There needs to be a transitional solution for EU emissions trading

Family businesses are open to a market-based approach to climate change mitigation. However, the EU still stands rather alone in the world with its trading of CO₂ allowances. With CO₂ prices rising, how can European companies remain internationally competitive? A simulation of the measures shows that there are only second-best solutions.

Munich, 12 January 2026. The EU’s Carbon Border Adjustment Mechanism (CBAM) has been in place for a few days now, but it remains unsatisfactory and far from being finalised. An ideal CBAM (modelled on VAT, for example) is theoretically possible, but impractical to implement: it would involve overly complex calculations of emissions along the supply chain.

The simplifications adopted by the EU do not fully protect (family) businesses from unequal competitive conditions, while at the same time being highly bureaucratic. They call into question the EU’s climate targets and provoke retaliatory measures from trading partners. The Foundation for Family Businesses therefore sought to have two alternatives calculated. Trade economist Professor Gabriel Felbermayr, Director of the Austrian Institute of Economic Research (WIFO), and a research team have taken on this task.

One option is the Leakage Border Adjustment Mechanism (LBAM), which aims to limit the leakage of CO₂ emissions to countries outside the EU. The combination of import duties and export subsidies based on domestic CO₂ intensity determines the current competitive situation for imports and exports. As the calculations based on the KITE model show, LBAM would prevent trade diversion but would still lead to a decline in domestic production. In addition, the mechanism dampens companies’ climate ambitions and is difficult for authorities to manage.

Hoping for followers and better climate change mitigation data
The second alternative is called a “climate levy” (i.e. a product tax ), coupled with the current practice of allocating free allowances to producers of CO₂-intensive goods. This option offers better protection for industry, is unbureaucratic, poses no trade policy concerns and generates government revenue. Although consumers would be burdened by the levy, real incomes would fall less sharply than under the current regulation. However, it offers little incentive for global climate action.

Despite this, Felbermayr considers the climate levy to be a good transitional solution. He hopes that other countries will follow the example of the EU Emissions Trading System and that the EU itself will soon have more accurate data on the CO₂ content of individual products at its disposal. This would perhaps enable a CBAM in its purest form.

The calculations show that all options are better than no “BAM” at all, i.e. no border adjustment. In addition, Felbermayr argues that the free allocation of CO₂ allowances also incentivises lower emissions in the EU, as long as the number is limited enough that they can be resold at a certain price.

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