Putting a price on carbon inside your own borders makes local production more expensive than that of countries which do not. The temptation, for the industries affected, is then to move to where emitting costs nothing. Emissions do not fall: they simply change address. Understanding this risk, and the answer raised against it, is the whole point of this notion.
1 Carbon leakage
When emissions move instead of disappearing.
The definition
A move, not a disappearance
"Carbon leakage" refers to the shift of greenhouse-gas emissions from a country that taxes carbon to one that does not. Two channels: production can relocate to less demanding jurisdictions; or local goods, now more expensive, can be replaced by more carbon-intensive imports. In both cases the global climate balance does not improve: one country's policy simply pushes its emissions across the border. Carbon leakage is the blind spot of any carbon pricing pursued in scattered order.
2 The border adjustment
Making imports pay the same carbon price as production at home.
The fix
A mirror held up to imports
The carbon border adjustment (in Europe, the CBAM, for Carbon Border Adjustment Mechanism) consists of making imports pay the same carbon price as the one borne by domestic producers. In practice: the importer declares the emissions "embedded" in the good, then pays an amount indexed to the internal carbon price, from which any price already paid in the country of origin is deducted. The idea is not to close the border, but to restore equality at it: that carbon should cost the same whether it is emitted inside or outside. In this way, decarbonising at home no longer amounts to handing an advantage to the most polluting foreign producers.
3 Why it looks like a customs duty
Form and function do not quite coincide.
Form and function
A charge at the border, scaled by origin
By its function, the adjustment is a climate measure. By its form, it is an amount paid on goods as they cross the border, varying by origin and carbon content: the very definition of a customs duty. Hence a legal tension. World-trade rules (WTO) in principle forbid treating partners differently; a carbon adjustment can comply only by invoking the environmental exception (Article XX of the GATT), and on condition that it does not serve as a "disguised restriction on trade". This is why such a mechanism is carefully designed to target carbon, not the competitor: the deductibility of the price already paid elsewhere is its keystone.
4 The limits
A useful tool, but neither complete nor infallible.
What it does not solve
Shifting flows is not cutting emissions
The border adjustment has blind spots. It can be circumvented through "resource reshuffling": a country exports its cleanest products to the regulated zone and redirects the dirtiest ones elsewhere, without changing global emissions at all. Its coverage is often limited to raw products, not finished goods, which encourages relocating downstream processing. Nor does it protect domestic exporters on third markets. Finally, its burden concentrates on a few highly specialised developing economies, hence the charge of "green protectionism". Worth noting too: the carbon leakage actually observed in the past has been small, because carbon prices were low; the risk grows as those prices rise.
5 Takeaways
To remember.
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Carbon leakage: when a carbon price pushes emissions to move to a country that does not tax, with no global fall.
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The border adjustment makes imports pay the same carbon price as production at home, with a deduction for carbon already paid.
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By its form, it is a customs duty; its compatibility with the WTO rests on the environmental exception and the absence of disguised discrimination.
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Its limits: circumvention (resource reshuffling), partial coverage, a burden falling on a few developing countries.
This notion sheds light on an analysis
First published: June 28, 2026