Leakage

Carbon leakage occurs when carbon pricing or climate regulation in one jurisdiction causes businesses to relocate production to countries with weaker or no carbon constraints, resulting in no net global emission reduction. It undermines the effectiveness of climate policy and creates competitive disadvantages for regulated industries. CBAM (Carbon Border Adjustment Mechanism) is specifically designed to prevent carbon leakage by equalising the carbon cost on imports. Free allowance allocation in the EU ETS also addresses leakage risk.