EU ETS Closing the Export-bound Carbon Leakage Loophole: Why and How Export Rebates Need Not Qualify as a ‘Financial Contribution’, and thus No Subsidy under WTO Rules

This paper explores how export rebates under the EU Emissions Trading System (EU ETS) can be structured to avoid classification as export subsidies under WTO rules. While the EU is phasing out free allowances and implementing a Carbon Border Adjustment Mechanism (CBAM) to address import-bound carbon leakage, questions remain about how to prevent export-bound carbon leakage and preserving the competitiveness of the European industry without infringing subsidy disciplines. The analysis shows that, if designed carefully, export rebates would not qualify as ‘financial contribution’ within the meaning of the Agreement on Subsidies and Countervailing Measures (ASCM) and thus would not constitute subsidies at all, let alone prohibited ones.